EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.IV.1.3.5:18.IV.1.3.5 MiFID II Review: equity pre-trade transparency outside RMs and MTFs

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/18.IV.1.3.5

18.IV.1.3.5 MiFID II Review: equity pre-trade transparency outside RMs and MTFs

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS266484:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

The Commission and ESMA both observe that the amount of SIs has grown following the application of MiFID II.1 ESMA states that the number of SIs in shares increased from ten, mostly from the UK, to above 70 with a much more even geographical distribution.2 ESMA observes that the MiFID II aim of improving the level playing field between RMs/MTFs and SIs seems to fall short given the increased market share of SI trading. Furthermore, ESMA says that most of SI trading is still not subject to MiFID II equity pre-trade transparency requirements (i.e. SIs are subject to a lighter equity pre-trade transparency regime than RMs and MTFs).3 In view of ESMA, the lighter equity pre-trade transparency makes SIs a more attractive venue for market participants to the detriment of lit RMs and MTFs, thereby reducing market transparency.4 ESMA proposes stricter requirements for SIs to enhance the level playing field with RMs and MTFs and increase the degree of equity pre-trade transparency. To achieve these goals, ESMA proposes the following:

-: Tighten the liquid market-definition of equity instruments in order to ensure the SI equity pre-trade transparency obligations apply sooner compared to the current MiFID II regime.5
-: Increase the minimum quoting size for SIs from ten percent to one hundred percent of the standard market size.6 The result would be a high degree of equity pre-trade transparency coming from SIs.
-: Determine the standard market size on the basis of the so-called average daily turnover, rather than the current average value of transactions.7 The change would result in a stricter (i.e. more transparent) approach for the standard market size.

The Commission intends to verify the ESMA observations and whether or not stakeholders agree. Similar to the RM/MTF proposals, responses to the ESMA consultation reveal that the ESMA proposals are controversial. The final ESMA view in the MiFID II Review is a compromise position. ESMA takes a middle-way between those emphasizing more equity pre-trade transparency and an enhanced level playing field versus those stressing the importance of liquidity provision by SIs (i.e. position risks of SIs).8 Similar discussions were already present in drafting MiFID I, whereas the ESMA proposal would result in greater EU focus on equity pre-trade transparency and a level playing field compared to the SI positions risks. Last, but not least, the ESMA MiFID II Review does not address the MiFID II rules requiring investment firms to publish unexecuted client limit orders under certain conditions. This shows that the client limit order display rule is less controversial compared to the negotiation positions in drafting MiFID I.9

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Commission, Public consultation on the review of the MiFID II/MiFIR regulatory framework, February 2020, p. 83 and ESMA, Consultation Paper: MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares 4 February 2020 (ESMA70-156-2188), p. 49.

ESMA, Consultation Paper: MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares 4 February 2020 (ESMA70-156-2188), p. 49. Another factor for the growth in SIs, according to ESMA, is that SIs are an eligible venue under the MiFID II share trading obligation. For an examination, reference is made to paragraph 3 below.

ESMA, MiFID II/MiFIR Review Report, 16 July 2020(ESMA70-156-2682), p. 48. ESMA also proposes to deem ‘other equity like financial instruments’ illiquid by default (ibid). Furthermore, a stricter liquid market-definition is also relevant for other MiFID II equity pre-trade transparency requirements, such as the negotiated trade waiver for RMs and MTFs. For an examination of the implications of a stricter liquid market-definition, reference is made to chapter 5 (section VII).

ESMA, MiFID II/MiFIR Review Report, 16 July 2020(ESMA70-156-2682), p. 49.

For an examination of the ESMA MiFID II Review, including responses to the ESMA consultation, reference is made to chapter 5 (section VII).

For an examination of the client limit order display rule under MiFID I and MiFID II, reference is made to chapter 4 and chapter 5.