9.II.2.4.3 Level 2 text: length of deferral

The level 1-text of MiFID II appointed ESMA to provide draft regulatory technical standards on the large in scale concept for post-trade deferral.1 A main aspect of the ESMA advice concerned shares and depositary receipts. ESMA analyzed market developments across 2008-2013 using the share data available from the ESMA MiFID Database.2 The key findings of the ESMA analysis were that: (i) the majority of shares admitted to trading on RMs had an average daily turnover below EUR 100.000 across all the years (the percentage of shares with an average daily turnover below EUR 100.000 increased from 46 percent in 2008 to 61 percent in 2013) and (ii) there was a high concentration of shares in the average daily turnover class of EUR 1 million to EUR 25 million.3 Simply put, under MiFID I the average size in large transactions had reduced (point i) and the average daily turnover-classes/thresholds for MiFID I were potentially no longer up to date (point i-ii).

ESMA then – based on the empirical evidence – discarded the option to maintain the MiFID I-table for equity post-trade transparency deferral (status quo option). ESMA explored whether it would adopt CESR’s proposal during the MiFID I-review or to modify CESR’s proposal with one alteration, that is – extend the deferred publication of the largest trades from late in the day (15.00 or later) to noon of the next trading day (instead of prior to the opening of trading on the next trading day).4

In the end, ESMA adopted a compromise position. On the one hand, the intra-day thresholds were shortened from 180 minutes to 120 minutes and the maximum delay was shortened, thereby supporting more transparency. On the other hand, ESMA did not go so far as CESR’s proposal. ESMA introduced eight classes of average daily turnover (MiFID I covered four) to support the liquidity of the share in question, but lowered the class for the most illiquid shares. In addition, the maximum delay for the most illiquid class was the ‘end of the day+1’ (emphasis added). The lower average daily turnover-class and extended maximum delay would support more deferral possibilities. The aim here was to support the liquidity provision for highly illiquid shares, most notably in the SME-sector.5

ESMA noted that the additional average daily turnover-classes for equity post-trade transparency deferral would result in additional complexity compared to MiFID I. However, in ESMA’s view the complexity would be reduced, since the average daily turnover-classes would be aligned with the ‘large in scale’-exceptions for the MiFID II equity pre-trade transparency, as examined above.6 In view of ESMA, the additional four classes would also suit better with the liquidity of the instrument in question (i.e. more accurate). ESMA intended to apply the same regime for shares and depositary receipts.7

In relation to ETFs a similar discussion arose as in the context for the ETF large in scale-waiver for pre-trade transparency purposes, such as the complexity in designing ETF large in scale-classes (reference is made to chapter 5). Respondents to the ESMA consultation almost unanimously rejected thresholds on the basis of the average daily turnover. Instead, the large majority of respondents preferred a simple and transparent regime where all ETFs are treated equally. Based on these responses, ESMA proposed two minimum qualifying sizes for ETFs with a corresponding deferral of publication (i.e. no suggestions were made with regard to average daily turnover-classes).8

When it came to certificates, ESMA referred to its analysis of certificates in the context of equity pre-trade transparency (i.e. certificates were smaller in trading size compared to shares and of a different nature).9 ESMA proposed to establish two classes of liquidity, that is – average daily turnover above and below EUR 50.000 with time deferral of 120 minutes or end of the day depending on the size of the trade within each liquidity class.10 ESMA added that these thresholds would also apply to ‘other similar financial instruments’.11

The Commission adopted ESMA’s proposal. This is evident in the final MiFID II-text. First, MiFID II distinguishes between three classes of equity instruments for the purposes of equity post-trade transparency deferral, namely: (1) shares and depositary receipts, (2) certificates and other similar financial instruments, and (3) ETFs. A link is made between the average daily turnover and the minimum transaction size for each class, except for ETFs (ETFs only have a minimum qualifying size). Shares and depositary receipts are subject to a highly granular MiFID II-table for the average daily turnover compared to the minimum thresholds. Instead, certificates and other similar financial instruments are subject to a less granular table. Third, and finally, compared to MiFID I, the regime has become stricter for shares. Thresholds for deferral have increased and the maximum delay for deferral is now the end of the trading day. An exception to the latter is in place for the least liquid class of shares, which permits a maximum delay to the next trading day. Post-trade data publication can be deferred until the end of the trading day in relation to ETFs and certificates.12