9.II.2.4.4 Level 2 text: Conditions for authorizing deferral

Under MiFID I a necessary condition for deferral was that the transaction (1) was between an investment firm dealing on own account and (2) a client of that investment firm.1 ESMA assisted the Commission in drafting the implementing measures for MiFID II. ESMA consulted on whether to maintain the MiFID I conditions. Some respondents to ESMA’s consultation stated that the meaning of the MiFID I condition was unclear as to when an (a) investment firm is at risk and (b) when it deals with a ‘client’. Certain respondents noted that the deferral condition should be broader than only application in relation to clients. In view of these respondents, deferral conditions were deemed to be fulfilled where the investment firm is (i) dealing with another investment firm that is acting on behalf of a client or (ii) where the investment firm is dealing with another investment firm both on a principal capacity (the latter interpretation upheld a lenient approach).2 Other respondents added that ‘dealing on own account’ should be interpreted as being at market risk. MiFID I did not specify the importance of risk for the application of deferral of equity post-trade data publication.3 In sum, the MiFID I deferral conditions were considered too narrow (i.e. only application when the investment firm dealt with a ‘client’) and too vague (i.e. no specification on the importance of market risk and unclear whether the transaction was with a ‘client’ on the RM/MTF).

ESMA agreed that the deferred publication regime should rest on the presumption that the investment firm is at risk. For that reason, ESMA proposed to clarify that deferral of equity post-trade data publication should only be available when the investment firm is dealing on own account other than matched principal trading (back-to-back trading).4 ESMA also advised to clarify the application of the deferral regime by noting that a necessary condition would be for the investment firm to deal on own account (other than on a matched principal basis) with ‘another counterparty’ (not: ‘client’).5 ESMA acknowledged that the expansion to ‘another counterparty’ could have major consequences for equity post-trade transparency on RMs and MTFs. ESMA stated that members/participants of an RM/MTF are not considered to be trading with ‘clients’ on the trading venue (except possibly through negotiated trades).6 If deferral would become available to any investment firm dealing on own account with any counterparty under MiFID II, they would be available to any on-venue transaction where one party would be dealing on own account above the relevant threshold.7 That being said, a broader scope (i.e. ‘another counterparty’) could also provide clarity (i.e. no discussion whether or not the investment firm is trading with a client) and increase willingness by investment firms trading on own account to provide liquidity.8 In the end, ESMA took the latter approach. ESMA advised the Commission to adopt the deferral condition that the investment firm dealing on own account would trade with ‘any counterparty’.9

The Commission adopted ESMA’s advice in the final MiFID II text. MiFID II requires a condition for deferral that the transaction is between an investment firm dealing on own account other than through matched principal trading. MiFID II also covers the broad deferral condition that the transaction needs to be with ‘another counterparty’ (not: ‘client’).10