Quick links to key sections of this page
Summary
The new rules governing market transparency are one of the largest components of MiFID2 and have to stretch from improving the existing rules over the functioning of equity markets to completely new territory in the much more diverse and less liquid OTC derivative markets. Generally, the rules split into pre and post trading with further divisions into equity-like instruments and non-equity-like instruments. The EU is firstly a trade association and secondly a regulatory body. All its rules are drafted with a view to the promotion of fair and open trade. In this respect the major transparency changes are focused on;
- When should orders be public?
- What range of firm quotes and expressions of interest should trading venues and liquidity providers make public?
- When should the details of trades executed be made public?
A completely transparent market will deter firms from committing to positions they cannot cover. Equally a completely opaque market will make it very hard for customers to get a fair price. The rules are trying to balance this for all financial instruments.
What will be the impact? I think;
- This is one of the final stages in the maturing of the OTC markets and the normalisation of profit margins for market makers.1
- Trading will become yet more technology focused as compliance with rules of this breadth and complexity cannot be achieved manually.
- The consolidation of market intermediaries and their evolution into regulated trading venues will continue.
- The T+1 publication of illiquid trade execution details with other MiFID2 provisions on best execution will further compress the returns on market making in OTC derivatives as much more data on recent execution levels will be available along with trading venues’ and systematic internalisers’ real-time publication of quotes in liquid instruments such as vanilla swaps.
Background
Most of MiFID2 and MiFIR’s transparency rules are split into rules for equities and equity like instruments (shares, depositary receipts, ETFs, certificates) and those for non-equity-like instruments (bonds, structured finance products, emission allowances and derivatives).
Before MiFID2, equities and listed derivatives traded on markets that were fairly transparent but there were no complete public records of OTC trades executed. Orders and quotes revolved around proprietary venues built by the major banks and the inter-dealer broker market which effectively acted as unsupervised trading venues. Disclosure rules had little structure and the market was effectively self-regulating, which will change completely under MiFID2.
The Rules’ Objectives
The rules are trying to balance efficiency and fairness for customers with the need to protect liquidity providers from onerous position taking obligations and a competitive disadvantage where their competitors are aware of their trading positions through public disclosure of trade executions. If the system favours customers and competitors too much by making the obligations on liquidity providers too great the providers will withdraw making the markets much less effective. Equally, if there is too much protection for providers then clients will be paying unnecessarily large spreads for market access. And this has to stretch from highly liquid popular listed futures and equities to highly illiquid bespoke OTC derivatives. Quite a challenge for rule setters! Another challenge is the structure of the markets. Equity and listed derivatives markets have evolved over the last few years to a relatively standard order based system where the exchanges bring together buy and sell orders. The OTC markets are much less standardised with much of the market operating on “request for quote” and “expression of interest systems”. Also while clearing systems standardise the credit risk, uncleared trades cannot have complete standard quotes as the credit risk and collateral arrangements are still quite bespoke even as “Margin Reform” moves the uncollateralised market to prescribed CSAs.
Scope and Approach
One of the obvious issues with MiFID1 was that it focused on equities and had little to say about other products. MiFID2 covers almost everything but this then makes the scope of the transparency regime huge. The detail of all this are laid out in delegated regulations 2017/583 and 2017/587. Other parts of MiFID2 give regulators the powers to demand the market data they need to set up these rules but in any event they have given the entire FX derivatives market a pass and ruled that it is all illiquid (which sounds a little unlikely to me). Part of their problem is that the market’s underlying, spot FX is outside the scope of MiFID2 except where it trades on a trading venue.
Generally, the rules are trying to categorise financial instruments into similar groups and then determine a fair measure to quantify the liquidity of that piece of the market. Large orders (compared to the market’s liquidity) will not need to be made public. Trade executions which are above the market’s normal liquidity size will be made public on a deferred basis. The rule calculations are quite different for the equity-like and the non-equity-like instrument groups. The equity-like group uses the Average Daily Turnover (ADT) extensively as its benchmark augmented with the Standard Market Size (SMS) which is the average value of transactions conducted in the previous year where there is a liquid market. See the links for more detail on the calculations’ rules and exclusions.
