3.II.4 Exceptions to the ISD, FESCO, and national equity pre-trade transparency obligations

The ISD covered an exception to the ISD’s RM pre-trade transparency obligation. Similar to the ISD text on the obligation, the ISD was not entirely clear with respect to the exceptions for the RM pre-trade transparency obligation. The ISD provided the following provision:

The ISD did not define any of above-mentioned terms. Neither were the terms for delay or suspension set out in the ISD. FESCO provided broad guidance.2 FESCO noted that where an RM used the provision (derogation of the ISD transparency obligations) ‘(…) it should be able to demonstrate that this produces an overall benefit to market users (…)’. FESCO also noted that the RM could take into account ‘the size of the transaction’, which implies that FESCO permitted exceptions in order to reduce market impact.3 The ISD provision, including the FESCO guidance, was in effect principle-based.

The principle-based approach enabled a broad range of interpretations. For example, one could interpret ‘exceptional market circumstances’ (which was undefined) as the possibility for NCAs to permit market makers on RMs to publish indicative quotes for a limited time (i.e. the ISD obligation to maintain firm quotes on RMs would be delayed or suspended).4 Another interpretation is that a market maker was permitted to publish indicative quotes (not: firm) provided the transaction concerned a ‘very large in scale transaction’ (which terms were undefined). Whilst I believe these interpretations are valid, it is more important to observe once again that the ISD-provision was unclear. The ISD gave great flexibility to the individual Member States (see also paragraph 1 above). Not only was the ISD provision minimum harmonised, the ISD also gave substantial discretion in interpretation. As a result, the amount of harmonization with respect to the ISD pre-trade transparency exceptions was close to zero.5

Looking at the rules applicable to four large RMs at the time, different national regimes with respect to exceptions for equity pre-trade data publication can be observed. For example, so-called hidden orders6 were permitted on NSC (Paris Bourse) and TSA (Amsterdam Stock Exchange), but hidden orders were not permitted on SETS (London Stock Exchange) and XETRA (Deutsche Börse AG).7 Another example of a difference was evident with respect to large trades. Whilst ‘large trades’ were generally accepted as an exception to pre-trade data publication, the meaning of the term differed across the EEA.8 Along similar lines, the Commission observed ‘enormous discrepancies’ in transparency levels across RMs.9