5.II 2.2.6.1 Level 1 text: assessing the MiFID I negotiated trade waiver

CESR consulted on the negotiated price waiver during the MiFID I-review. There was widespread agreement among the respondents to the consultation that the waiver needed to be retained.1 The waiver played a crucial role in achieving, among other things, best execution and executing orders subject to specific conditions of the pre-trade transparency order book (e.g. a minimum size).2 Not all respondents agreed. Some noted that the MiFID I negotiated price waiver unfairly discriminated against trading systems that either did not have a displayed order book or did not offer continuous trading (both were requirements for the negotiated price waiver).3 In addition, several respondents stated that the negotiated price waiver required clarification.4 Based on the feedback received, CESR advised the Commission to retain the negotiated trade waiver, albeit in a rule-based manner (instead of principle-based) for clarity.5 The Commission took a similar approach as CESR. The Commission’s MiFID II proposal suggested to retain the negotiated trade waiver (and the other three MiFID II waivers), whilst specifying the ‘market model for which pre-trade transparency may be waived’ under MiFID II through delegated acts.6 The European Parliament adopted a similar position.7

The situation changed within the Council. After complex negotiations, the Council took the final position of keeping the negotiated trade waiver, albeit in a restricted manner. The Council suggested to specify the negotiated price waiver through the Level 1 text (similar to the reference price waiver), which reflected the political controversy of the waiver(s).8 The Council proposed a Level 1 text for negotiated trades with and without pricing conditions. The negotiated trades with pricing conditions would be divided in ‘liquid’ and ‘illiquid’ equity instruments. The Council wanted liquid equity instruments to be subject to the double volume cap mechanism.9 The Council wanted to use the double volume cap mechanism to preserve the price formation mechanism by limiting the use of the negotiated trade waiver.10 The Council did not propose to apply the double volume cap to negotiated trades in: (a) illiquid equity instruments; nor to (b) negotiated trade that were not subject to pricing conditions.11 Although difficult to assess due to political compromise, the rationale behind the final Council position reflected the aim to find a balance, namely a balance between: (i) price formation and (ii) protecting illiquid markets. In addition, since negotiated trades not subject to pricing conditions do not contribute to price formation, the double volume cap was deemed unneccessary for negotiated trades not contributing to price formation.12

The Council also proposed the Commission, as assisted by ESMA, to specify the meaning of a ‘negotiated transaction’ and ‘negotiated transactions not contributing to price formation’.13 In addition, the Council proposed to introduce a Level 1 definition of a ‘liquid market’.14

The final position of the Council is apparent in MiFIR (Level 1). MiFIR covers detailed rules on the negotiated trade waiver. MiFIR makes a distinction between the negotiated trade waiver for negotiated trades contributing and not contributing to price formation. The negotiated trades contributing to price formation are in turn divided in a negotiated trade waiver for liquid and illiquid instruments.15 The double volume cap mechanism only applies to the negotiated trade waiver with respect to equity instruments contributing to price formation and a liquid market.16MiFIR has required ESMA and/or the Commission to (assist/)draft the specifications (Level 2).17MiFIR covers a framework definition of a liquid market, which has been specified by the Commission, as assisted by ESMA, on Level 2.