5.II.2.2.6.3 Level 2 text: Member State discretion in assigning liquid equity instruments

MiFID II permits a Member State to override the liquid market-criteria under where the total number of liquid shares in its jurisdiction is less than five.1 The Member State discretion is a legacy from MiFID I and was ultimately retained under MiFID II, in particular due to the ESMA advice. In drafting MiFID II, ESMA proposed to simplify and harmonise the regulatory regime compared to MiFID I.2 For this reason, ESMA questioned whether it needed to remove the Member State discretion to appoint additional liquid instruments under MiFID I.3

Respondents to the ESMA consultation were equally split among those in favour and against retaining the discretion.4 Those in favour argued the Member State flexibility had positive effects on the overall level of transparency level in the EU (i.e. the rules would apply, also where the MiFID II criteria were not met) and could reduce any potential negative side effect coming from a ‘one size fits all’ model. Contrarily, those suggesting to remove the Member States discretion argued for a consistent and objective application across the EU. Based on the responses, ESMA noted that there were still reasons for allowing Member States to specify additional equity instruments as being liquid, even if they do not fulfil the criteria. ESMA therefore proposed to retain the Member State discretion under MiFID II.5

The Commission took a similar approach as ESMA. This is apparent in the final MiFID II text. MiFID II gives Member States flexibility in appointing liquid equity instruments (not greater than five), also where the four MiFID II criteria of a ‘liquid market’ are not met.6