CTP
After the entry into force of the MiFID/MiFIR framework, the consultation carried out on the matter by the EC in 2020 showed that most investors do not have a complete vision of the prices and volumes available and, in the absence of information on liquidity existing in alternative markets and SIs (which are of significant volume), significant obstacles to transparency are created. This scenario makes it difficult for intermediaries to ensure that investors opt for the most advantageous transactions in terms of price and costs.
In this regard, the impact assessment reviewed by the EC’s Regulatory Scrutiny Board focused on the consolidation of market data and incorporated five options for its achievement, resulting in the option of a single and independent CTP for each asset class as the preferred option. Specifically, the option proposes that each CTP (of shares, ETFs, bonds and derivatives) collect data for securities by type of instrument in geographically separate venues. In turn, they would consolidate the data in a centralised data centre and then disseminate them from that central location to subscribers elsewhere. It is recognised that such a model could be less punctual/immediate, but it would guarantee greater data integration.
In addition, the same impact assessment considered three options on how to ensure fair remuneration of market data contributors, with the option of mandatory contributions with “minimum revenue targets” for market data consolidators being the favourite. Minimum revenue targets are expected to be established and reviewed by an independent operating committee, which would take into account the various uses of the consolidated tape as well as other significant parameters. Additionally, levels could be set such that retail access is at little or no cost.
In any case, the expected revenues from the CTPs are expected to significantly exceed the costs, thus building a strong revenue sharing system where CTPs and market data contributors share harmonised business interests. In this regard, ESMA will provide the EC with an evaluation of the revenue participation scheme designed for regulated markets for its provision of trading data in the context of the consolidated tape for shares, twelve months after the entry into operation of the CTP.
Obtaining basic market data on financial instruments is a costly and difficult process, which to date has resulted in no entity requesting to act as CTP. Supported by the introduction of high-quality harmonised templates and the establishment of an obligation for all contributors, ESMA is preparing to periodically organise2 competitive selection procedures to choose a single CTP for each asset class. ESMA will adopt a decision three months after the start of the selection procedure. The proposal indicates that for shares, in the first instance, it is planned to collect post-trade transparency data and, subsequently, ESMA will assess whether there is also a demand for pre-trade data, for the EC to decide ultimately.
The EC has also provided, in the event that a CTP is not established for any class of assets one year after the entry into force of this reform, the possibility of revising the framework by introducing as a proposal that ESMA be the CTP. Finally, other responsibilities assumed by ESMA in this matter are the preparation of draft regulatory technical standards3 on the characteristics of the public information obligation of the CTPs and on the level of accuracy to which the clocks of the trading venues, the SIs, the authorised publication agents (APAs) and the CTPs will have to be synchronised.
TRANSPARENCY
As a result, the proposed revision includes seven sections with adjustments to the transparency framework related to:
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the delimitation between multilateral and bilateral systems, which moves from MiFID II to MiFIR, in order to achieve a greater degree of harmonisation to increase transparency;
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establishing a minimum trading volume threshold to apply the reference price exemption that prevents any alternative trading venue from executing small trading volumes under the reference price exemption, in line with ESMA recommendations;
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replacing the double volume cap by a single cap set at 7% of the total volume traded with said financial instrument in the EU, on transactions executed under the exemption for the use of the reference price or the exemption applicable to negotiated transactions;
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reducing and harmonising deferrals for post-trade reports of non-equity instruments intended for the public;
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reinforcing the transparency obligations applicable to SIs to increase their pre-trade obligation to quote share prices, in order to cover price quotes of transactions that have a size of up to a minimum of twice the standard size of the market;
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applying the floor of the reference price exemption for SIs without pre-trade transparency and, in line with the floor of the exemption for use of the reference price, SIs will not be allowed to match small trades at intermediate points;
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empowering ESMA to prepare draft regulatory technical standards that specify how the concept of reasonable commercial basis should be applied6 in relation to non-discriminatory access to pre-trade and post-trade information by the public on transactions with financial instruments.
COMPETITIVENESS AND OTHER MEASURES
Also regarding the promotion of competitiveness, the measure proposed in the area of the obligation to trade shares introduces a clarification by specifying that this only applies to shares with an EEA ISIN, for the purpose of offering greater security to market participants. In order to avoid possible ambiguities, it is planned to establish an official list of EU shares subject to said obligation, which will be periodically updated.
Among other measures included in the proposal, the prohibition of payment for order flow (PFOF) stands out, and should increase the quality of execution for retail investors, in addition to increasing pre-trade transparency. As a principle, financial intermediaries must obtain the best possible price and the highest possible likelihood of execution for trades that they execute on behalf of their clients. To this end, their activity obliges them to select the optimal trading venue or counterparty, based on the criterion of achieving the best execution for its clients. Consequently, PFOF consisting of the receipt by a financial intermediary of a payment from a trading counterparty in exchange for ensuring the execution of client trades is incompatible with this principle of best execution. The ban introduced is intended to put an end to this controversial practice and the expectation is that these orders will be sent to a pre-trade transparent market.
Finally, it is worth mentioning among the rest of the measures that, in relation to the obligations to report operations and to provide reference data on financial instruments, ESMA is expected to evaluate in the future the integration of information on transactions and rationalisation of data flows. Likewise, in this area, ESMA is empowered to prepare draft regulatory technical standards on the date by which transactions and reference data are to be reported.
1MSP (2020), The study on the creation of an EU consolidated tape, commissioned by the European Commission. https://op.europa.eu/en/publication-detail/-/publication/82763219-1cbe-11eb-b57e-01aa75ed71a1/language-en/format-PDF/source-169654830
2Initially, 3 months after the effective date of the proposal.
3From the entry into force of this proposal, a period of nine months is set to prepare regulatory technical standards on the characteristics of the public information obligation of CTPs and six months for regulatory technical standards on the level of precision with which the clocks of the trading venues, SIs, APAs and CTPs will have to be synchronised.
4MiFID II/MiFIR Review Report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares: https://www.esma.europa.eu/sites/default/files/library/esma70-156-2682_mifidii_mifir_report_on_transparency_equity_dvc_tos.pdf
5MiFID II/MiFIR Review Report on the transparency regime for non-equity instruments and the trading obligation for derivatives: https://www.esma.europa.eu/sites/default/files/library/esma70-156-3329_mifid_ii_mifir_review_report_on_the_transparency_regime_for_non-equity_instruments.pdf
6Once nine months have elapsed from the entry into force of this proposal.
Useful links:
MiFIR amendment proposal
MiFIR Amendment Proposal Impact Assessment Report Summary