The non-equity-like group, with a vastly diverse set of instruments uses a number of measures; Average Daily Notional Amount (ADNA), Average Daily Number of Trades (ADNoT), to assess if a market or sub asset class is liquid as well Threshold Values, Large in Scale (LIS) and Size Specific To the financial Instrument (SSTI) when considering individual liquidity limits. Luckily for us the rules use the same calculations for the pre and post trade determination rules. However, the levels they then apply are different so the SSTI level for a specific type of derivative in considering order publication will be different to the SSTI level for the same product when considering post trade execution publication.
Instrument Classes
The equity-like side of this is fairly straight forward;
| Asset Class | Definition |
|---|---|
| Shares, depositary receipts | "‘depositary receipts’ means those securities which are negotiable on the capital market and which represent ownership of the securities of a non-domiciled issuer while being able to be admitted to trading on a regulated market and traded independently of the securities of the non-domiciled issuer" |
| ETF | "fund of which at least one unit or share class is traded throughout the day on at least one trading venue and with at least one market maker which takes action to ensure that the price of its units or shares on the trading venue does not vary significantly from its net asset value and, where applicable, from its indicative net asset value" |
| Certificates and othersimilar financial instruments | "those securities which are negotiable on the capital market and which in case of a repayment of investment by the issuer are ranked above shares but below unsecured bond instruments and other similar instruments;" |
The non-equity-like side is much more complex dividing asset classes into sub asset classes and sub classes which can be further sub divided where necessary to include currencies, underlyings, type of settlement and maturities. Here are the asset classes and sub-classes;
MiFID2 Non-Equity-Like Instrument Classes
| Asset Classes of Financial Instrument | Sub Asset Classes | Sub Classes (excluding maturities) |
|---|---|---|
| Bonds | Sovereign Other Public Convertible Covered Corporate Exchange Traded Commodities (ETC) Exchange Traded Notes (ETN) Other | none |
| Structured financial products | none | none |
| Securitised derivatives | none | none |
| Interest rate derivatives | • Bond futures and forwards • Bond options • IR futures and FRAs • IR options • Swaptions • Fixed to Floating multi/ Xccy Swaps and futures/FRAs on them. • Floating to Floating multi/ Xccy Swaps and futures/FRAs on them. • Fixed to Fixed multi/ Xccy Swaps and futures/FRAs on them. • OIS multi/ Xccy Swaps and futures/FRAs on them. • Inflation multi/ Xccy Swaps and futures/FRAs on them. • Fixed to Floating single ccy Swaps and futures/FRAs on them. • Floating to Floating single ccy Swaps and futures/FRAs on them. • Fixed to Fixed single ccy Swaps and futures/FRAs on them. • OIS single ccy Swaps and futures/FRAs on them. • Inflation single ccy Swaps and futures/FRAs on them. • Other | • Issuer • Underlying bond • Underlying interest rate, term of the rate • Underlying interest rate, term of the rate • Underlying type of swap, currency of the option, underlying inflation index where applicable • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • None |
| Equity derivatives | • Stock index options • Stock index futures, forwards • Stock Options • Stock futures, forwards • Stock dividend options • Stock dividend futures, forwards • Stock dividend index options • Stock dividend index futures, forwards • Volatility index options • Volatility index futures, forwards • ETF options • ETF futures, forwards • Equity swaps • Portfolio swaps • Other | • Underlying index • Underlying index • Underlying share • Underlying share • Underlying share • Underlying share • Underlying index • Underlying index • Underlying index • Underlying index • Underlying ETF • Underlying ETF • Underlying Type, underlying index/share, return parameter • Underlying Type, underlying index/share, return parameter • None |
