EC MiFID II proposals pull rug out of non-lit trading and diverge from UK proposals

The European Commission has published proposals to amend MiFIR and MiFID. The Commission issued a consultation on the review of MIFID regime in February 2020 (see our briefing) and the updated Capital Markets Union Action Plan outlined plans to amend MIFID. Market participants will be keen to see if the proposals set out by the European Commission (concerning among other things trade transparency, PFOF and consolidated tape) indicate further divergence between the EU and UK MIFID regimes. The UK published its Wholesale Markets review in the summer of 2021 and the FCA is likely to issue a Policy Statement to its April 2021 consultation paper on changes to the UK MIFID conduct and organisational requirements (see our briefing).

The key punchline is the EC has moved to restrict dark trading in a way that appears to "roll forward" MiFID II – restrictions on use of reference price waiver, SI mid-point trading, retaining the double volume cap and share trading obligations (subject to modifications). This looks stark when compared with the UK that is planning on removing the share trading obligation and double volume cap restrictions, alongside "loosening" / "scaling" back SI obligations (in particular, in non-equities markets). Is this evidence of the UK and the EU on their own separate paths and where does it end? What does it mean for liquidity, the much loved concept of single cross-border liquidity pools?

Key proposals

We set out some of the key proposals here and provide some commentary/points of contrast with the UK.

• Moving provisions concerning the demarcation between multilateral and bilateral systems from MiFID II to MiFIR; it is not clear how this resolves the market uncertainty and troubling perimeter between "multilateral" v "bilateral" systems. The UK has promised guidance on this and there is likely to be a review of how the framework is working next year.
• Introducing a minimum threshold trade size for the reference price waiver – to all intents and purposes a size restriction on the use of the reference price waiver. On the "waiver front" (along with the negotiated waiver) the reference price waiver has always seemed to win the "most disliked" waiver award amongst certain EU regulators. No surprises the Commission has taken another opportunity to narrow it.
•  Prohibiting SIs from offering payment for retail order flow – a further example of PFOF clamp down across Europe.
•  Replacing the double volume cap with a single volume cap set at 7 per cent of trades that are executed under the reference price waiver or the negotiated trade waiver. Note the UK will remove the double volume cap; Europe apparently still considers it has value.
• Shortening and harmonising publication deferrals for non-equity post trade reports to the public, as well as removing the discretion of national competent authorities to permit post trade reports for non-equities to be deferred for four weeks (this is to be by replaced with EU-wide thresholds). MiFID II deferrals were complex, so some rationalisation seems sensible. If this leads to less deferral time, it is unlikely to be welcomed by all.
• SI-midpoint trading amendments:

1. SIs should no longer be allowed to match at midpoint below twice the standard market size; and
2. Clarification that SIs should be allowed to match at midpoint while complying with tick-size rules in accordance with MIFID when they trade above twice the standard market size but below the large in-scale threshold (the proposals provide that when SIs trade above a large in-scale threshold, they should continue to be allowed to match at midpoint without complying with the tick-size regime).

By way of contrast, the UK looks like it may allow more unrestricted mid-point matching for SI's. The above retains the regime's complexity.

• Introducing an obligation for trading venues to contribute harmonised market data directly and exclusively to the entities appointed by ESMA as the consolidated tape provider for each asset class. This is part of a concerted effort to create a consolidated tape that is felt necessary by regulators for market efficiency purposes and for best execution. This may not be welcome by all trading venues…
• Introducing organisational requirements and quality of service standards applicable to all consolidated tape providers selected and appointed by ESMA. These include the collection of consolidated core market data. Under the proposals, consolidated tape providers will also be subject to public reporting obligations concerning speed of delivery and operational resilience. So far, the prize has not been sufficient to encourage the emergence of a private sector CP, it will be interesting to see whether this kick starts a new framework (both the EU and UK regulators seem determined this time around).
• Extending the mandate of synchronisation of business clocks beyond trading venues and their members to SIs, APAs and consolidated tape providers. This appears to be an area of "roll forward" rather than "roll backward" on MiFID II reforms, SI's in particular will be required to use clock-sync tech in relation to their trades.
• Clarifying the parameters of the EU Share Trading Obligation and requiring ESMA to publish and maintain a list of all shares subject to the STO. The STO continues to survive in the EU, despite criticism from many sides. The UK has confirmed it will remove the obligation.
• Aligning the derivatives trading obligation under MiFIR with the clearing obligation for derivatives under the EMIR Refit Regulation, in particular with respect to the scope of the entities that are subject to the clearing and trading obligation and the suspension of these obligations. The proposals also introduce a new stand-alone suspension mechanism for the Commission to suspend the trading obligation for certain investment firms acting as market makers with non-EEA counterparties when certain conditions are met. This looks similar to some of the UK proposals.