4.II.2.2.2 Background

CESR suggested introducing a negotiated price waiver for MiFID I. The arguments of CESR were based on the merits of negotiated transactions without pre-trade transparency as examined above, such as the achievement of best execution, the avoidance of minimum order size requirements, and ensuring negotiated trades subject to other pricing conditions than the market price do not deceive the price discovery process.1 CESR proposed a distinction between two types of negotiated price waivers, that is – negotiated trades (a) subject or (b) not subject to pricing conditions.

The overall position of CESR was that pricing conditions needed to apply to negotiated trades that reflected the current market price. The pricing conditions were seen as necessary for the fair treatment of clients expressing their interests, regardless whether the trading interest was expressed in the pre-trade transparent order book or through bilaterally negotiated trades (i.e. similar pricing conditions are available).2 Not all CESR Members agreed with this position. In view of the dissenting CESR members, negotiated trades subject to current market conditions could still take advantage of the pre-trade transparency displayed and the efficiency of the price formation process (of pre-trade transparent trades). In view of these CESR members, negotiated trades subject to the current market price would still deny other investors from the opportunity to trade at an executable price.3 The dissenting view was not the final view of CESR. The final position of CESR was to apply pricing conditions to negotiated transactions subject to the current market price.

CESR also advised the Commission on a waiver for negotiated trades that are not subject to pricing conditions. CESR believed that such a negotiated trade waiver needed to concern potential trades subject to conditions other than the current market price of the share.4 CESR mentioned as examples the individual shares in a portfolio trade5 or where the price of the negotiated trade was based on a volume weighted average price for a certain period (VWAP).6

Respondents to the CESR consultation widely supported CESR’s proposal.7 The Commission reflected a similar view. This is apparent in the final MiFID I text. MiFID I covered a negotiated trade waiver with two limbs, one being for negotiated trades subject to the current market price, whereas the second limb was not. Pricing conditions applied to the former. By contrast, negotiated trades under the second limb could be subject to conditions other than the current market price of that share.8