| Commodity derivaitives | • Metal futures, forwards • Metal options • Metal swaps • Energy futures, forwards • Energy options • Energy swaps • Agricultural futures, forwards • Agricultural options • Agricultural swaps • Other | • Precious/non, underlying metal, currency • Precious/non, underlying metal, currency • Precious/non, underlying metal, currency, settlement type • Energy type, underlying, currency, load type, settlement type • Energy type, underlying, currency, load type, settlement type • Energy type, underlying, currency, load type, settlement type • Underlying, currency • Underlying, currency • Underlying, currency • None |
| Foreign exchange derivatives | • Non deliverable forward • Deliverable forward • Non deliverable option • Deliverable option • Non deliverable swap • Deliverable swap • Futures • Other | • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • Currency pair • None |
| Credit derivatives | • Index default swaps • Single name default swaps • Bespoke basket default swaps • Index default options • Single name default options • Other | • Underlying, currency • Underlying reference entity, entity type, currency • Not specified... • As for index default swaps • As for single name default swaps • None |
| C10 derivatives | • Freight • Other | • Forward or option, dry/wet, carrier type, cargo size, route/time • None NB The cargo size sub class is not specified |
| Emission allowances | • EU allowance (EUA) • EU aviation allowance (EUAA) • Certified emission reductions (CER) • Emission reduction units (ERU) | • None • None • None • None |
| Emission allowance derivatives | • Derivatives on EU allowance (EUA) • Derivatives on EU aviation allowance (EUAA) • Derivatives on Certified emission reductions (CER) • Derivatives on Emission reduction units (ERU) • Other | • None • None • None • None • None |
| CFDs | • Currency CFDs • Commodity CFDs • Equity CFDs • Bond CFDs • Equity future/ forward CFDs • Equity option CFDs • Other/ spread betting | • Currency pair • Underlying • Underlying • Underlying • Underlying • Underlying • None |
This shows the sub classes for maturity and term that are also applied. Equity index options and equity stock options do not have any maturity sub classes but are using the Average Daily Notional as a way of distinguishing between liquid and less liquid contract types. The problem this may raise is that a twenty year derivative such as FTSE index option will be grouped with the three month contracts while in practice their liquidity is very different.;
Standard Maturity Sub Classes for Asset Sub-Classes
| • Credit default swaps • Single name default swaps • Equity dividend return swaps • Non-precious metal futures, forwards, options and swaps | • Credit default options on indices. • Credit default options on single names • Coal futures, forwards, options and swaps | • Bond futures and forwards | • Bond option, futures and forwards. IR options, futures and FRAs • Equity volatility return swaps • Agricultural futures, forwards, options and swaps | • IR Swaps and IR swaption underlyings • Equity price return swaps • Equity portfolio swaps | • Swaptions | • Precious metal futures, forwards, options and swaps | • Oil/ oil distillates/ oil light ends futures, forwards, options and swaps | • Nat gas, Electricity and inter-electricity futures, forwards, options and swaps | • Freight derivatives |
|---|---|---|---|---|---|---|---|---|---|
| 0 – 1 year | 0 – 6 months | 1 – 4 years short-term | 0 – 3 months | 0 – 1 month | 0 – 6 months | 0 – 3 months | 0 – 4 months | 0 – 1 month | 0 – 1 month |
| 1-2 years | 6 – 12 months | 4 – 8 years medium-term | 3 – 6 months | 1 – 3 months | 6 – 12 months | 3 – 12 months | 4 – 8 months | 1 – 12 months | 1 – 3 months |
| 2 - 3 years | 1-2 years | 8 – 15 years long-term | 6 – 12 months | 3 – 6 months | 1-2 years | 1 – 2 years | 8 – 12 months | 1 – 2 years | 3 – 6 months |
| And so on | 2 - 3 years | >15 years ultra-long-term | 1 – 2 years | 6 – 12 months | 2 - 5 years | 2 – 3 years | 1 – 2 years | 2 – 3 years | 6 – 9 months |
| And so on | 2 – 3 years | 1 – 2 years | 5 - 10 years | And so on | 2 – 3 years | And so on | 9 – 12 months | ||
| And so on | 2 – 3 years | > 10 years | And so on | 1 – 2 years | |||||
| And so on | 2 – 3 years | ||||||||
| And so on |
The Actual Rules
Pre Trade
1. Does the order need to be made public?
2. When are quotes, expressions of interest required and when must they be made public?
Post Trade
3. Are the trade’s details made public immediately?
1. Order Publication?
There are two mechanisms which permit order publication to be suppressed;
- Large orders do not need to be published (MiFIR Art 4.1.c and Art 9.1.a).
