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

The liquid market concept is relevant for two related concepts concerning SIs. The two concepts are: (1) the applicability of the MiFID II requirement for SIs to publish a firm quote; and (2) the characteristics of so-called over the counter (OTC) transactions. MiFID II only requires SIs to publish a firm quote in relation to liquid equity instruments traded on an RM or MTF (point 1).1 Secondly, MiFID II does not intend to apply the MiFID II pre-trade transparency rules to transactions carried out on an OTC-basis (point 2). 2 To quote two MiFIR recitals:

‘In order to ensure that trading carried out OTC does not jeapardise efficient price discovery or a transparent level playing field between means of trading, appropriate pre-trade transparency requirements should apply to investment firms dealing on own account in financial instruments OTC insofar as it is carried out in their capacity as SIs in relation to shares, depositary receipts, ETFs, certificates, and other similar financial instruments for which there is a liquid market (…) (emphasis added).3

Furthermore,

MiFID II does not explicitly define transactions carried out on an OTC basis, but the MiFIR recitals show that trading outside RMs and MTFs, including SI activity, is OTC trading. The MiFID II regime is in effect different compared to MiFID I where SI activity was not considered to be OTC trading. In fact, under MiFID I SIs were labelled as a ‘trading venue’.5 By contrast, MiFID II reflects the aim of preserving the ‘trading venue’ label only for highly regulated entities, being RMs, MTFs (and OTFs). SIs are not ‘trading venues’ under MiFID II. MiFID II considers SIs to be somewhat in the middle between RMs/MTFs and OTC trading (although SI activity formally is ‘OTC’). MiFID II in principle does not want investment firms trading on own account outside an RM or MTF (i.e. OTC) to be subject to pre-trade transparency requirements. ‘In principle’, because an exception applies (i.e. pre-trade transparency requirements apply) where the investment firm trading on own account is an SI. As a consequence, SIs are best informally characterised as semi-trading venues.

Finally, the first MiFIR recital makes a link between OTC trading (including SIs) and liquid markets. The SI pre-trade transparency requirements only apply in relation to instruments with a ‘liquid market’. The MiFIR recital shows the MiFID II objective of finding a balance between (a) sufficient transparency/a level playing field between RMs, MTFs, and SIs and (b) sufficient liquidity provided by investment firms trading on own account, including SIs.