Background/Mandate
Article 5 of MiFIR
1. In order to ensure that the use of the waivers provided for in Article 4(1)(a) and 4(1)(b)(i) does not unduly harm price formation, trading under those waivers is restricted as follows:
(a) the percentage of trading in a financial instrument carried out on a trading venue under those waivers shall be limited to 4% of the total volume of trading in that financial instrument on all trading venues across the Union over the previous 12 months.
(b) overall EU trading in a financial instrument carried out under those waivers shall be limited to 8% of the total volume of trading in that financial instrument on all trading venues across the Union over the previous 12 months.
That volume cap mechanism shall not apply to negotiated transactions which are in a share, depositary receipt, ETF, certificate or other similar financial instrument for which there is not a liquid market as determined in accordance with Article 2(1)(17)(b) and are dealt within a percentage of a suitable reference price as referred to in Article 4(1)(b)(ii), or to negotiated transactions that are subject to conditions other than the current market price of that financial instrument as referred to in Art 4(1)(b)(iii).
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4. ESMA shall publish within five working days of the end of each calendar month, the total volume of Union trading per financial instrument in the previous 12 months, the percentage of trading in a financial instrument carried out across the Union under those waivers and on each trading venue in the previous 12 months, and the methodology that is used to derive those percentages.
5. In the event that the report as referred to paragraph 4 identifies any trading venue where trading in any financial instrument carried out under the waivers has exceeded 3.75% of the total trading in the Union in that financial instrument, based on the previous 12 months trading, ESMA shall publish an additional report within 5 working days of the 15th day of the calendar month in which the report referred to in paragraph 4 is published. That report shall contain the information specified in paragraph 4 in respect of those financial instruments
where 3.75% has been exceeded.
6. In the event that the report referred to paragraph 4 identifies that overall EU trading in any financial instrument carried out under the waivers has exceeded 7.75% of the total EU trading in the financial instrument, based on the previous 12 months trading, ESMA shall publish an additional report within five working days of the 15th on the day of the calendar month in which the report referred to in paragraph 4 is published. That report shall contain the information specified in paragraph 4 in respect of those financial instruments where 7.75% has been exceeded.
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9. ESMA shall develop draft regulatory technical standards to specify the method, including the flagging of transactions, by which it collates, calculates and publishes the transaction data, as outlined in paragraph 4, in order to provide an accurate measurement of the total volume of trading per financial instrument and the percentages of trading that use those waivers across the Union and per trading venue.
1. In order to ensure that the use of waivers from pre-trade transparency does not unduly harm price formation, MiFIR introduces in Article 5 a mechanism that caps the amount of trading carried out under:
i. systems matching orders based on a trading methodology by which the price is determined in accordance with a reference price; and
ii. negotiated transactions in liquid instruments carried out under limb (i) of Article 4(1)(b) of MiFIR.
2. This double volume cap mechanism is to be implemented and supervised on the basis of ESMA publications regarding the volume of trading under the waivers and an empowerment for technical standards enabling CAs to obtain the data for making such publications.
3. The volume cap applies on an instrument by instrument basis. Two situations can be distinguished. In the first case, the first volume cap is calculated on a trading venue by trading venue basis and is set at the level of 4% of the overall amount of trading across all trading venues in the EU. That means that the volume of trading on any trading venue using the reference price waiver and/or the first limb of the negotiated trade waiver should not exceed the 4% threshold. As an example, a trading venue would be in breach of the 4% threshold when the amount of trading carried out under the reference price waiver and the relevant negotiated trade waiver is 2% and 3% respectively. If the 4% cap is breached by a trading venue in a particular financial instrument, the CA that has authorised the use of these waivers shall suspend within 2 working days their use for that trading venue for that particular financial instrument for a period of 6 months.
4. In the second case, the volume cap is calculated across all trading venues operating under one or both of the relevant waivers and is set at the level of 8% of the overall amount of trading across all trading venues in the EU. That means that the total volume of trading on all trading venues using the reference price waiver and/or the first limb of the negotiated trade waiver should not exceed the 8% threshold. As an example the 8% threshold would be considered to be breached when the amount of trading in the EU carried out under the reference price waiver and the relevant negotiated trade waiver is 4% and 5% respectively. If the 8% cap is breached, all CAs shall within 2 working days suspend the use of those waivers across all trading venues in the EU for a period of 6 months.
5. Both volume caps are measured against a rolling 12 month period with monthly updates published by ESMA as well as updates published twice a month in certain circumstances.
6. In order to effect such publications of actual volume traded within waiver facilities, ESMA is empowered to draft RTS specifying the methods by which ESMA can collate the necessary information, calculate the actual volumes traded and publish the information.