- Illiquid markets do not require orders to be published (MiFIR Art 9.1.c).
Equity markets exist to match orders so suppressing publication is counter to their objectives. However, as very large orders can disrupt markets both equity and non-equity markets are not required to make public orders which are “Large in Scale” (LIS) (MiFIR Art 4.1.c, Art 11). Determination of LIS for equity like instruments is determined by reference to the instruments’s Average Daily Turnover (ADT).
LIS for non-equity-like instruments is determined through more complex calculations. There are three different determinations used; 1) Against a simple Threshold Value, 2) The greater of a Threshold Value and the average trade size of set percentile of a set historic traded population, or 3) The greatest of a Threshold Value, the average trade size of a set percentile of a set historic trade population and the average volume size of a set percentile of the same historic trade population. The tests are set differently depending on whether the sub-asset class (e.g. swaption) market is deemed liquid or illiquid;
The table below provides links to the specific details in the regulation where the equity-like instruments LIS;
MiFID2 Large in Scale Order publication suppression for Equity-like instruments
| Asset Class | Comment | Link to the table in the regulation |
|---|---|---|
| Equity shares and depositary receipts | Table 1 |
|
| Certificates and similar financial instruments | Table 2 | |
| ETFs | 2017/587 Article 7.2 | Any order ≥ €1m |
The rules have the following tests to identify where a non-equity-like market is liquid or not. Some markets are de facto declared liquid (e.g. equity options) or illiquid (e.g. structured financial products) while the majority have tests which are applied at the sub class of the asset class as described above.
Non-Equity-Like Markets Liquidity tests
| Asset Class | Comment | Test Type | Link to the table in the regulation |
|---|---|---|---|
| Bonds | except ETCs and ETNs ETCs and ETNs ETCs ETNs | Bond markets are deemed illiquid, the following tests apply to individual bonds Four tests all of which have to be passed for a bond to be liquid; 1. Average daily notional traded > €100k 2. Average daily number of trades > 15 3. Percentage of days where a trade occurs > 80% 4. Issue size < €1Bn (Sovereign, corpoarate and covered bonds) or < €500m (public and convertible bonds) At at individual level are liquid where; ADT > €500k and ADNoT > 10 ADT > €500k and ADNoT > 10 | Table 2.1 Table 2.2 Table 2.4 |
| Interest rate derivatives | Bond futures/forwards Bond options IR futures and FRAs IR options Swaptions Fixed to floating multi/XCCy swaps Floating to floating mulit/XCCy swaps Fixed to fixed multi/XCCy swaps OAI multi/XCCy swaps and futures/ forwards on them Inflation multi/XCCy swaps and futures/ forwards on them Fixed to floating single CCY swaps and futures/ forwards on them Floating to floating single CCY swaps and futures/ forwards on them Fixed to fixed single CCY swaps and futures/ forwards on them OIS single CCY swaps and futures/ forwards on them Inflation single CCY swaps and futures/ forwards on them | The sub asset classes are not deemed liquid and the sub-classes have the following tests; ADNA > €5m and ADNoT > 10 ADNA > €5m and ADNoT > 10 ADNA > €500m and ADNoT > 10 ADNA > €500m and ADNoT > 10 ADNA > €500m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 ADNA > €50m and ADNoT > 10 | Table 5.1 |
| Equity derivatives | stock index options stock index futures/ forwards Stock options Stock futures/ forwards Stock dividend options Stock dividend futures/ forwards Dividend index options Dividend index futures/ forwards Volatility index options Volatility index futures/ forwards ETF options ETF futures/ forwards Price return swaps Volatility return swaps Dividend return swaps Portfolio swaps | Most sub asset classes are liquid but the sub asset classes and sub classes of swaps have to meet the tests below; Liquid market Liquid market Liquid market Liquid market Liquid market Liquid market Liquid market Liquid market Liquid market Liquid market Liquid market Liquid market ADNA > €50m and ADNoT > 15 ADNA > €50m and ADNoT > 15 ADNA > €50m and ADNoT > 15 ADNA > €50m and ADNoT > 15 | Table 6.1 |
