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Transparency

Transparency under MiFID II/MiFIR

The concept of transparency can be considered as one of the most impactful regimes under MiFID II/MiFIR in terms of how the provisions thereunder have been expanded to new market segments, firms and instruments.

Stipulating transparency requirements for trading venues as well as for Systematic Internalisers (SIs) and investment firms trading over the counter (OTC), MiFID II/MiFIR will expand their reach to include equity-like and non-equity instruments.

While national competent authorities (NCAs) may waive some of the pre-trade transparency obligations for trading venues, the European Commission reserves the right to review and adjust these requirements two years after they have come into force. In addition, a volume cap mechanism has been introduced to limit the trading under some of these waivers. In the past, the waivers had entailed “dark pools” of large amounts of trading being conducted anonymously, with regulators arguing that the inconsistent implementation of a waiver regime across venues has harmed price formation and weighed on transparency.

As outlined above, transparency under MiFID II/MiFIR concerns pre-trade transparency requirements and post-trade disclosure that, once implemented, expose the vast majority of trading in financial instruments to publication.

Procedure for the legal implementation of MiFID II/MiFIR

Going back to the so-called Lamfalussy Process, there are four levels of implementation of a financial services regulation. Whilst the implementation procedure has changed slightly since, the four-level framework remains.

Transparency for trading venues

Transparency for equity and equity-like instruments

Pre-trade transparency requirements

Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs) are obliged to continuously publish current bid and offer prices for shares, depositary receipts, ETFs, certificates and other similar financial instruments (“equity and equity-like instruments”) advertised through their systems. It also has to be reported what portion of the market would be willing to trade at each of these quotes (equally applicable to actionable indication of interests).

Waivers

The four types of waivers, the national competent authorities (NCAs) may grant to exempt firms from making public their quotes before the execution of the transaction are the reference price waiver, the negotiated trade waiver, the order management facility waiver and the large-in-scale waiver.

Volume cap mechanism

The percentage of trading in a financial instrument carried out on a trading venue under the negotiated trade waiver and the reference price waiver will be limited to 4 per cent of the total volume of trading in that financial instrument on all trading venues across the EU over the previous twelve months.

At the same time, the overall EU trading in a financial instrument under those waivers may not exceed 8 per cent of the total volume of its trading on all venues throughout the EU over the previous twelve months. These caps will be measured against a rolling twelve-month period. ESMA is mandated with publishing and updating this data on a monthly basis; prior to this, it has to collate this data from the respective reports filed by the competent authorities which granted the waivers to firms which have to report to ESMA.

Post-trade transparency requirements

Trading venues are obliged to publish the price, volume and time of the transactions executed in equity and equity-like instruments traded on that trading venue as close to real time as is technically possible.

It is also mandatory for them to provide access, on reasonable commercial terms and on a non-discriminatory basis, to the arrangements made for publishing the above information to investment firms which are obliged to publish those details of their transactions in equity and equity-like instruments themselves.

Minimum trade information requirements

The trade information to be published must at least include:

  • the identifier of the financial instrument,
  • the price at which the transaction was concluded,
  • the volume and the time of the transaction,
  • the time the transaction was reported,
  • the price notation of the transaction and
  • the code for the trading venue.

Deferred publication

NCAs may allow trading venues the deferred publication of a transaction's details depending on its type or size. In particular, they may authorise the deferred publication for transactions that are large in scale compared with the normal market size for that (or a similar) equity or equity-like instrument.

Transparency for non-equity instruments

Pre-trade transparency requirements

Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs) are obliged to continuously publish current bid and offer prices for bonds, structured finance products, emission allowances and derivatives (“non-equity instruments”) advertised through their systems. It also has to be reported what portion of the market would be willing to trade at each of these quotes.

While equally applicable to actionable indication of interests, these requirements shall be calibrated for different types of trading systems, including order-book, quote-driven, hybrid, periodic auction trading and voice trading systems. The obligation to publish these details does not apply to derivative transactions of non-financial counterparties entered into for hedging purposes.

