What contracts for providing venues with liquidity ('LP schemes') comply with the criteria for not including transactions in the calculation of an ancillary activity?
Under the 5th paragraph of Article 2(4) of MiFID II, certain transactions are not taken into account for the calculation of what is known as the "ancillary activity exemption". It concerns among other things "transactions in commodity derivatives and emission allowances entered into to fulfil obligations to provide liquidity on a trading venue, where such obligations are required ... by trading venues."
Requirements imposed on market makers
It should be noted first and foremost that this obligation to provide liquidity on a trading venue is not the same as the activities of 'market makers' under MiFID (defined in Article 4(1)(7)). The definition of market makers is more limited and does not mention obligations. Market makers can only make use of this exemption if they are subject to additional requirements. The willingness to perform transactions is not sufficient; a liquidity provider must be subject to an actual obligation to perform transactions.
This obligation must have been laid down in advance by the venue and must be subject to enforceable agreements between the venue and the liquidity provider. The programme must be transparent for other market participants and accessible in a non-discriminatory manner. For example, the obligations should be quote obligations with linked additional requirements that may concern a maximum bid-ask spread, minimum volumes, minimum duration, maximum response time or a minimum mandatory presence in the market.
The exemption for these types of transactions only applies to transactions performed under a liquidity programme, not the liquidity provider as a person. The AFM assumes that the programmes applied by the relevant Dutch venues comply with these conditions.
ESMA provided further guidance concerning this subject in a q&a. Please see q. 8 p. 22.
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