| Commodity derivatives | Metal futures/ forwards Metal options Metal swaps Energy futures/ forwards Energy options Energy swaps Agricultural futures/ forwards Agricultural options Agricultural swaps | The sub asset classes are not considered liquid markets so the sub classes will have to meet the following tests; ADNA > €100m and ADNoT > 10 ADNA > €10m and ADNoT > 10 ADNA > €10m and ADNoT > 10 ADNA > €10m and ADNoT > 10 ADNA > €10m and ADNoT > 10 ADNA > €10m and ADNoT > 10 ADNA > €10m and ADNoT > 10 ADNA > €10m and ADNoT > 10 ADNA > €10m and ADNoT > 10 | Table 7.1 |
| Credit derivatives | Index default swaps Single name default swaps CDS Index options Single name CDS options | The sub asset classes are not considered liquid markets so the sub classes will have to meet the following tests; ADNA > €200m and ADNoT > 10 but if the underlying index is "on-the-run" it will be deemed liquid for this period and the first 30 business days after it becomes the first off-the-run index. ADNA > €10m and ADNoT > 10 If the underlying is deemed liquid and option maturity 0-6 months then liquid. If the underlying is deemed liquid and option maturity 0-6 months then liquid. | Table 9.1 |
| C10, Freight derivatives | Freight derivatives | The sub asset class is not considered a liquid market so the sub classes will have to meet the following tests; ADNA > €10m and ADNoT > 10 | Table 10.1 |
| CFDs | Currency CFDs Commodity CFDs Equity CFDs Bond CFDs Equity future/ forward CFD Equity option CFD | The sub asset classes are not considered liquid markets so the sub classes will have to meet the following tests; ADNA > €50m and ADNoT > 100 ADNA > €50m and ADNoT > 100 If the underlying equity is deemed to have a liquid market If the underlying bond or bond future is deemed to have a liquid market If the underlying equity future/ forward is deemed to have a liquid market If the underlying equity option is deemed to have a liquid market | Table 11.1 |
| Emission allowances | EU Allowances (EUA) EU Aviation Allowances ( EUAA) Certified Emission Reductions (CER) Emission Reduction Units (ERU) | The sub asset classes are not considered liquid markets so the sub classes will have to meet the following tests; ADA = Average Daily Amount ( of Carbon Dioxide) ADA > 150k tons C02 and ADNoT > 5 ADA > 150k tons C02 and ADNoT > 5 ADA > 150k tons C02 and ADNoT > 5 ADA > 150k tons C02 and ADNoT > 5 | Table 12.1 |
| Emission allowance derivatives | EUA derivatives EUAA derivatives CER derivatives ERU derivatives | The sub asset classes are not considered liquid markets so the sub classes will have to meet the following tests; ADA = Average Daily Amount ( of Carbon Dioxide) ADA > 150k tons C02 and ADNoT > 5 ADA > 150k tons C02 and ADNoT > 5 ADA > 150k tons C02 and ADNoT > 5 ADA > 150k tons C02 and ADNoT > 5 | Table 13.1 |
| Structured finance products | Test 1: All SFPs Test 2: Individual SFPs | Structured financial product markets are deemed illiquid, the following tests apply at a product level; ADNA > €300m and ADNoT > 500 Average daily number of trades > 2 and percentage of day traded > 80%. | Table 3.1 |
| Securitised derivatives | Transferable securities including vanilla and exotic covered warrants, investment certificates with and without leverage, negotiable rights. | All securitised derivatives are considered to be part of a liquid market | Table 4.1 |
| FX derivatives | FX derivatives are not considered a liquid market, nor are the sub asset classes. There are no tests in the regulation to determine if a sub class is liquid | Table 8.1 |
The table below provides links to the specific details in the regulation where non-equity-like instruments in liquid markets test levels are set;
Non-Equity-Like Large in Scale Transaction Percentile Threshold Values for order publication supression
