EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.VII.3.4.1:5.VII.3.4.1 ESMA key proposals and observations

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.VII.3.4.1

5.VII.3.4.1 ESMA key proposals and observations

Documentgegevens:

mr. J.E.C. Gulyás, datum 01-02-2021

Datum: 01-02-2021
Auteur: mr. J.E.C. Gulyás
JCDI: JCDI:ADS266761:1
Vakgebied(en): Financieel recht / Bank- en effectenrecht
Financieel recht / Europees financieel recht
Financiële dienstverlening / Financieel toezicht

The third aspect of ESMA review concers the exemptions of the MiFID II share trading-obligation. MiFID II covers two possible exemptions, namely share transactions that are: (1) non-systematic, ad-hoc, irregular and infrequent or (2) carried out between eligible and/or professional counterparites and do not contribute to the price discovery process.1 ESMA provides two proposals:

1.: Delete the reference to transactions ‘carried out between eligible and/or professional counterparties’ (exemption 2) in order to simply application and supervision; and
2.: Delete the available exemption for trades that are ‘non-systematic, ad-hoc, irregular and infrequent’ (exemption 1) (in case the scope of the MiFID II share trading-obligation is modified, as proposed by ESMA, see paragraph 3.2 above).2

The final ESMA proposals are based on the ESMA consultation process. ESMA observed in the consultation paper that the second exemption has as been specified in a MiFIR Delegated Regulation. ESMA stated that the exemption appears justified in practice (i.e. excluding transactions that do not contribute to the price discovery process) and should in ESMA’s view be maintained. ESMA asked for stakeholder input on simplifying the second exemption by deleting ‘carried out between eligible and/or professional counterparties’ (i.e. only keep the part of not contributing to the price discovery process).3 Several respondents to the ESMA consultation agreed with the ESMA view in light of simplicity.4 ESMA also observes that there were no concerns raised during the consultation process. For this reason, ESMA proposes to delete the reference the reference ‘carried out between eligible and/or professional counterparties’. ESMA proposes only to maintain the part of the exemption that excludes share transactions that ‘do not contribute to the price discovery process’.5

During the consultation process, ESMA also believed that there is merit in reflecting whether or not to remove the first exemption, in particular where third country-shares are removed from the MiFID II share trading-obligation scope. As examined in section VI, the first exemption is currently important under MiFID II to ensure third countries not yet deemed equivalent are exempted from the MiFID II share trading-obligation.6 Where third country shares are excluded from the MiFID II share trading-obligation in accordance with ESMA’s proposals (see paragraph 3.2 above), ESMA considers to delete the first exemption, or at least specify it in Level 2 measures (the first exemption is currently not specified under MiFID II). Respondents to the ESMA consultation expressed different opinions. Some argued to maintain the exemption in light of flexibility,7 whilst others want the exemption to be removed due to current legal uncertainty8 or at least be clarified to leave no room for discretionary interpretation.9 ESMA responded, among other things, by stating that MiFID II covers sufficient trading possibilities (flexibility) to trade in shares, both in terms of systems (e.g. order-book, periodic auction, request for quote) and available waivers (negotiated transactions in particular), including for less liquid shares. Against this background, ESMA proposes to delete the available exemption for trades that are ‘non-systematic, ad-hoc, irregular and infrequent’ in case the scope of the MiFID II share trading-obligation is modified in accordance with the ESMA proposals for the third-country scope (see paragraph 3.2 above).10

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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. 97. For a detailed examination of the MiFID II exemptions for the share trading-obligation, reference is made to section V 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. 45.

See, for example, Nasdaq, Reply form for the Consultation Paper on MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, the DVC and the trading obligations for shares, 4 February 2020, p. 16 and Borse Stuttgart, Reply form for the Consultation Paper on MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, the DVC and the trading obligations for shares, 4 February 2020, 16. Both respondents state that doing so would in practice exclude so-called technical trades (not to be confused with ‘technical trading’), such as so-called give-up trades (transfer of ownership of shares from one investment firm to another, usually between an executing investment firm and the prime investment firm of a client) (AFME, Market Analysis: The Nature and Scale of OTC Equity Trading in Europe, April 2011, p. 5). Technical trades are not retail in nature (AFME, Reply form for the Consultation Paper on MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, the DVC and the trading obligations for shares, 4 February 2020, p. 35).

In short, third countries that have not yet been deemed equivalent are considered to be ‘non-systematic, ad-hoc, irregular and infrequent’ (under ESMA and Commission guidance). Accordingly, the MiFID II share trading-obligation does not apply. For an examination of the ESMA and Commission guidance, reference is made to section V above.

Janus Henderson, Reply form for the Consultation Paper on MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, 4 February 2020, p. 12 and AFME, Reply form for the Consultation Paper on MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, 4 February 2020, p. 35.

Euronext, Reply form for the Consultation Paper on MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, 4 February 2020, p. 22,

Nasdaq, Euronext, Reply form for the Consultation Paper on MiFID II/MiFIR review report on the transparency regime for equity and equity-like instruments, 4 February 2020, p. 15

10.