Waivers

National competent authorities (NCAs) may allow trading venues the deferred publication of a transaction's details for

(a) orders that are large in scale compared with normal market size and orders held in an order management facility of the trading venue pending disclosure,

(b) actionable indications of interest in request-for-quote and voice trading systems that are above a size specific to the financial instrument, which would expose liquidity providers to undue risk, taking into account whether the relevant market participants are retail or wholesale investors, and

(c) derivatives which are not subject to the trading obligation specified in Article 28 and other financial instruments for which there is not a liquid market.

Post-trade transparency requirements

Trading venues are obliged to publish the price, volume and time of the transactions executed in non-equity instruments traded on that trading venue as close to real time as is technically possible.

By comparison with the post-trade transparency obligations for equities and equity-like instruments it is also mandatory for them to provide access, on reasonable commercial terms and on a non-discriminatory basis, for the arrangements made for publishing the above information to investment firms which are obliged to publish those details of their transactions in non-equity instruments themselves.

Deferred publication

NCAs may allow trading venues the deferred publication of a transaction's details depending on its type or size. In particular, they may authorise the deferred publication for transactions that are

(a) large in scale compared with the normal market size for that (or a similar) non-equity instrument,

(b) related to a non-equity instrument for which there is no liquid market,

(c) above a size specific to that non-equity instrument which would expose liquidity providers to undue risk, taking into account whether the relevant market participants are retail or wholesale investors.

Separate publication of pre-trade and post-trade data on a reasonable commercial basis

Trading venues are obliged to publish the information according to the requirements above described for the different instruments separated by pre-trade and post-trade information. In addition, trading venues must publish the information on a reasonable commercial basis and ensure non-discriminatory access while, 15 minutes after publication, such information must be made available free of charge.

Transparency for Systematic Internalisers (SIs) and investment firms trading OTC

Firm quote publication obligation for investment firms, including SIs, regarding equity and equity-like instruments

Investment firms must publish firm quotes for equity and equity-like instruments traded on a trading venue for which they are SIs and for which there is a liquid market. Absent a liquid market for such instruments, SIs must disclose quotes to their clients upon request. These requirements – as well as the regime on whom they must grant access to their quotes and how to execute orders received – apply where SIs deal up to standard market size. They do not when they deal in sizes above standard market size.

While SIs are free to choose the size at which they quote, the quote must at least represent the equivalent of 10 per cent of the standard market size of an equity or equity-like instrument. For a particular instrument traded on a trading venue, each quote must be firm for sizes up to standard market size for this (type of) instrument with its price mandatorily reflecting the prevailing market conditions.

The equity and equity-like instruments must be grouped in classes reflecting the arithmetic average value of the orders executed in the market for that financial instrument. The “standard market size” for each (type of) instrument must represent the arithmetic average value of the orders executed in the market for the financial instruments included in each class.

The “market” for each equity and equity-like instrument means all orders executed in the European Union for the respective instrument without those classified as large in scale compared to the standard market size. The grouping must be conducted annually by the NCA of the most liquid market for each instrument based on the average trade turnover in the market for this (type of) instrument. The national competent authority (NCA) must publish this information and send it to ESMA which, in turn, will publish it via its website. ESMA is also mandated with developing the technical standards for the above standardisations.

Execution of client orders

SIs must continuously publish their quotes “in a manner which is easily accessible to other market participants on a reasonable commercial basis” and update them regularly at any time while being allowed to withdraw them under exceptional market conditions. Where an investment firm reaches or exceeds the thresholds defined for systematic internalisation criteria, they must notify their NCA, who will notify ESMA which will establish a list of all SIs in the European Union.

