EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.VII.1.2.3:5.VII.1.2.3 Large in scale-thresholds for ETFs

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.VII.1.2.3

5.VII.1.2.3 Large in scale-thresholds for ETFs

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS267323:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

ESMA proposes in the MiFID II Review Report to introduce a stricter large in scale-threshold (large in scale-waiver) for ETFs, albeit less strict than initially proposed in the ESMA consultation paper. During the consultation process, ESMA observed that the MiFID II equity pre-trade transparency regime has been beneficial for ETF trading. ESMA identified that ETF trading has grown substantially over the past few years, in part due to the MiFID II regime that enhanced pre-trade transparency for ETF trading that was initially mainly dark.1 That being said, ESMA observed that for ETFs, 88 percent of volume and 11 percent of transactions executed under the RM/MTF waivers, are executed under the large in scale-waiver.2 To enhance equity pre-trade transparency for ETFs (being a market characterized mainly by large transactions), ESMA proposed in the consultation paper to increase the current MiFID II ETF threshold from EUR 1,000,000 to EUR 5,000,000.3

Most respondents disagreed with ESMA’s proposal to increase the pre-trade large in scale-threshold for ETFs. The main reason highlighted, ESMA observes, was that the ‘heterogeneity of ETFs in terms of liquidity does not make it suitable to apply a single threshold for all types of instruments’.4 In other words, trading in ETFs is considered to be too diverse to apply one threshold. In addition, some respondents argued that a stricter threshold (i.e. higher) could result in a move of trading to so-called request for quote systems which, according to these respondents, provide for less transparency than other trading systems.5 However, other respondents believed that the current use of the large in scale-waiver for ETFs was against the main objectives of MiFID II to increase market transparency.6

The final position of ESMA in the MiFID II Review reflects a compromise. On the one hand, ESMA reiterates that currently close to 90% of the volume traded in ETFs are subject to a pre-trade transparency (indicating a stricter large in scale-threshold is required). On the other hand, ESMA takes the arguments against a stricter threshold for ETFs in account. For this reason, ESMA proposes to increase the pre-trade transparency threshold for ETFs from EUR 1,000,000 to EUR 3,000,000 (instead of EUR 5,000,000).7

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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. 22. See also Financial Times (Philip Stafford), ‘Europe’s Mifid rules on ETFs help to pump up the volume’, 29 July 2019 (available at: https://www.ft.com/content/0543cca6-91a9-11e9-8ff4-699df1c62544).

For an examination of the ETF threshold under the current MiFID II regime, reference is made to section II above.

ESMA, 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, 16 July 2020(ESMA70-156-2682), p. 10. For an examination of different trading systems that RMs and MTFs can deploy, reference is made to section II above.