| Asset Class | Comment | Test Type | Link to the table in the regulation |
|---|---|---|---|
| Bonds | except ETCs and ETNs | Greater of Threshold Value and Trade Size percentile | Table 2.3 |
| Interest rate derivatives | Greatest of Threshold Value, Trade Size percentile and Volume Size percentile. | Table 5.2 | |
| Commodity derivatives | Greatest of Threshold Value, Trade Size percentile and Volume Size percentile. | Table 7.2 Table 6.3 |
|
| Credit derivatives | Greatest of Threshold Value, Trade Size percentile and Volume Size percentile. | Table 9.2 | |
| Freight derivatives | Greatest of Threshold Value, Trade Size percentile and Volume Size percentile. | Table 10.2 | |
| CFDs | Greatest of Threshold Value, Trade Size percentile and Volume Size percentile. | Table 11.2 | |
| Emission allowances | Greatest of Threshold Value, Trade Size percentile and Volume Size percentile. | Table 12.2 | |
| Emission allowance derivatives | Greatest of Threshold Value, Trade Size percentile and Volume Size percentile. | Table 13.2 | |
| Structured finance products | which have passed Test-1 and Test-2 | Greatest of Threshold Value, Trade Size percentile and Volume Size percentile. | Table 3.3 |
The table below provides links to the specific details in the regulation where non-equity-like instruments in illiquid markets test levels are set;
MiFID2 Large in Scale Threshold Values for order publication supression
| Asset Class | Comment | Link to the table in the regulation |
|---|---|---|
| Bonds | ETCs and ETNs | Table 2.5 |
| Securitised derivatives | Table 4.1 | |
| Equity derivatives | Table 6.2 is for sub classes which are deemed liquid. Table 6.3 is for sub classes which are deemed illiquid markets | Table 6.2 Table 6.3 |
| FX derivatives | Table 8.2 | |
| Interest rate derivatives where the sub class is determined illiquid | Table 5.3 | |
| Commodity derivatives where the sub class is determined illiquid | Table 7.3 | |
| Credit derivatives where the sub class is determined illiquid | Table 9.3 | |
| Freight and other derivatives deemed not to have a liquid market. | Table 10.3 | |
| CFDs deemed not to have a liquid market | Table 11.3 | |
| Emission allowances | EU Allowances, EU Aviation Allowances, Certified Emission Reductions, Emission Reduction Units | Table 12.3 |
| Emission allowance derivatives | Table 13.3 | |
| Structured finance products | The liquidity tests are in Table 3.1, where Test-1 is not passed Table 3.2 applies, where Test-1 is passed but not Test-2 Table 3.3 applies | Table 3.1 Table 3.2 Table 3.3 |
In devising the second and third test with trade size and volume size percentiles ESMA is introducing a lighter test initially and then tightening it over the next three years, using four stages “S1” to “S4”. By 30 July each year ESMA is required to submit amended technical standards to fine tune the levels of the stages after assessing their performance. If ESMA does not do this the move to the next stage is postponed by one year. Overall this give ESMA considerable flexibility (at the cost of yet further complexity!).
The stages are currently expected to phase in according to the following schedule;
| Measure subject to implementation modification | Products covered | Stage 1 (2018) | Stage 2 (2019) | Stage 3 (2020) | Stage 4 (2021) |
|---|---|---|---|---|---|
| Average daily number of trades | Used for bonds except ETCs and ETNs as one of the tests to determine if a bond is illiquid. | 15 | 10 | 7 | 2 |
| Trade size percentile and volume size percentile | Bonds and all classes of derivatives for pre-trade SSTI. | 30 | 40 | 50 | 60 |
| Trade percentile | This is only for covered bonds so it might be a typo! | 30 | 40 | 40 | 40 |
| Bond issue size | Corporate and Covered Bonds where issues below this size will be deemed illiquid. | €1Bn | €1Bn | €500m | €500m |
Separately, trading venues with order management facilities can hold orders back from public disclosure if it is contingent on some conditions being met and, 1) will be disclosed once those conditions are met and 2) cannot be filled prior to its disclosure.
