EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.III.4.1:4.III.4.1 General

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.III.4.1

4.III.4.1 General

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS266668:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

MiFID I in principle required SIs to make public their quotes to all investors (willing to meet the reasonable commercial terms).1 ‘In principle’, because investors did not automatically have access to the system of an SI. MiFID I permitted an SI, on the basis of its commercial policy and in an objective non-discriminatory way, to decide who could access the system it used for quote execution.2 MiFID I therewith made a distinction between: (a) access to the quotes as published (available to all investors willing to meet the reasonable commercial terms) and (b) access to the system for execution (available for SI designated clients).3 The rationale behind permitting SIs to decide the persons they accept as clients was to protect SIs against exposure from the general public.4

SIs were permitted to decide to give access to their system only to retail clients, only to professional clients, or to both. SIs were not allowed to discriminate within those categories of clients.5 To that end, MiFID I required the SI to have clear standards for governing access to their systems. SIs were permitted to refuse to enter into or discontinue business relationships with (potential) clients on the basis of commercial considerations, such as the credit status, the counterparty risk, and the final settlement of the transaction.6

In addition to protection against exposure from the entire trading public, MiFID I also encompassed provisions to limit the exposure of SIs from multiple transactions, both from (1) the same or (2) different clients. The objective of protection for SIs against multiple transactions was driven by the fact that SIs, in contrast to the publication of limit orders,7 published quotes that could be executed multiple times. The situation of SIs contrasted with the situation of investors posting limit orders that, once executed, would disappear from the market. In other words, limit orders were only subject to ‘one hit’. Instead, SIs were in theory exposed to so-called ‘multiple hits’. ‘In theory’, since MiFID I covered a provision that enabled SIs to protect themselves by limiting exposure from multiple transactions (multiple hits).8

In order to limit the risk of being exposed to multiple transactions from the same client, SIs were allowed to limit in a non-discriminatory way the number of transactions from the same client that the SI undertook to enter at the published conditions.9 SIs were also allowed, in a non-discriminatory way and in accordance with best execution-obligations, to limit the total number of transactions from different clients at the same time, as long as the number and/or volume of orders sought by clients considerably exceeded the norm.10

MiFID I required a SI that limited the number or volume of orders it undertook to execute, needed to set out in writing, and make available to clients and potential clients, the arrangements designed to ensure that such a limitation did not result in the discriminatory treatment of clients.11

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Art. 27(3) MiFID I and art. 30 MiFID I Implementing Regulation.

Art. 27(5) MiFID I.

Similar R.A. Pattiselanno, ‘De meldplicht en transparantievoorschriften voor en na de handel’, in F.M.A. ’t Hart (Ed.), MiFID ‘Vanuit praktijk en theorie bezien’, Bankjuridische reeks, 2007, p. 158. A similar distinction was not in place for RMs and MTFs, suggesting that the pre-trade information needed to be available to all investors willing to meet the reasonable commercial terms (i.e. not only the members or participants of the RM/MTF). For an examination of the MiFID I equity pre-trade transparency requirements for RMs and MTFs, reference is made to section II above.

See in this context also Ferrarini and Recine who notes that the initial proposal of the Commission to oblige investment firms to deal with any ‘investment firm or eligible counterparty’ would result in a significant increase of credit risk (G. Ferrarini and F. Recine, ‘The MiFID and Internalisation’, in G. Ferrarini and E. Wymeersch (Eds.), Investor Protection in Europe: Corporate Law Making, the MiFID and Beyond, Oxford University Press, 2006, p. 254).

Recital 50 MiFID I. An example of a non-discriminatory commercial policy was where a policy of ‘one transaction per quote’ was used (Markets Media (S. Basar), ‘MiFID II SIs Raise Concerns’, 4 December 2017 (available at: https://www.marketsmedia.com/mifid-ii-systematic-internalisers-raise-concerns/).

Art. 27(5) MiFID I.

MiFID I defined a ‘limit order’ as an order to buy or sell a financial instrument at its specified price limit or better and for a specified size (art. 4(1)(16) MiFID I).

Art. 27(6) MiFID I. See in this context also G. Ferrarini and F. Recine, ‘The MiFID and Internalisation’, in G. Ferrarini and E. Wymeersch (Eds.), Investor Protection in Europe: Corporate Law Making, the MiFID and Beyond, Oxford University Press, 2006, p. 263).

Art. 27(6) MiFID I.

10.

Art. 27(6) MiFID I. The meaning of ‘considerably exceeding the norm’ was regarded to be in place where the SI could not execute those order without exposing itself to undue risk. In order to identify the number and volume of orders that the SI could execute without exposing itself to undue risk, a SI needed to maintain and implement as part of its risk management policy a non-discriminatory policy which took into account the volume of the transactions, the capital that the firm had available to cover the risk for that type of trade, and the prevailing conditions in which the firm is operating (art. 25(2) MiFID I Implementing Regulation).

11.

Art. 25(3) MiFID I Implementing Regulation.