5.II.2.5.1 General

MiFID II has introduced the double volume cap mechanism. The aim of the double volume cap mechanism is to preserve the price formation process.1 The mechanism applies to (1) the reference price waiver and (2) certain negotiated trades under the negotiated trade waiver, that is – negotiated trades in liquid equity instruments subject to pricing conditions.2 The double volume cap mechanism does not apply to the large in scale or order management facility waiver. Neither does the double volume mechanism apply to negotiated trades that: (i) are subject to conditions other than the current market price; or (ii) in illiquid equity instruments dealt within a percentage of a suitable reference price.

The double volume cap mechanism works as follows:

The cap of point (a) limits the use of the reference price and negotiated trade waiver in liquid equity instruments (hereafter: negotiated trade waiver) on the level of an individual RM or MTF. The use by an individual RM/MTF of the reference price and negotiated trade waiver together for a specific equity instrument must not exceed 4 percent of the total trading in that specific equity instrument in the EU. If the total value of the reference price and/or negotiated trade waiver together exceed(s) the 4 percent threshold, the NCA that authorized those waivers is required to suspend the use of the waivers within two working days, for a period of six months.5

The cap of point (b) limits the use of the reference price and negotiated trade waiver on the level of all RMs/MTFs combined. On all RMs/MTFs combined the use of the reference price and negotiated trade waivers for a specific equity instrument must not exceed 8 percent of the total trading in that specific instrument in the EU. If the total value of the reference price and/or negotiated trade waiver exceed(s) the 8 percent threshold, all NCA must within two working days suspend the use of those waivers across the EU for a period of six months.6

MiFID II contains several publication requirements for ESMA in relation to the double volume cap mechanism.7 ESMA is required to publish monthly the total volume of trading in the EU in each financial instrument in the previous 12 months. Furthermore, ESMA needs to publish on a monthly basis the percentage of trading in a financial instrument carried out under the reference price and negotiated trade waiver in the previous 12 months.8 In case the use by an individual trading venue of the reference price and negotiated trade waiver together exceeds 3,75 percent of all trading in the EU, ESMA must publish an additional report after the fifteenth day of a calendar month.9 A similar requirement for ESMA applies where the use by all trading venues of these waivers combined exceeds 7,75 percent of all trading in the EU.10

Finally, MiFID II imposes monitoring-obligations on trading venues in respect of the volume cap mechanism. MiFID II requires trading venues to have systems and procedures in place to (a) identify all trades that take place on its venue under these waivers; and (b) ensure that it does not exceed the permitted percentage of trading allowed under these waivers.11 These obligations aim to ensure that trading venues can monitor the trading taking place under the reference price and negotiated trade waiver and to determine whether the 4 and 8 percent thresholds have been exceeded.12 The double volume cap is part of the MiFID II Review (see section VII below).