Top things you need to know about the latest ESMA Consultation Paper
The publication of the European Regulator’s consultation paper including plans to review the existing MiFID II/MiFIR equity transparency framework has sent shock waves across the industry. The proposals, if fully implemented, will likely have a significant impact on liquidity formation and routing practices in Europe, yet the key themes have been on the agenda since the implementation of MiFID II (read more here).
The ESMA proposals intend to:
1. Restrict dark trading either by:
- Reducing the complexity of pre-trade transparency waivers to just Large-In-Scale (LIS) and OMF; but by removing the Reference Price Waiver (RPW) and Negotiated Trade Waivers (NTW) this would remove the need for the Double Volume Cap (DVC); or
- If the DVC remains, widening the DVC to include illiquid instruments and greater enforcement by eliminating the individual trading venue (TV) threshold and potentially altering the DVC EU wide threshold to 7%.
2. Restrict Use of Periodics - ESMA recently published an Opinion[1] restricting the use of Frequent Batch Auctions (FBA) and are now proposing amendments to MiFIR to provide legal backup to ensure industry participation across the board, specifically:
- All orders (volume and price) submitted to FBAs should be disclosed to meet the MiFIR pre-trade transparency requirements; and that
- All trading systems should be genuinely price-forming in order to operate without a waiver.
3. Adjust the Systematic Internaliser (SI) regime to level the playing field between on-venue and SI trading. ESMA proposes:
- An increase of minimum quoting obligations subject to pre-trade transparency;
- A revised methodology for determining quoting sizes;
- And/or an extension of the SI obligations to illiquid instruments;
- ESMA also propose that the deferrals thresholds for OTC and SI transactions should be the same as those on-venue.
4. ESMA is proposing to limit the scope of the Share Trading Obligation (STO) to third-country shares where the main pool of liquidity is located outside the EU in a similar manner to their guidance on trading Apple in Frankfurt.
- Proposal is to use the LEI of the issuer (the headquarters location) whose shares remain primarily traded in the EU vs. issuers who have not admitted shares to trading on a venue in the EU (such as Apple in US).
- Where an issuer has actively sought to have its shares admitted to trading both on a on a third country’s venue and on a trading venue in the EU—such as Deutsche Telecom—shares would be in scope of the STO but could be traded on third country trading venues on which the issuer has sought admission to trading.
- ESMA propose to remove SIs as an eligible execution venue under the STO. An alternative would be to limit the STO in liquid shares to trading venues only whereas SIs could remain an eligible execution place for illiquid shares.
For more on the latest ESMA CP, click here.
Rebecca Healey, Global Head of Market Structure