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MiFID II - Transparency

MiFID II will bring about important changes in the market structure and transparency of European capital markets. For instance, the licence obligation for proprietary trading will be expanded to algorithmic trading and direct electronic access. Also a new trading venue will be introduced: an organised trading facility (OTF). In addition, the pre- and post- trade transparency provisions and the provisions regarding transaction reporting will be expanded.

The transparency obligations for other instruments than equity instruments, such as bonds and derivatives, are very similar to the obligations for equity instruments. The most important difference is that exemptions (pre-trading) and postponement (post-trading) can be granted for the obligations when the liquidity of an instrument falls below a certain limit.

Pre-trade transparency

The exact pre-trade transparency obligation depends on the type of trading system. No pre-trade transparency obligations apply for investment firms that trade outside of a trading venue, with the exception of investment firms with systematic internalisation.

As was the case under MiFID I, national supervisors have the power to grant exemptions to regulated markets, MTFs and now also OTFs. This means that exemption from the pre-trade transparency obligation can be granted under certain circumstances, for example when an order is large in scale. Exemptions can also be granted based on the reference price, the negotiated trade and the order management facility (the regulations for instruments other than equity instruments has, however, no reference price exemptions for negotiated trades). A supervisor must inform other national supervisors and ESMA about the intention to grant an exemption. ESMA will then indicate whether the exemption complies with MiFIR. This is a non-binding advice.

On 28 September 2017, ESMA issued a public statement regarding the joint work plan of ESMA and national competent authorities (NCAs) for opinions on MiFID II pre-trade transparency waivers and position limits.

The statement explains that ESMA intends to finalise the opinions on equity waivers by the end of 2017. The AFM will subsequently notify the parties concerned. Due to the high number and complexity of pre-trade transparency waivers for non-equity instruments, it is unlikely that ESMA is in a position to issue opinions on these waivers before 3 January 2018.

The  waiver requests for non-equity instruments will be reviewed by the NCAs before 3 January 2018. Any provisionally granted waivers will be applied from January 3, 2018. However, if ESMA in its final review later that year reconsiders the granted waivers, the AFM will duly inform the relevant trading venues.

Volume cap mechanism

MiFIR limits the use of exemptions from pre-trade transparency obligations for transactions in equity instruments by introducing the volume cap mechanism. This mechanism was introduced to limit trading on 'dark pools’ and thus to increase the general transparency of price formation.

This mechanism means that the trade volume in an instrument under either the reference price exemption or the negotiated trade exemption may not be bigger than 4% of the total trade volume in that instrument per trading venue and not bigger than 8% of the total trade volume in the instrument. In the event that one of these limits is exceeded, the exemption in that instrument for the trading venue or all trading venues is suspended for a period of six months. This means that the trading venue (or the trading venues) must satisfy the pre-trade transparency obligations for that instrument during these six months. Due to the limits of 4% and 8%, the mechanism is often referred to as a double volume cap.

Post-trading transparency

Under MiFIR, the post-trade transparency obligations also apply to transactions by investment firms that are executed outside of a trading venue.

However, transactions between two investment firms require only a single publication. In principal the investment firms are free to choose who will publish the trade. But the responsibility for correct and timely publication lies with the SI and/or the selling firm, conform the the specifications in the ESMA Q&A (page 17 Q3)

Transactions that are executed on a trading venue, must always be published by the venue. Publication of transactions must take place as quickly as technically possible. As quickly as technically possible means for equity instruments that this has to take place in any case within one minute, for other instruments than equity instruments within 15 minutes (within 5 minutes as from 2021).

Deferrals

National supervisors can grant deferrals. A deferral is a postponement of the publication of transactions in case the transaction meets a number of requirements based on the type of product, the average daily turnover of that product and the size of the transaction.

Parties have to submit an application for a deferral by e-mail and/or by post. The AFM provides an Application form deferrals which also has to enclose the AFM Excel template deferrals. These forms can be found in the Digital portal of the AFM. There are separate documents available for market operators and investment firms operating a trading venue and for investment firms (not operating a trading venue). 

