18.IV.1.2.1.3 Difference 3: shift in political controversy

A third change was the shift in political controversy. Whereas under the ISDpost-trade transparency rules were the main topic of political disagreement, it was especially the pre-trade transparency regime in drafting MiFID I. Controversial in drafting MiFID I were in particular pre-trade transparency rules for investment firms operating outside RMs and MTFs. Some Member States argued that pre-trade transparency rules for investment firms operating outside RMs and MTFs was not necessary. Post-trade transparency outside RMs and MTFs was regarded as sufficient and also more reliable (market-led perspective). Other Member States disagreed in light of price formation and a level playing field (market-shaping perspective). A similar debate took place in the context of the proposed MiFID I client limit order display rule for all investment firms operating outside RMs and MTFs.1

The final result was a compromise. MiFID I introduced the SI pre-trade transparency regime and the client limit order display rule, but the scope of these provisions was limited and several exceptions were in place.2 Controversial, albeit to a less extent, were also the negotiated trade and reference price waiver for RMs and MTFs. Main arguments against the negotiated trade waiver included that the ability to negotiate a deal without pre-trade transparency harms price formation and is unfair to the investors contributing to the lit part of the market without being able to transact at the negotiated prices. Arguments against the reference price waiver included the lack of pre-trade transparency involved due to the passive pricing mechanism (no price formation). Others disagreed and mainly referred to the advantages of the negotiated trade waiver and reference price waiver. Examples of such advantages include being able to negotiate a better deal in the dark than available in the lit markets or obtain a better price due to execution at the referenced mid-point (i.e. achieve best execution).3 Despite the concerns raised, the negotiated trade and reference price waiver for RMs and MTFs was introduced under MiFID I. The rest of the RM and MTF pre-trade (and post-trade) transparency regime was relatively uncontroversial.4

There are two reasons why especially equity pre-trade transparency rules for investment firms operating outside RM and MTFs was controversial in drafting MiFID I. First, RMs and some alternative trading systems were already under the ISD required to publish a high degree of pre-trade (and post-trade) transparency under national law (see paragraph above). It was for this reason not a big step to formalise RM and MTF equity pre-trade (and post-trade) transparency rules under MiFID I. An accompanying reason is that MTFs would represent the same organised trading functionality as RMs under MiFID I. Similar pre-trade transparency rules for RMs and MTFs were therefore logical in light of a level playing field.5 Second, already in the early stages of drafting MiFID I it became clear that a more competitive landscape compared to the ISD was envisioned. For this reason, the EU debate shifted towards pre-trade transparency rules for investment firms operating outside RMs (and MTFs). Such investment firms posed new and potentially greater risks in terms of price formation and a level playing field. Given that investment firms operating outside RMs and MTFs were often a different trading functionality than RMs/MTFs (e.g. internalising investment firms), the EU debate concerned whether and, if so, to which extent pre-trade transparency rules would be sufficient for such investment firms. As noted above, some Member States argued post-trade transparency rules for investment firms operating outside RMs and MTFs were sufficient, whereas other Member States disagreed in light of price formation and a level playing field. The final MiFID I text reflected a compromise. An SI and client limit order display rule were introduced, albeit limited in scope and with several exceptions.

This is not to say there were no debates in drafting the MiFID I post-trade transparency rules. Such debates took place, albeit relatively mild compared to the pre-trade transparency topics. There was overall agreement that post-trade transparency would be required for a wide range of venues, namely RMs, MTFs, and investment firms operating outside such venues. Deferral of post-trade data publication was not controversial per se. Controversy arose on the specifics of the scope and length of deferral. The debate on the scope and time limits of deferral took place on Level 2, meaning that CESR, the Commission, and several stakeholders were involved (instead of directly the Member States on Level 1). Certain stakeholders and CESR emphasized price formation and for this reason argued to limit (not: prohibit) deferral possibilities. By contrast, other stakeholders and the Commission stressed liquidity provision by investment firms taking temporary risk positions and for this reason favoured a more lenient deferral regime. The final MiFID I text reflected both positions. The scope for deferral was limited (i.e. only in relation to clients, not to all parties), whilst the deferral lengths were relatively long.6