5.II.2.3.2.1 Level 1 text: general aspects

CESR consulted on the waiver during the MiFID I-review. Most respondents to the consultation were satisfied with the current application of the waiver or did not provide specific proposals for amendments.1 However, some responding RMs and MTFs had concerns about the level playing field. The MiFID I order management waiver did not permit RMs and MTFs to contain purely dark orders in their order management facilities, that is – MiFID I required the order to ‘pend’ (be dark) until a triggering reference was met.2 It was argued that this created an unlevel playing field between investment firms and RMs/MTFs.3

CESR noted that there were two options to address the level playing field. One way was to ‘level up’ the pre-trade transparency requirements for investment firms. CESR stated this would require all orders submitted by investment firms to RMs/MTFs to be publicly displayed. Among other things, this would result in investment firms not being allowed to submit market orders or other orders with a zero time in force.4 A second option was to address ‘level down’ the order management facility waiver for RMs and MTFs. This would mean that RMs and MTFs would be permitted to offer the same functionality with their order management facilities as investment firms. This would allow purely dark orders (in price and size) to be managed by RMs and MTFs that would never appear in the order book or be visible to market participants before execution.5

In the end, CESR considered that the business conducted by RMs and MTFs is different to that of investment firms. In CESR’s view there was therefore little ground to suggest that RMs and MTFs needed to operate under the same rules as an investment firm. In line with the foregoing, CESR made no amendments to address the potential level playing field concern in use of the order management facility waiver.6

Another concern about the waiver was the lack of legal clarity.7 MiFID I left fairly wide room for interpretation of what order management facilities were and how they needed to be designed to be MiFID I compliant.8 CESR recommended the waiver to be retained, but recognised that further clarification on its conditions through a rule-based approach (instead of principle-based) would be desirable.9

In the MiFID II proposal the Commission proposed specifications on the methods of the order management waiver through level 2 measures. The aim here was to ensure legal certainty regarding the interpretation of the waiver.10 The European Parliament suggested a similar approach.11 The Council changed the proposal in the sense that it embedded the order management waiver in the Level 1 text.12 The Council left the specifics of waiver, being the type and minimum size of orders held in an order management facility, to ESMA through draft regulatory technical standards.13

The position of the Council was adopted in the final MiFID II text. MiFID II covers the order management facility waiver on Level 1. MiFID II notes that waivers are possible for ‘orders held in an order management facility of the trading venue pending disclosure’.14 The type and minimum order size were delegated to the Commission, as supported by ESMA.15