ESMA publishes third consultation package on MiFIR Review

RegCORE – Client Alert | Capital Markets Union

QuickTake

On 10 July 2024, the European Securities and Markets Authority (ESMA) published its third consultation package (CP3).Available here.Show Footnote CP3’s 359 pages are delivered in furtherance of reforms to the EU’s Markets in Financial Instruments Regulation (MiFIR)Regulation (EU) No 600/2014, available here.Show Footnote and the Markets in Financial Instruments Directive II (MiFID II)Directive 2014/65/EU, available here.Show Footnote (as amended, including in the MiFIR/MiFID II Review)See analysis here and/or the primary rulemaking instruments in respect of the:
• MiFIR Review please see: Regulation (EU) 2024/791 of the European Parliament and of the Council of 28 February 2024 amending Regulation (EU) No 600/2014 as regards enhancing data transparency, removing obstacles to the emergence of consolidated tapes, optimising the trading obligations and prohibiting receiving payment for order flow (Regulation (EU) 2024/791), available here.
• MiFID II Review please see: Directive (EU) 2024/790 of the European Parliament and of the Council of 28 February 2024 amending Directive 2014/65/EU on markets in financial instruments (Directive (EU) 024/790), available here.Show Footnote, as supplemented by related rulemaking instruments.

CP3 is comprised of seven sections. The various Annexes to CP3 present technical advice as well as the legal drafting of the proposed L2 amendments as well as for the new implementing technical standards (ITS) and draft regulatory technical standards (RTS).

In summary, CP 3 focuses on the following reforms:

1. Amendments to rules on the liquidity assessment for equity instruments, on equity transparency and on the volume cap; 
2. A draft of the new ITS on systematic internalisers (SIs);
3. A section on the equity Consolidated Tape Provider (CTP) in relation to the input/output data, to ensure full alignment between the transparency requirements and the CTP specifications;
4. A section on flags to be used in the post-trade transparency reports for non-equity instruments which was missing in the previous consultation; and
5. New rules specifying organisational requirements of trading venues, adding new provisions on circuit breakers and with targeted amendments to adapt to the EU’s Digital Operational Resilience Act (DORA) framework (see separate coverage, including from PwC Legal’s RegCORE).

Given the breadth of what CP3 contains the consultation has two expiry deadlines until which comments can be submitted by stakeholders:

(a)    15 September 2024 for the technical advice (Section 3), RTS 1 (Section 4), the RTS on input/output data for shares and ETFs CTP (Section 8) and the flags under RTS 2; and

(b)    15 October 2024 for the SI ITS (Section 5), RTS 3 (Section 6) and RTS 7 (Section 7).

Based on the responses received to CP3, ESMA will prepare a final report for subsequent submission of the final draft ITS and draft RTS to the European Commission ahead of these being published in the EU’s Official Journal. 

CP3 as well as the respective draft ITS and draft RTS serve to complement ESMA’s efforts in finalising the aims and outcomes of the MiFIR/MiFID II Review as well as to contribute to improve and further harmonise the EU’s Capital Markets Union (CMU) – see standalone coverage from our EU RegCORE on CMU in 2024 and beyond reflecting key announcements made by EU and ESMA policymakers on and after 22 May 2024. 

Key takeaways from CP3 and the draft ITS/RTS

CP3 contains a bumper pack of proposed clarifications, new rules and changes to existing requirements. When taken individually as well as together, CP3 will have a number of impacts on firms and how they comply with the requirements and supervisory expectations of national competent authorities (NCAs) in respect of (a) the individual ITS/RTS and (b) the other related MiFIR/MiFID II Review reforms as well as (c) ESMA’s wider efforts in completing CMU.

CP3 is part of a package of three consultation papers that cover various aspects of the MiFIR Review, such as transparency, data reporting, trading obligation and market structure. Specifically, CP3 focuses on the amendments to the Commission Delegated Regulation (EU) 2017/567 (CDR 2017/567) and the Commission Delegated Regulation (EU) 2017/587 (RTS 1) on transparency requirements for equity and equity-like instruments, as well as the draft ITS on the notification for SIs.

CP3 is divided into seven sections, each addressing a specific topic related to the MiFIR Review and the draft ITS/RTS in the annexes (see below). The sections are as follows:

Section 2 provides an introduction to the general considerations on the transparency calculations, such as the data sources, the publication frequency and the transitional provisions. 

Section 3 presents the proposed technical advice on the amendments to CDR 2017/567, which defines the criteria for determining the liquidity of equity and equity-like instruments, such as shares, depositary receipts, exchange-traded funds (ETFs) and certificates. The main changes proposed by ESMA include replacing the free-float parameter with the market capitalisation of the issuer, setting a market capitalisation threshold of EUR 100 million for shares, deeming other similar financial instruments as illiquid and modifying the calculation methodology for the average daily turnover (ADT), the average daily number of transactions (ADNTE) and the daily traded parameter.

