ESMA: Consultation 2:  RTS 2 and draft RTS on RCB and RTS 23

Background:  Consultation 2 on RTS 2 and draft  RTS on RCB and RTS 23 

This consultation focuses on changes brought by revised MIFIR including in relation to:

• Reduction of the scope of pre-trade transparency to central limit order books (CLOB) and periodic auction trading systems. RFQs no longer required to have pre-trade transparency.
• The introduction of a static determination of liquidity for non-equity instruments by updated MIFIR.
• Reduction the scope of OTC derivatives subject to trade transparency requirements to exchange traded derivatives and certain interest rate and credit derivatives and providing that only derivative contracts negotiated on a regulated market fall under the definition of “exchange-traded derivative”.
• The introduction of two new articles (Article 8a for pre-trade transparency and Article 11a for post-trade deferrals) separating the non-equity regime into two: one for bonds, structured finance products (SFPs) and emission allowances under amended Articles 8 and 11; and another one for OTC derivatives.
• Conversion of ESMA guidelines on cost of market data to legal obligations.
• Revised Article 27(1) now states that reference data reported pursuant to that article should be used for both transaction reporting and transparency disclosures.
• The removal of SSTI waiver.

RTS 2

• A definition of CLOB trading systems is to be introduced  building on the description of continuous auction trading systems set out Annex I of RTS, and including trading systems combining elements of a continuous auction trading system and elements of a periodic auction trading system.
• Consequential amendments are to be made to RTS 2 in light of the fact that pre-transparency requirements for non-equity instruments now only apply to trading venues operating a CLOB or a periodic auction trading system (e.g. removal of Article 1(2) and (3) of RTS 2 now that the empowerment under Article 9(5)(b) of MiFIR to define request for quote and voice trading systems has been removed).
• ESMA proposes using European System of National and Regional Accounts (ESA 2010) to classify bond issuers to address uncertainties and divergencies in classifications of bonds issued by different entities.
• All references to the SSTI waiver from RTS 2 (e.g. in Article 5 and amending Article 15 of RTS 2) and all references to the pre-trade SSTI thresholds from Annex III are to be removed.
• RTS 2 sets calculations that are required in relation to determining whether a non-equity instrument is liquid or will benefit from pre-trade transparency waiver. ESMA suggests a new approach to the LiS waiver for non-equity instruments owing to the changes made by Updated MiFIR. Updated MiFIR introduced a static determination of liquidity for bonds (with reference to issuance size of the bond), replacing the periodic assessment previously used. An order is to be large in scale compared with market size where its equal to or larger than the following thresholds: sovereign and other public bonds EUR 5 000 000; covered bonds EUR 5 000 000; and corporate, convertible and other bonds EUR 1 000 000.
• For LIS waiver in respect of SFPs, ESMA proposes categorising these instruments on the basis of a static qualitative assessment (i.e. all SFPs as illiquid). For emission allowances, ESMA proposes that EU allowances reported with the type "EUAE" have a liquid market (new Article 6a and amending Table 12.1 of Annex III of RTS 2). For trade sizes for LIS, ESMA proposes a trade size of 5 lots.
• A static determination of liquidity is also to be applied in respect of the illiquid waiver for bonds liquidity thresholds for bonds based on issuance size (sovereign and other public bonds >= EUR 1Bn; corporate, convertible and other bonds>= EUR 500Mn; covered bonds >= EUR 250Mn).
• Column names are to be standardised by introducing a column naming convention for all fields.
• A new field “Flag” in Table 2  is to be added to RTS 2 and ESMA proposes to specify that where flags can be combined, the flags should be reported in the same field, separated by commas.
• Further detail is provided ESMA on what counts as medium, large and very large transactions in respect of the deferral regime for sovereign and other public bonds; corporate;  convertible and other bonds and; covered bonds.
• Further detail is provided by ESMA in relation to liquid market and arrangements for deferred publication for SFPs.

ESMA: Proposed bond liquidity thresholds based on issuance size

ESMA: Proposed deferral regime for sovereign and other public bonds

ESMA: Proposed Deferral regime for corporate, convertible and other bonds

ESMA: Proposed deferral regime for covered bonds

Pre-trade large in scale thresholds for bonds

RTS on reasonable commercial basis

• Categorising main costs directly associated with the production and distribution of market data: (i) the infrastructure, (ii) the connectivity, (iii) the personnel employed, (iv) financial costs and (v) other administrative costs.
• ESMA proposes a principles- based approach to be taken by data providers when calculating the reasonable margin in respect of market data. The draft RTS proposes that "data providers should: (i) set such margin in a way that does not disproportionately exceed the costs of data provision and (ii) in cases where the data provider offers other services unrelated to the provision and distribution of market data, set the margin in a way that reasonably compares to the overall margin of the business, including data provisions. The margin should be expressed as a percentage of costs".
• A template is to be introduced for information reporting to NCAs on the cost of producing and disseminating data and on the margin applied to data.
• Terms and conditions in market data agreement to include an obligation for information to be provided by market data providers before the conclusion of the agreement, general prohibition of unfair terms and conditions in the market data agreement, and market data agreement conformity with published policies.

RTS 23

• A number of consequential changes are proposed in respect of RTS 23 to reflect updates to be made to RTS 1 and RTS 2. These relate to (among other things): the reference data needed to perform calculations in line with the revised rules related to transparency calculations; and change on scope of derivatives subject to transparency on the type of transparency reference data needed.

• ESMA sets out proposed changes to be made to RTS 23 depending on what approach the EC adopts in respect of an OTC derivatives identifier: ISO 4914 UPI complemented by additional attributes used as identifying reference data; or a modified ISO 6166 ISIN.

• Reference data is to be adapted for the use for publications under CSDR.

• New fields in Table 3 of Annex of RTS 23 (e.g. such as minimum trading value; LEI of fund manager; LEI of the DPE; new field to help indicate whether the reporting venue is the regulated market where the financial instrument was first admitted to trading) are proposed.

• Further detail is provided on reporting by DPEs under Article 27 of Updated MiFIR and in particular that  ESMA will establish a register of DPEs containing the classes of financial instrument for which they are DPEs.  ESMA proposes that categorisation be based on broad categories of financial instruments. ESMA notes that certain venue related fields (fields 6 and 8-10 in the current RTS 23) will not be applicable for the instruments reported by the DPEs and that references to SI in RTS 23 will need to be replaced with DPEs.