2. Firm and Indicative quote levels
Equity-Like Trading Venues
Trading venues for equity-like instruments must make public all bid/offer prices and depth of trading interests which are advertised through their systems, whether quote, order, auction or hybrid. This may be waived where;
- The venue simply follows prices from a more reliable liquid price source.
- The instrument is illiquid.
- The trades are negotiated subject to other conditions than the current price.
- The orders are LIS.
- The orders are within an order management facility awaiting their publication conditions to be met.
Point 1. above covers venues that do not aim to set prices but use the best price (spot or average) from a more liquid source. They are subject to a specific (4%) and a market wide (8%) volume cap test to ensure that this practice does not degrade the quality of the instruments’ liquidity (MiFIR Art 5 and Del Reg 2017/577).
Non-Equity-Like Trading Venues
Trading venues for non-equity-like instruments must make public all bid/offer prices and depth of trading interests which are advertised through their systems, whether quote, order, auction, computerised or voice. This may be waived where;
- The instrument is illiquid or is a derivative not subject to the trading requirement (such derivatives must be traded on a trading venue).
- The orders are LIS or the expression of interest/quote is above the SSTI (MiFIR Art 8.4 and Art 9.1.b,c).
- The orders are within an order management facility awaiting their publication conditions to be met.
- The interest is risk reducing and from a non-financial party
Venues should publish indicative prices for contracts above the SSTI. Indicative prices should be based on the best available price or an average of available prices or a weighted average of prices. Trading venues should make clear how they compute such indicative prices. For non-equity-like instruments the tables above provide links to the same SSTI computation rules.
Systematic Internalisers
Systematic Internalisers are not required to give contractual access to their quotes to all parties but may select their clients (in a commercial and non-discriminatory fashion). For equity-like products they are required to provide continuous quotes during the trading day in a size of at least 10% of the SMS for liquid equity-like products, these quotes must be made public. For illiquid equity-like products they must provide quotes on request. For non-equity-like products, for which there is a liquid market they should provide a quote when requested by a client and they agree to do so. Any quotes they provide must be made public (although this does not mean the SI is committed to trading at this level with any other party). For non-equity-like products for which there is not a liquid market they may provide a quote again when requested and when they agree to do so. (MiFIR Art 18)
3. Deferred publication of executed transactions
Trades that do not meet the deferral conditions will be published immediately (MiFIR Art 6.1 and Art 10.1). For equity-like instruments this means within one minute. For non-equity like. for the first three years this is defined as within 15 minutes of execution and this will then reduce to five minutes. The rules contain many complex provisions permitting delays in the publication of trades for as little as one hour stretching to regulatory suspension of publication for months when a product experiences a liquidity crisis. The deferral of trade publication for equity-like and non-equity-like instruments follow different mechanisms although the objective is the same; to promote transparency without unduly penalising liquidity providers. Various computations are used to identify transactions which are large with respect to the standard liquidity of the instrument. There is also a general exemption from publication for trades which do not form part of a market’s price discovery (compression, , splitting, conversion, exercise et cetera, transfers between funds under common management where non investment firm is a party). NB deferred publication is not permission to defer trade reporting which is subject to separate regulatory provisions.
Equity-Like Deferral
The publication of equity-like large transactions may be delayed either; 1 hour, 2 hours or until the end of the trading day. Very roughly, for equity-like instruments a trade which is 10%, 20%, 30% of the ADT will get a delay; of 1 hour, 2 hours, until the end of day respectively (Table 4). Trades executed out of hours measured by the trading venue or the firm’s own business hours should be published by the start of the next day’s business.