SIs are generally obliged to execute the orders they receive from their clients for equity-like instruments for which they are SIs at the quoted prices at the time they receive the order. They may execute orders at a better price if the price falls within a public range close to market conditions. The above is not binding in case they deal with professional clients in transactions where the execution in several securities is part of one transaction or where conditions agreed upon with professional clients deviate from current market prices.

An SI that receives an order higher than its quotation but still below what is standard market size is free to execute the part of the order which goes beyond the quoted size at the quoted price. If an SI receives an order of a size between different sizes it has quoted, it may execute the order at one of the quoted prices. Both of the aforementioned cases are subject to the exceptions according to the previous paragraph.

Access to quotes

SIs may grant access to their quotes at their discretion given that the respective decision is in line with their commercial policy and given this policy is objective and non-discriminatory.

Such a policy may contain exclusion criteria related to client credit status or counterparty risk as well as criteria governing the final settlement of the transaction. Additional such provisions may limit the number of transactions from the same client which an SI may enter into at the published conditions, or the total number of transactions from different clients at the same time should the total significantly exceed the standard.

A delegated act by the European Commission will detail the quote accessibility criteria, the publication channel (through a Regulated Market (RM), an Approved Publication Arrangement (APA) or proprietary solutions) as well as the criteria for the aforementioned exceptions.

Firm quote publication obligation for SIs regarding non-equity instruments

Investment firms must publish firm quotes for non-equity instruments traded on a trading venue for which they are SIs and for which there is a liquid market upon client request and where they agree to provide a quote.

NCAs may waive the quotation obligation for

a) non-equity instruments for orders that are large in scale, and orders held in an order management facility of the trading venue pending disclosure,

b) actionable indications of interest in request-for-quote and voice trading systems that are above a size specific to the instrument,

c) derivatives not subjected to the trading obligation under MiFIR and other financial instruments for which there is no liquid market.

SIs must update their quotes at any time and may withdraw them only under exceptional market conditions. Quotes shown upon client request have to be made available to other clients as well. They have the discretion not to publish quotes or to enter into a transaction (similarly to the provisions for equity and equity-like instruments). The NCAs and ESMA are mandated with monitoring the application of these provisions.

Post-trade disclosure obligations for investment firms, including SIs, regarding equity and equity-like instruments

Investment firms which conclude transactions in equity and equity-like instruments traded on a trading venue, must publish the volume and price of those transactions and the time at which they were concluded, irrespective of whether traded on own account or on behalf of clients. This information has to be published via an APA as close to real time as is technically possible while the deferral regime is the same as described for trading venues.

Post-trade disclosure obligations for investment firms, including SIs, regarding non-equity instruments

Investment firms which conclude transactions in non-equity instruments traded on a trading venue, must publish the volume and price of those transactions and the time at which they were concluded, irrespective of whether traded on own account or on behalf of clients. This information has to be published – for each individual transaction once – through a single APA, as close to real time as is technically possible.

The trade information to be published via an APA must at least include:

  • the identifier of the financial instrument,
  • the price at which the transaction was concluded,
  • the volume of the transaction,
  • the time of the transaction,
  • the time the transaction was reported,
  • the price notation of the transaction,
  • the code for the trading venue (here: “SI” or “OTC”) and, if applicable
  • an indicator that the transaction was subject to specific conditions.

In order to avoid ambiguity over the question which party to a transaction is obliged to report and to prevent potential regulatory arbitrage, ESMA has imposed the publishing responsibility on the seller.

According to ESMA, in case one party to the transaction is an SI in the instrument traded, the obligation to publish via an APA will always be with the SI, even if the SI is the buyer. In the rare cases where both parties to a trade are SIs in the given instrument, the seller principle applies.

While the deferral regime is formally equal to that for equity instruments, NCAs may ask for certain items even during the deferral period.

Information for transparency and other calculations

NCAs may refer to trading venues, APAs and Consolidated Tape Providers to collect the information necessary to implement the transparency regime and for the supervision of the determination of investment firms’ SI status.