5.VII.1.2.4 Double volume cap: thresholds, no extension to illiquid instruments, and sanctions

ESMA provides several proposals in relation to the MiFID II double volume cap. Three main issues ESMA identified were that the double volume cap: (a) led to a decrease in the use of the reference price and negotiated trade waiver; (b) the system of two thresholds (four and eight percent) is relatively complex; and (c) a lack of an EU approach for sanctions for infringements of the double volume cap.1 ESMA provided recommendations to simplify the current double volume cap while enhancing equity pre-trade transparency. The ESMA recommendations in the consultation paper included, among other things, (i) whether or not to retain the two thresholds of the double volume cap and, if so, in which form, (ii) remove the requirement for NCAs to issue the suspension notices and require RMs and MTFs, on the basis of ESMA’s publication, to suspend dark trading in case of a breach, (iii) whether or not to extend the double volume cap to illiquid equity instruments, and (iv) whether or not to introduce an EU approach for sanctions of infringements of the double volume cap.2 In the ESMA MiFID II Review report ESMA proposes the following:

The ESMA proposals are the result of the ESMA consultation process, including the feedback from respondents to the consultation. During the consultation process, ESMA observed that the double volume cap had positive effects on market liquidity even to a limited extent. ESMA stated there has been a decrease in the bid-ask spread and an increase in the average trade size.3 However, ESMA acknowledged that the benefits need to be balanced against the issues of the double volume cap system. The result is these four ESMA proposals for the double volume cap mechanism.