Analysis following feedback from stakeholders Volume traded via waiver facilities
7. ESMA is aware of the sensitivity of the double volume cap calculations and the potential commercial consequences for venues, issuers and other market participants alike of the publication of incorrect information which would then lead to the suspension of the use of one waiver or of all waivers across the EU for one particular financial instrument. In the CP, ESMA proposed to use two different channels for collecting data:
i. First source of data - Collation of the volume of trading from trading venues: One way envisaged to collect the entire volume of on-venue trading consists in requesting all trading venues to submit volumes traded on their systems over the relevant 12 months period to their CA.
ii. Second source of data - Collation of volumes from CTPs: ESMA also considered that trading volumes could be retrieved from the CTPs. ESMA considered this source particularly helpful for checking the validity and completeness of data submitted by trading venues.
8. In the responses received to the CP, some respondents questioned the fact that ESMA was expecting to receive data from these two different sources (i.e. trading venues and CTPs). In their view, this would represent an unnecessary burden and, hence, they recommended using only one source of data. They added that, given that uncertainty remains on whether or not there will be CTPs in the future, TVs should be used as the unique source of data. On the other hand, other respondents welcomed the ESMA
proposal in this respect highlighting the extreme sensitivity of the DVC publications and they deemed crucial to have the possibility to cross check data if necessary.
Frequency of the calculations and publications
9. According to Article 5(4) of MiFIR, “ESMA shall publish within five working days of the
end of each calendar month, the total volume of Union trading per financial instrument in the previous 12 months, the percentage of trading in a financial instrument carried out across the Union under those waiver and on each trading venue in the previous 12 months, and the methodology that is used to derive those percentages”. Article 5(2) and
5(3) stipulate that, in case of breach of one of two thresholds, the competent authority will have two days after this publication by ESMA to suspend the use of the waiver concerned. Therefore, and given the limited timeframe granted to CAs to react and in order to ensure timely publication, ESMA suggested in the CP that the use of waivers should be monitored on a more frequent basis and proposed to request data and perform the calculations twice a month.
10. ESMA proposed in the CP to receive data twice a month for two reasons:
i. to minimise the impact of potential data errors; if data is requested twice a month, data errors can be corrected as soon as they are detected. This is important as ESMA only has five days for error checking and publication from the reception of end of month information, as foreseen in Article 5(4) of MiFIR;
ii. to be prepared from the outset for the publication of information twice a month which is required in cases where the thresholds of 3.75% per trading venue or 7.75% overall are reached (Article 5(5) and (6) of MiFIR).
11. No comments were received against collecting data twice a month, hence the proposal to do so is maintained. However, respondents wondered whether the mid-month data were to be published on a systematic basis. As mentioned in the CP, updates will only be published once a month as prescribed by Level 1 text or twice a month in the cases described in Article 5(5) and (6) of MiFIR.
12. In the CP, ESMA also suggested, in order to simplify the periodic submission of data, that trading volumes should be requested not for the previous 12 months but only for the last 15 days (or 13, 14, 15 or 16 days in the second half of the month, depending on the calendar month). The volumes would then be aggregated with the data collected previously from which the trading volume for the first 15 days (or again 13, 14, 15 or 16 as the case may be) of the rolling calendar year would be removed. As an example, on 1 March 2017, trading venues would be requested to submit data for the period from 16 February 2017 to 28 February 2017 (end of the month). Volumes collected would then be added to the calculation sample from which volumes for the period from 16 February 2016 to 29 February 2016 (end of the month) would have been removed. No specific
13. Trading venues will be required to send all data required on the first and sixteenth day of each calendar month by 13.00 CET to their respective CA. All such dates are subject to adjustments if they fall on a public holiday or a non-trading day according to the trading venue’s home country calendar. In this case, it was proposed that data should be reported on the following working day before the opening of the markets. However, in some of the responses received, respondents asked ESMA to extend the submission in those cases to the following working day by 13.00 CET. Although ESMA noted that a non-working day for a trading venue might always correspond to a non-working day for ESMA (and hence the delay for the general publication of the volumes on the ESMA website would necessarily be delayed), ESMA also appreciates the benefit of having consistent timing for the delivery of the data. Hence, the draft RTS has been modified to accommodate the comments received in this respect.
14. It is worth stressing that ESMA has maintained the possibility to submit ad-hoc requests to trading venues and CTPs. Thus, trading venues and CTPs should have systems and IT infrastructures in place to submit, by close of business on the next working day following the request, data for the last 12 months aggregated over different time horizons (e.g. last 12 months aggregation, monthly aggregation over the last year, etc.). As mentioned above, this data could for instance be used in case errors are detected in the main data sample.
Calculation of actual volumes by ESMA
15. Some responses received during the consultation questioned the use of “value” thresholds (i.e. number of units traded multiplied by price) and recommend using rather “volume” thresholds (i.e. considering only the number of units traded). Should the “value” threshold be maintained, respondents asked for having further clarity on the exchange rate to be used. With respect to the converted data, one respondent stressed that, in his view, converted data might introduce distortion in the calculation with the possibility that one of the thresholds is breached just because of currency swings.