The AFM will only grant its permission when an application is complete and meets the legal requirements. A deferral will be granted per entity for future transactions in financial instruments traded on venues.

Please note that the postponed publication only concerns the disclosure requirement and not the reporting to the AFM. This reporting obligation continues to apply in full.

Deferrals for trading venues

The AFM has the authority to grant deferrals pursuant to Article 7 (equity) and Article 11 (non-equity) of MiFIR. The AFM will grant applications for postponed publications pursuant to Article 7, paragraph 1 and Article 11, paragraph 1 of MiFIR made by market operators and investment firms operating a trading venue if these meet the legal requirements. This makes it important to completely and accurately fill in the forms that are provided by the AFM. The forms can be found in the Digital portal of the AFM. The AFM does not set additional publication requirements as referred to in Article 11, paragraph 3, under a of the MiFIR.

In addition, the AFM will grant its permission on request in the following cases:

  1. On request, the AFM will allow market operators and investment firms operating a trading venue to omit the publication of the volume of an individualtransaction during an extended time period of deferral of no more than four weeks, in accordance with Article 11, Delegated Regulation (EU) 2017/583 (DR 2017/583). All details of the transactions must be published on a separate basis after four weeks.
  2. In respect of non-equity instruments that are not sovereign debt, on request, the AFM will allow market operators and investment firms operating a trading venue to publish several transactions in an aggregated form during an extended time period of deferral of no more than four weeks, in accordance with Article 11, DR 2017/583. All details of the transactions must be published on a separate basis after four weeks.
  3. In respect of sovereign debt instruments (government bonds), on request, the AFM will allow market operators and investment firms operating a trading venue to publish several transactions in an aggregated form for an indefinite period of time, in accordance with Article 11, DR 2017/583.
  4. On request, the AFM will allow market operators and investment firms operating a trading venue to perform a combination of both 1) and 3) for government bonds, whereby after four weeks, the volumes should be published in aggregated form, in accordance with Article 11, DR 2017/583.

Deferrals for investment firms that perform transactions outside trading venues

Investment firms that perform transactions outside trading venues can also be eligible for the option of deferred publication, pursuant to Article 20, paragraph 2 of Article 21, paragraph 4, final paragraph of MiFIR. It then has to concern transactions in financial instruments that are also traded on a venue that uses deferred publication in the trade in those financial instruments. This does not require the AFM's prior permission (therefore this possibility is not shown in the AFM application documents for deferrals). However, at the AFM's request investment firms must be able to demonstrate that their systems and processes are structured in accordance with the statutory requirements in respect of the applicability of the deferred publication.

Investment firms that perform transactions outside trading venues can also use the deferred publication for transactions in financial instruments that are traded on a venue that does not use deferred publication, as referred to in Article 21, paragraph 4, first paragraph of MiFIR. However, this does require the AFM's prior permission. Permission can be acquired by filling in the Application form deferrals for investment firms which also has to enclose the AFM Excel template deferrals for investment firms. These documents can be found in the Digital portal of the AFM.

Deferral regimes in other European countries

ESMA has published an overview of deferral regimes regarding the trading of non-equity instruments in European countries.  

APAs & ARMs

For compliance with post-trade transparency requirements and reporting requirements in the OTC market, MiFID prescribes that Approved Publication Arrangements (APAs) and Approved Reporting Mechanisms (ARMs) must be used. These data reporting services providers (APAs and ARMs) are subject to a licence obligation. The national supervisors are responsible for granting these licences.

Investment firms are obliged to publish OTC transactions in those instruments that are traded on European venues. In principle, investment firms trade OTC, unless the trade takes place on a European trading venue (RM, MTF, OTF) or on one of the third-country trading venues on the list in the annex to the ESMA opinion. This opinion also provides a description of the conditions that a third-country trading venue must satisfy in order to be placed on the list.

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