EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.III.2.3.2:4.III.2.3.2 Scope: obligation to publish a firm quote and OTC transactions

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/4.III.2.3.2

4.III.2.3.2 Scope: obligation to publish a firm quote and OTC transactions

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The standard market size concept was relevant for two related concepts concerning SIs. The two concepts were: (1) the applicability of the MiFID I requirement to publish a firm quote; and (2) the characteristics of so-called over the counter (OTC) transactions.

To start with point 1, being the obligation to publish a firm quote. SIs were only required to publish a firm quote in relation to liquid shares admitted to trading on an RM above the standard market size. The methodology was a follows: the concept of a liquid market was a precondition for determining the standard market size. No liquid market, meant no determination of the standard market size. This follows from the MiFID I-text that only required the standard market size to be determined for liquid shares.1

MiFID I only required SIs to publish firm quotes (binding pre-trade data) for sizes up to transactions above the ‘standard market size’ (for liquid shares).2 Once the subset of shares for which there was a liquid market was determined (step 1), the shares needed to be divided into classes for which the standard market size would be determined (step 2).3 In sum, SIs only needed to publish binding quotes for orders in shares trading on an RM for which there was (a) a liquid market; (b) up to the standard market size.4

The transparency threshold of a ‘standard market size’ was also relevant for the related meaning of transactions carried out on an OTC basis (point 2).5 MiFID I did not intend to apply the MiFID I pre-trade transparency rules to transactions carried out on an OTC-basis.6 The characteristics of transactions carried out on an OTC-basis included transactions that were:

a)

ad-hoc and irregular;

b)

carried out wholesale counterparties;

c)

part of a business relationship which was itself characterised by dealings above standard market size (emphasis added); and

d)

carried out outside the systems usually used by the firm concerned for its business as an SI (emphasis added).7

The meaning of transactions carried out on an OTC-basis was closely related to the qualification as a SI. MiFID I did not explicitly define transactions carried out on an OTC-basis, but MiFID I set out OTC characteristics. The foregoing list indicates that SIs could engage in transactions above a standard market size. Dealings above standard market size did not disqualify an investment firm from being an SI. The situation was different when, in addition to dealing above the standard market size, the other characteristics of transactions carried out on an OTC-basis were also present (i.e. ad-hoc and irregular, with wholesale parties, and outside the systems of a SI). Here, an investment firm did not classify as a SI.8 The MiFID I aim of not applying pre-trade transparency requirements to OTC transactions related to the SI requirement to publish firm quotes only for share orders above ‘standard market size’.9

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