16. With respect to the use of “volume” thresholds rather than “value” thresholds, ESMA disagrees with the responses received. In its view, the price remains an essential element that should be taken into consideration in order to adequately monitor the volume of trading undertaken under the waivers and the economic impact this has on financial markets. ESMA also notes that the proposed use of “volume” thresholds would not allow taking adequately into account potential increases or decreases of the number of outstanding shares for a specific financial instrument (e.g. in case of splits or reverse splits).
17. With respect to the conversion of data into euros, ESMA appreciates the concern that conversion might introduce distortion in the calculations and agrees that it would more appropriate to convert volumes only where necessary. Therefore, with respect to financial instruments which are traded in only one single currency across the Union, the volumes to be used for the calculations and to be published will not be converted.
However, for financial instruments traded in more than one currency across the Union, it is necessary to convert the volumes executed in different currencies into one common cuurency so as to enable the computation of those volumes and make the required calculations. In those cases, the volumes will be converted into euro using average exchange rates calculated on the basis the euro foreign exchange reference rates as published daily by the European Central Bank on its website over the collection period. 18. It is also worth stressing that trading venues will not be responsible for the conversion of
the volumes. Leaving to trading venues the repsonsability of the conversion might otherwise lead to divergent application between venues and would introduce additional operational risks and possible errors. Hence, ESMA has revised its proposal in this respect: data will be reported to CAs and ESMA using the transaction original currency and the conversion into euros will be managed, where necessary, centrally by ESMA. 19. Last but not least, some respondents also asked ESMA to clarify whether transactions
executed on the basis of orders benefitting from the pre-trade large in scale (LIS) waiver should be included in the calculations. In ESMA’s view, this should only be the case for a transaction executed on the basis of two orders benefitting from the large in scale waiver, where such waiver has been granted by the CA.
Data with respect to financial instruments for which there is less than 12 months of data available
20. It is worth clarifying that ESMA also expects to receive data for instruments for which there is less than 12 months of data available. This could concern notably instruments newly admitted to trading or instruments traded for the first time on a venue. More generally, trading volumes have to be reported for equity and equity-like financial instruments regardless of whether they have been traded continuously over the previous 12 months or only during a limited time over that period.
Consolidation of volumes by ESMA
21. With regard to the consolidation and calculation of the relevant data for the operation of the volume cap, ESMA remains minded to establish technical arrangements seeking to ensure that the data is consolidated on a timely basis and that proper procedures for the identification and correction of errors are in place.
22. To ensure a timely publication of data each month ESMA intends to develop templates in a format allowing for a seamless aggregation of volumes across venues which must be completed by stakeholders. In order to ensure sufficient harmonisation in this respect, ESMA has deemed appropriate to already include some specifications on the data to be submitted in Annex of the RTS.
23. In particular, ESMA notes that the identifiers currently used by trading venues for diverse purposes do not always provide the sufficient level of granularity required for performing
the DVC calculations. In particular, ESMA has observed that in some cases, where for instance a regulated market and a MTF are operated by the same entity, they might be using the same identifier (MIC code) which is not appropriate in the context of the DVC calculations.
24. As indicated in a recital, for the purpose of the double volume cap mechanism, trading venues and CTPs should ensure that the entity on which the transaction was executed is identified with sufficient granularity so as to allow ESMA to perform all calculations set out under MIFIR. In particular, the trading venue identifier used should be unique and not shared with any other trading venue operated by the same market operator or otherwise. Trading venue identifiers should allow ESMA to distinguish in an unequivocal manner all trading venues for which the market operator has received a specific authorisation under MiFID II.
Suspension and resumption of the waiver
25. Some respondents asked for further clarification on how the suspension and resumption of the waiver will operate in practice and in particular on how to achieve sufficient coordination. ESMA appreciates the concerns expressed in this respect and agrees that some clarification could be provided. However, it also notes that those questions concern more specifically the level 1 text and are outside the mandate conferred to ESMA with respect to the Technical Standards on the double volume cap mechanism. 26. Some responses suggested that in case of suspension of the use of the waiver for six-
months, the aggregated volumes of the two waivers should be reset automatically to zero rather than include the six months prior to the suspension in a rolling 12 month calculation claiming that, otherwise, the same trades could result in two consecutive suspensions. ESMA does not agree with this interpretation and considers that the last 12 months of data should always be taken into consideration, as prescribed by the level 1 text and regardless of whether a suspension has already occurred or not. In ESMA’s view, the same trades could indeed result in two separate suspensions should the volumes of trading under the waiver(s) for the last 12 months still be above the