18.IV.1.3.7 MiFID II Review: share trading-obligation

Another part of the MiFID II review is the MiFID II share trading obligation. The MiFID II share trading obligation requires investment firms to undertake certain share transactions on an RM, MTF, SI, or equivalent third-country trading venue, unless MiFID II exceptions apply.1 The MiFID II objective of the share trading-obligation is to reduce liquidity fragmentation in shares and ensure that share trading takes place on regulated venues, including in terms of equity pre- and post-trade transparency.2 The Commission observes problems in relation to (1) third country-shares, (2) whether or not to retain SIs as eligible venues, and (3) a potential lack of clarity on the share trading-obligation provisions.3 A main observation of ESMA is that, despite the share trading-obligation, there has not been a significant change in the share trading volume executed on RMs, MTFs, and investment firms operating outside such venues, including SIs.4 In light of the MiFID II objectives, ESMA proposes a stricter MiFID II equity pre-trade transparency regime for SIs, but ESMA does not recommend to remove SIs as eligible venues under the MiFID II share trading-obligation. ESMA also recommends to clarify the MiFID II share trading-obligation by deleting one of the exemptions, as well as removing unuseful references (‘carried out between eligible and/or professional counterparties’).5 Last, but not least, ESMA proposes to limit the scope of the application of the MiFID II share trading-obligation to EU shares. In short, ESMA proposes that EU shares are identified on the basis of the first two letters of their so-called ISIN code (International Securities Identification Code).6

Responses to the ESMA consultation differ between those understanding that a stricter approach for the MiFID II share trading-obligation is necessary to enhance share transparency and liquidity pooling and those arguing against a stricter approach in order to preserve liquidity provision, in particular by SIs. Several respondents to the ESMA consultation agree with ESMA that the MiFID II share trading-obligation requires clarification (many terms are undefined). Many stakeholders also agree with ESMA that the MiFID II share trading-obligations should only apply to EU-situation (i.e. no extra-territorial reach). However, it is unclear what an ‘EU situation’ entails (e.g. only a so-called ISIN approach or instead an ISIN approach complemented by other criteria, and so forth).7