EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.I:5.I Introduction

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.I

5.I Introduction

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The MiFID II-regime succeeded the MiFID I framework on 3 January 2018.1 The MiFID II-regime consists out of a framework directive (MiFID II Directive) and a framework regulation (Markets in Financial Instruments Regulation: MiFIR), as well as a great amount of implementing measures (level 2 legislation).2 A main objective of MiFID II3 is to reduce the amount of dark trading under MiFID I. MiFID II provides a highly top-down equity pre-trade transparency regime to achieve this result.4 In doing so, MiFID II retains the general equity pre-trade transparency framework of MiFID I. Under MiFID II equity pre-trade transparency rules continue to apply to RMs, MTFs, SIs, and investment firms executing client orders (client limit order display rule). Despite using the general MiFID I framework, MiFID II is far more encompassing compared to MiFID I. This is apparent the following eight changes:

1.

MiFID II expands the asset classes falling within the scope of the equity pre-trade transparency regime. Under MiFID II equity pre-trade transparency rules apply to: (a) shares, depositary receipts, ETFs, certificates, and other similar financial instruments; (b) admitted to trading on an RM or traded on a trading venue (i.e. RM or MTF).

2.

MiFID II introduces a new trading venue, the OTF (Organised Trading Facility). While OTFs are like RMs and MTFs also trading venues, MiFID II confines OTFs to non-equity only. Accordingly, the MiFID II equity pre-trade transparency rules do not apply to OTFs.5

3.

MiFID II introduces new definitions and requirements to reduce regulatory arbitrage. First, SIs are subject to a new and more quantitative MiFID II definition. Second, MiFID II requires investment firms operating ‘internal matching systems’ in equity instruments ‘on a multilateral basis’ to ensure they are authorised as an MTF.6

4.

MiFID II requires more equity pre-trade data to be published. Among other things, SIs are required to publish more equity pre-trade information.

5.

MiFID II reduces the amount of available exceptions to the equity pre-trade transparency obligations. A main element here is the introduction of the so-called double volume cap. The double volume cap restricts the amount of trading under the reference price and one type of negotiated price waiver available for RMs and MTFs.

6.

A trading obligation is in place for shares. Under MiFID II investment firms can, save for exceptions, only undertake certain share transactions on highly pre-trade transparent platforms.

7.

Maximum harmonised and rule based-provisions are in place. In contrast to MiFID I, in particular the MiFID I Directive, MiFID II lays down most equity pre-trade transparency requirements in directly applicable regulations. References indicating minimum harmonisation for RMs and MTFs (MIFID I) have been removed under MiFID II. The MiFID II equity pre-trade transparency requirements are also characterised by a great amount of detail, especially compared to MiFID I.

8.

A new regime for performing calculations and operating databases has been introduced (the so-called FIRDS/FITRS databases). The reason for the new regime is two-fold. First, MiFID II covers more equity pre-trade transparency thresholds compared to MiFID I. Second, MiFID II expands the amount of equity instruments to which the transparency regime applies (see difference 1 above). As a consequence, there are more requirements for market participants, NCAs, and ESMA in making the operational part of the MiFID II equity pre-trade transparency regime work.

The eight key changes from MiFID I to MiFID II are the focus of this chapter. Below, first the MiFID II equity pre-trade transparency regime for RMs and MTFs is discussed (section II). Thereafter, the rules for SIs will follow (section III). An examination of the regime for investment firms executing client limit orders outside RMs and MTFs will be made in the subsequent paragraph (section IV). The MiFID II trading-obligation for shares, applicable to investment firms is then examined (section V). Subsequently, the MiFID II regime for performing calculations and operating databases is discussed (section VI). The MiFID II Review is examinedin thereafter (section VII). Finally, concluding remarks are drawn (section VIII).

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