Section 4 discusses the proposed amendments to RTS 1 on the pre-trade transparency regime for equity and equity-like instruments, which applies to trading venues and SIs. The main changes proposed by ESMA include introducing a new threshold for the publication of firm quotes by SIs, based on the market impact of the transaction, revising the arrangements for the publication of a firm quote, aligning the approach for equity and non-equity instruments by requiring each individual transaction to be made public once through a single approved publication arrangement (APA) and specifying the party to a transaction that has to make the transaction public in accordance with the new Article 21a on designated publishing entities (DPEs).

Section 5 examines the proposed amendments to RTS 1 on the post-trade transparency regime for equity and equity-like instruments, which applies to trading venues, SIs and investment firms trading outside a trading venue. The main changes proposed by ESMA include introducing a new mandate to specify the arrangements for the publication of transactions that are large in scale, revising the deferral regime for transactions that are large in scale or illiquid and modifying the reporting requirements for the purpose of the volume cap mechanism and the trading obligation for derivatives.

Section 6 analyses the proposed amendments to RTS 1 on the trading obligation for shares, which requires investment firms to ensure that trades in shares take place on a trading venue, an SI or a third-country trading venue assessed as equivalent. The main changes proposed by ESMA include clarifying the scope of the trading obligation by introducing a new ISIN-based approach, introducing a new exemption for transactions that do not contribute to the price discovery process and requiring investment firms that operate an internal matching system to be authorised as a multilateral trading facility (MTF).

Section 7 explores the proposed amendments to RTS 1 on the tick size regime, which sets the minimum price variation for orders and quotes on trading venues. The main changes proposed by ESMA include introducing a new mandate to specify the arrangements for the application of the tick size regime to SIs, revising the criteria for the determination of the most relevant market in terms of liquidity (MRMTL) and modifying the reporting requirements for the purpose of the tick size regime.

Section 8 outlines the proposed draft ITS on the notification for SIs, which lays down the content and format of the notification that investment firms have to submit to their competent authorities when they intend to provide SI activities. The draft ITS includes a standard template for the notification, which covers the details of the investment firm, the classes of financial instruments and the signature of the authorised person.

In summary, looking at changes in new or existing ITS/RTS:

1. CDR 2017/567 (Chapter I) and RTS 1: ESMA proposes changes to the L2 provisions on equity transparency (sections 3 and 4 in CP3), covering changes to the definition of a liquid market for equity instruments, the specification of information to be disclosed for pre-trade transparency purposes, which is also of relevance for the equity consolidated tape and the review of the pre-trade transparency requirements for SIs, notably the calibration of two quoting sizes; 
2. A new Commission ITS on the content and format of the SI Notification: ESMA is proposing to establish a standard template to be used by firms for the notification to their NCA when they meet the definition of an SI. In this regard, a first notification is to be submitted to the NCA when a firm commences activities as an SI in one or more classes of financial instrument or decides to opt-in. ESMA is proposing to have the notification take shape in electronic form. The proposed new template covers four sections:
   1. An introductive part will allow the NCAs to quickly understand the type of notification, whether the investment firm is submitting a notification for the first time (i) because it met the SI definition; (ii) because it decided to opt-in; (iii) because the investment firm needs to update a previously submitted notification; or (iv) because the investment firm ended all its SI activities;
   2. A section including information to be populated with the details of the investment firm, its Compliance Officer and the person authorised to represent it;
   3. The core section where the investment firm indicates details of the SI activities at the date of the submission and whether the company is acting also as a DPE; and 
   4. Lastly, a section for the signature of the person authorised to represent the entity. 
3. Commission Delegated Regulation 2017/577 (RTS 3): ESMA proposes some targeted changes to Articles 1 and 5, which specify the general principles applicable to the provision of information for the purposes of transparency and other calculations. A substantial amendment to Article 5 entails the lengthening of the obligation to maintain records from three years to five years. ESMA proposes to reflect in RTS 3 the direct reporting from trading venues to ESMA implemented since 2021, removing the intermediary step whereby trading venues previously reported data to NCAs that, in turn, reported data to ESMA. The relevant changes in respect of the application of the volume cap and of the DTO are introduced in amendments to Articles 6 and 7; 
4. Recast of Commission Delegated Regulation 2017/584 (RTS 7): ESMA proposes to develop in the RTS principle-based requirements with the aim of leaving a certain degree of discretion to trading venues in their calibration of circuit breakers. Therefore, the proposed requirements are largely based on the guidelines on Calibration of circuit breakers and the Supervisory Briefing on the calibration of circuit breakers. ESMA proposes to set homogenous standards for public disclosure of information by trading venues on the circumstances leading to trading being halted or constrained and to specify a template for the purpose of reporting to competent authorities including further details on the parameters related to the calibration of circuit breakers; 
5. New RTS on input/output data for shares and ETFs CTP: ESMA is proposing to set up requirements to data to be transmitted to the CTP to be operational and data to be disseminated by the CTP, also called as input and output data. The data is divided in three categories: (i) regulatory data; (ii) core market data pre-trade CTP; and (ii) core market data post-trade CTP; and
6. Flags in Commission Delegated Regulation 2017/583 (RTS 2): ESMA is proposing that the post-trade transparency flags be aligned with the revised post-trade transparency regime introduced by the MiFIR review. In relation to bonds (excluding exchange traded commodities (ETCs) and exchange traded notes (ETNs)), ESMA suggests defining one new post-trade deferral flag for each of the five categories of transactions. ESMA also proposes new supplementary deferral flags, agency-cross flags and matched principal trading flags.

