18.III.2.3.2.1 Type of financial instrument

The type of financial instrument is a relevant aspect for price formation. Whereas for equity instruments pre- and post-trade data can be a good indicator of liquidity, pricing in non-equity instruments is determined by factors beyond current and completed transactions, such as macroeconomic conditions (in particular for government bonds), credit risk and duration (e.g. maturity date of a bond).1 Consequently, although not entirely uncontroversial, the EU decided only to impose pre- and post-trade transparency rules for shares (admitted to trading on an RM) under MiFID I. In a change from the ISD, which applied to all financial instruments (dealt on an RM), the Commission (as accepted by the European Parliament and Council) believed that there was no economic rationale in transparency rules beyond shares for MiFID I.2 The price formation dynamics of shares played an important role for the EU in deciding to impose transparency rules.3 Under MiFID I Member States were permitted (not: required) to expand the MiFID I equity pre- and post-trade transparency rules to financial instruments other than shares.4

The EU changed its perspective from MiFID I to MiFID II. CESR (predecessor of ESMA) noted that certain equity-like instruments, being – depositary receipts, ETFs, and certificates, have many characteristics like shares, including in terms of liquidity, structure, and the types of investors. CESR believed it would therefore be beneficial to require these equity-like instruments to meet the same pre- and post-trade transparency requirements as shares.5 The EU has adopted the same view as CESR under MiFID II. The MiFIR preambles indicate that trading in depositary receipts, ETFs, certificates, and similar financial instruments take place in largely the same fashion, and fulfills a nearly identical economic purpose as trading in shares. Transparency provisions applicable to shares under MiFID I have for this reason been extended to equity-like instruments under MiFID II (relabeled as ‘equity’).6