19.III.2.3.3 Through which trading system a financial instrument is traded

Another dimension that determines the degree of EU equity pre- and post-trade transparency regulation in relation to financial instruments is whether or not the instrument (a) is respectively ‘dealt in on’, ‘admitted to trading on’ and/or ‘traded on’ (b) a certain venue (e.g. an RM). The ISD required RMs to publish some pre- and post-trade data for financial instruments (including equity) ‘dealt in on the RM in question’. Simply put, the term ‘dealt in on’ meant that the financial instrument met the conditions of the Listing Admission Directive (LAD) or, where the LAD was not applicable, the national conditions concerning when a financial instrument could effectively be dealt in on (admitted to/listed) the RM. The admission conditions (LAD or national) can be characterised as a quality standard. EU transparency requirements – in a broad sense – applied where the financial instrument was ‘dealt in on a/the RM’. ‘In a broad sense’, since not only the ISD pre- and post-trade transparency requirements for RMs applied in this situation, but also other EU transparency requirements, such as issuer requirements with respect to prospectuses, market abuse, and annual reports. The aim here was to ensure investor protection and related transparent financial markets. The ISD threshold of ‘dealt in on’ was limited to RMs. The reason for the limitation to RMs was that the applicability of similar quality standards were deemed inappropriate for some growing and mid-size issuers intending to raise capital through alternative markets. The result was an ISD limitation of the ‘dealt in on’ concept to RMs.

The situation was somewhat similar under MiFID I. MiFID I introduced the concept of ‘admitted to trading on an RM’, which – similar to the ISD – functioned as a quality threshold for the financial instrument. Where a financial instrument was admitted to trading on an RM, MiFID I equity pre- and post-trade transparency rules applied, as well as several other quality standards, such as disclosure in relation to prospectuses, market abuse, and annual reports. MiFID I was ‘somewhat similar’ to the ISD, because differences were in place. MiFID I was different in the sense that not only RMs, but also MTFs, SIs, and other investment firms operating outside RMs and MTFs were subject to MiFID I pre- and post-trade transparency rules in case of shares ‘admitted to trading on an RM’. This meant that the MiFID I concept of shares ‘admitted to trading on an RM’ reached further than the ISD concept of ‘dealt in on the RM in question’ (i.e. the ISD only required RMs to publish the pre- and post-trade data). Similar to the ISD, MiFID I limited the quality threshold to RMs (‘admitted to trading on an RM’). The rationale here was the same as under the ISD. MiFID I considered it inappropriate (i.e. too burdensome) to apply quality standards for instruments admitted on venues other than RMs.

MiFID II has changed the MiFID I framework for ‘admission to trading on an RM’ and its relation to the applicable equity pre- and post-trade transparency rules in two ways. First, the MiFID II concept of ‘admission to trading on an RM’ is narrower compared to MiFID I. Under MiFID I ‘admitted to trading on an RM’ also included the situation where a financial instrument was admitted to trading on one RM and subsequently admitted to trading on other RMs, even without the consent of the issuer (a so-called ‘passive secondary listing’). By contrast, MiFID II distinguishes between (a) financial instruments admitted to trading on an RM with issuer consent and (b) financial instruments admitted to trading on an RM and subsequently traded on another RM without issuer consent. Where a financial instrument is traded on an RM without issuer consent, MiFID II deems the financial instrument simply to be ‘traded on’, not ‘admitted to trading on’ the RM in question. The distinction is not relevant for the MiFID II equity pre- and post-trade transparency-rules, which apply both where a financial instrument is ‘admitted to trading’ or ‘traded on an RM’, but it removes issuer disclosure requirements (e.g. most financial reports under the Transparency Directive only apply for financial instruments admitted to trading on an RM with issuer consent) where the financial instrument is traded without issuer consent (i.e. ‘traded on’, instead of ‘admitted to trading on an RM’). This observation is relevant, because it shows that the EU believes that equity pre- and post-trade transparency is a minimum when it comes to financial transparency. Whilst issuer disclosure requirements often only apply where a financial instrument is admitted to trading with issuer consent, the same is not true for equity pre- and post-trade transparency. The equity pre- and post-trade transparency requirements apply both for instruments admitted to trading on and traded on an RM.

The foregoing results to the second change from MiFID I to MiFID II. Under MiFID I the concept of ‘admitted to trading on’ (including without issuer consent) was limited to RMs. Under MiFID II the equity pre- and post-trade transparency rules also apply where a financial instrument is ‘traded on a trading venue’, meaning traded on an RM or MTF. The reason here is that under MiFID I an increased number of financial instruments were only traded on MTFs, that is – without being admitted to trading on an RM. In other words, MTFs started to compete on a larger scale with RMs in terms of listing services. The MiFID I equity pre- and post-trade transparency rules did not apply in case a financial instrument was only admitted to trading on an MTF. To ensure sufficient transparency and a level playing field with RMs, the EU believed it was necessary to change the MiFID I scope. This is apparent in EU regulation. The MiFID II equity pre- and post-trade transparency requirements apply in relation to equity instruments ‘traded on a trading venue’ (i.e. RM or MTF).