Key considerations and challenges for firms

CP3 marks a major milestone in the delivery of the MiFIR/MiFID II Review’s comprehensive and ambitious reform of the EU’s capital markets regulation, aiming to enhance transparency, efficiency and resilience of the markets, as well as to finalise the EU’s CMU project. Firms operating in the EU’s capital markets need to be aware of the implications of the review and prepare for the changes that will affect their business models, processes, systems and reporting obligations as well as those of their counterparties and clients.

As discussed above, one of the main objectives of the MiFIR/MiFID II Review is to improve the transparency regime for equity and non-equity instruments, which has been criticised for being too complex, fragmented and ineffective. CP3 proposes several amendments to the transparency requirements, such as specifying the details of pre-trade data to be made public, redefining liquidity classes and thresholds and introducing new rules for data transmission to the CTP for shares and exchange-traded funds (ETFs). Firms need to adapt to the new requirements for pre-trade data publication, ensuring that the information is reliable, monitored for errors and corrected promptly. Firms also need to report new fields such as “Venue of admission to trading” to ensure high-quality data for transparency calculations and the tick-size regime. Firms must consider the annual calculations for instruments admitted to trading or first traded from 1st to 31st December of the preceding calendar year. Firms must understand and implement the new rules for data transmission to the CTP, which aim to facilitate data consolidation and dissemination to the public.

Another objective of the MiFIR/MiFID II Review is to ensure a level playing field and fair competition among different types of market participants, such as trading venues, SIs and investment firms. CP3 proposes changes to the SI notification process, the trading obligations for shares and derivatives and the quoting thresholds for SIs. Accordingly, firms may face challenges in adapting to the new electronic format for SI notifications and the content requirements for these notifications, which aim to enhance the quality and consistency of the data provided to ESMA and the public. Firms must also comply with the trading obligations for shares and derivatives, which aim to ensure that trading takes place on regulated platforms and to prevent market fragmentation and regulatory arbitrage. Firms must calibrate quoting thresholds for SIs, considering international best practices and competitiveness, as well as the impact of the revised liquidity classes and thresholds.

A further objective of the MiFIR/MiFID II Review is to strengthen the organisational requirements of trading venues, which play a crucial role in the functioning and integrity of the capital markets. CP3 proposes new rules specifying organisational requirements of trading venues, including provisions on circuit breakers, adaptations to the EU’s DORA framework and direct reporting from trading venues to ESMA. Some firms will need to calibrate circuit breakers according to the principle-based requirements, which may require a careful balancing of discretion and compliance, as well as coordination with other trading venues and market participants. A number of firms will also need to align their systems and processes with the DORA framework, as supplemented by aspects set out in CP3. Firms will need to adjust to the direct reporting from trading venues to ESMA, which removes the intermediary step of reporting data to NCAs and may require changes to reporting processes and formats.

In addition to the topics covered by CP3, firms should also be aware of the other aspects of the MiFIR/MiFID II Review that have been addressed by previous consultation packages (CP1 and CP2), such as the scope of the transparency regime, the definition of liquid market, the post-trade transparency regime and the alignment of post-trade transparency flags with the revised regime. Firms should consider the impacts of individual ITS/RTS as well as the broader MiFIR/MiFID II Review reforms, which are part of ESMA’s efforts to complete the CMU and harmonise the EU’s capital markets.

Outlook and next steps

ESMA has developed its draft RTS and ITS having due regard to the principle of proportionality and being mindful about the possible costs the obligations they contain would create for market participants. Nevertheless, respondents are invited to highlight in their response any specific concerns the ESMA proposals could raise for them in terms of their associated costs. ESMA will include a cost-benefit analysis in the final report.

Despite that approach, the requirements set out in the draft ITS/RTS and/or any (what we anticipate to be minor) changes that flow into the final ITS/RTS (which will be covered in further standalone analysis from PwC Legal’s RegCORE) may mean that some firms might want to already conduct a review of their existing arrangements and respective documentation, systems and controls as to how it meets the regulatory requirements and supervisory expectations.

Compliance with the requirements and supervisory expectations of NCAs is essential for firms operating in the EU’s capital markets, as NCAs are responsible for monitoring and enforcing the MiFIR/MiFID II regime in their jurisdictions. Firms should also be prepared for potential increases in costs associated with the obligations contained in the draft ITS/RTS, such as the costs of data provision, reporting and system upgrades. 
Firms’ efforts in complying with the aims and outcomes of CP3 and the changes set out in the ITS/RTS should also consider how this may factor into the wider range of MiFIR/MiFID II Review driven reforms along with the EU’s revised CMU priorities (both of which are covered in separate Client Alerts from PwC Legal RegCore).

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