9.II.2.3 Similarities and differences with the MiFID II equity pre-trade transparency regime

Similar to MiFID I, the MiFID II-table for deferred post-trade data publication is based on a so-called ‘ladder-model’.5 The MiFID II categories of average daily turnover for post-trade data deferral consist out of different minimum qualifying sizes, in which the higher the minimum qualifying size, the longer the length of deferral.6 The ladder-model for post-trade deferral contrasts with the MiFID II large in scale-exceptions for pre-trade transparency in the sense that the latter is binary. The pre-trade information was disclosed or not depending on the average daily turnover/minimum order size, instead of providing different time lengths for non-disclosure (i.e. deferral). The difference is because for pre-trade, the justification for large in scale-orders rests more in the prevention of market impact. The situation is different for investment firms that need to rebalance their inventory after a trade has taken place, which is reflected in the MiFID II framework. MiFID II deems different deferral lengths appropriate depending on the transaction size that needs to be rebalanced.7

Second, and related to the former difference, under MiFID II it is easier under the lower average daily turnover classes (which comprises the less liquid shares) to get deferred post-trade data publication compared to a pre-trade transparency large in scale-exception.8 The minimum size of large in scale size related to the average daily turnover class is lower for post-trade data deferral. The difference between the two stems from the MiFID II objectives concerning pre-trade and post-trade transparency exceptions. The rationale behind deferral of post-trade transparency publication is to reduce so-called inventory risk. As examined in chapter 5, the rationale in permitting exceptions for pre-trade data publication is the reduction of market impact and volatility. MiFID II considers that the risks of (a) inventory rebalancing take place at a lower transaction size compared to (b) pre-trade transparency risks of market impact and volatility. Simply put, an investment firm already faces inventory risks with a small transaction size (i.e. post-trade transparency risks). By contrast, pre-trade transparency risks, being market impact and volatility, only occur at larger sizes. Whilst the same line of thought was already apparent under MiFID I,9MiFID II introduces an important change compared to MiFID I. MiFID II has expanded the scope of deferral compared to MiFID I (i.e. any investment firm at risk, instead of only investment firms dealing with ‘clients’, see paragraph above). In combination with the lower deferral minimum sizes, the result is that while some pre-trade transparent orders in less liquid shares will not be eligible for the MiFID II pre-trade large in scale-exceptions, the investment firm could benefit from deferral.10

Finally, MiFID II covers an observing role for ESMA and the Commission in authorizing deferral arrangements. MiFID II requires ESMA to monitor the application of the deferred publication arrangements by the NCAs and report to the Commission.11 The situation is different for the MiFID II equity pre-trade transparency waiver regime in which ESMA leads the process. The aim of the ESMA-led waiver process is to ensure EU consistency concerning the waivers. The ESMA-led process reflects the complexity and contentious nature of pre-trade transparency waivers compared to post-trade transparency deferral arrangements (i.e. many different types of waivers are possible, whereas the deferrals are more straightforward, simply put a trade is deferred or not).12 The MiFID II process between equity pre-trade waivers and post-trade deferral is not entirely different. Similar to the equity pre-trade transparency waiver regime, ESMA can provide binding mediation where an NCA disagrees with a deferral authorisation by another NCA (see paragraph above).13