MiFID2 Equity Share Trade Publication Deferral
| Average Daily Turnover € 000s | Trade Size to permit 1 Hour Publication Deferral € 000s | Trade Size to permit 2 Hours Publication Deferral € 000s | Trade Size to permit Publication Deferral until End of Day € 000s | Trade Size to permit Publication Deferral until End of Day on T+1 € 000s |
|---|---|---|---|---|
| <50 | 7.5 | 15 | Not applicable | 25 |
| 50 - 100 | 15 | 30 | 50 | |
| 100 - 500 | 30 | 80 | 120 | |
| 500 - 1,000 | 75 | 150 | 225 | |
| 1,000 - 5,000 | 450 | 750 | 1,000 | |
| 5,000 - 25,000 | 2,500 | 4,000 | 5,000 | |
| 25,000 - 50, 000 | 5,000 | 10,000 | 12,000 | |
| 50, 000 - 100, 000 | 7,000 | 15,000 | 25,000 | |
| > 100,000 | 10,000 | 20,000 | 35,000 |
MiFID2 ETF and Certificates Deferred Transaction Publication
| Deferral Type | MiFIR Reference | Technical Regulation (2017/583 2017/587) Reference | Instruments covered | Normal Deferred Publication |
|---|---|---|---|---|
| Intra-day deferral | Art 7.1 | Table 5 | ETFs | ≥ €10m 1 hour ≥ €50m End of day |
| Intra-day deferral | Art 7.1 | Table 6 | Certificates and similar instruments | ADT < €50k: trade ≥ €15k 2 hours ADT < €50k: trade ≥ €30k End of day ADT ≥€50k: trade ≥ €30k 2 hours ADT ≥ €50k: trade ≥ €60k End of day |
Non-Equity-Like Deferral
Non-equity-like instruments may be delayed until 19:00 on the second business day after the transaction was executed where the rules permit deferral. For non-equity-like it’s very hard to estimate which trades will qualify for deferral to T+2 but it seems likely that for say interest rate swaps trades will need to have a notional exceeding €10m or possibly more to qualify for deferral. There is no deferral provision for trades executed out of hours as there is for equity-like instruments.
MiFID2 Deferred Transaction Publication
| Deferral Type | MiFIR Reference | Technical Regulation (2017/583 2017/587) Reference | Instruments covered | Normal Deferred Publication | Regulatory Exercise of Deferred Publication | Interim Publication |
|---|---|---|---|---|---|---|
| The transaction is "Large in Scale". | Art 11.3.a Art 11.2, 3 | Art 8.1.a Art 11.1.a | Non-equity | T+2 19:00 | Trade details without the actual volume or a daily aggregate of the previous day's activity by 9:00am. | |
| The trade is in a financial instrument for which there is no liquid market. | Art 11.3.b Art 11.2, 3 | Art 8.1.b Art 11.1.b | Non-equity | T+2 19:00 | After four weeks by 9:00am on the next working day. Regulators may authorise aggregated reporting for sovereign debt instruments. | Without the volume. |
| The trade is above the "Size Specific to the Financial Instrument" (SSTI). | Art 11.3.c Art 11.2, 3 | Art 8.1.c Art 11.1.c | Non-equity and not sovereign debt | T+2 19:00 | After four weeks | Aggregate publication of the previous week's transactions by 9:00 each Tuesday |
| Temporary suspension of publication requirement for an instrument by a regulator | Art 11.2 Art 11.2, 3 | Art 11.1.d | Sovereign debt | Up to three months | Aggregate publication of the previous week's transactions by 9:00 each Tuesday |
For non-equity-like instruments the class structure and sub classes are the same for the pre and post trade transparency rules BUT the levels that Large in Scale and Size Specific To the financial Instrument reference are different. Generally, the LIS and SSTI is larger for post trade publication than pre-trade publication, i.e. the order might be large enough to waive publication but the consequent execution might still be subject to immediate publication. The LIS determination test for OTC derivatives (the greatest of the three measures test) is modified if the volume based result is greater than 97.5 percentile of the trade based calculation then the volume based result is excluded from the calculation.
Central Bank Exemption
Central banks where they are operating in their official capacity performing monetary, foreign exchange and financial stability operations are exempt the pre and post trade rules for trading venues and systematic internalisers with respect to bonds, structured financial products, emission allowances and derivatives. Obviously, they need to inform their counterparty/ venue that their order/ execution is under this exemption. Orders and transactions for other purposes cannot use this exemption.
1 There are numerous studies showing how market spreads and dealing costs are reduced for customers when financial products move from opaque to transparent.