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Date: 22 May 2014ESMA/2014/548Responding to this paperThe European Securities and Markets Authority (ESMA) invites responses to the specific questions listedin this Discussion Paper.In order to respond to this paper, please follow the instructions given in the document ‘Reply form for theMiFID/MIFIR Discussion Paper’ also published on the ESMA website (here).Please note that the responses must reach us by 1 August 2014.Who should read this paper?This document will be of interest to all stakeholders involved in the securities markets. It is primarily ofinterest to competent authorities and firms that are subject to MiFID II and MiFIR – in particular, investmentfirms and credit institutions performing investment services and activities. This paper is also importantfor trade associations and industry bodies, institutional and retail investors and their advisers, andconsumer groups, as well as any market participant because the MiFID II and MiFIR requirements seek toimplement enhanced provisions to ensure investor protection and the transparency and orderly running offinancial markets with potential impacts for anyone engaged in the dealing with or processing of financialinstruments.2
1.Overview _____________________________________________________________ 122.2.1.2.2.2.3.2.4.Investor protection ______________________________________________________ 15Authorisation of investment firms _________________________________________ 15Freedom to provide investment services and activities / Establishment of a branch _______ 23Best execution - publication of data related to the quality of execution by trading venues for eachfinancial instrument traded _____________________________________________ 25Annex 2.3.1. Details of proposals regarding data to be provided by venues _____________ 34Best execution - publication of data by investment firms __________________________ 37Annex 2.4.1. Detail of proposals relating to data regarding order flow to be provided byinvestment firms _____________________________________________________ 453.3.1.3.2.3.3.3.4.3.5.3.6.3.7.3.8.3.9.3.10.3.11.3.12.3.13.Transparency __________________________________________________________ 47Pre-trade transparency - Equities __________________________________________ 47Post-trade transparency - Equities _________________________________________ 77Annex 3.2.1. Results of the analysis of equity-like instruments _____________________ 92Systematic Internaliser Regime - Equities ___________________________________ 94Trading obligation for shares (Article 23, MiFIR) ______________________________ 100Introduction to the non-equity section and scope of non-equity financial instruments _____ 105Liquid market definition for non-equity financial instruments _____________________ 116The components of the definition of a ‘liquid market’ ___________________________ 117Decision mechanisms for assessing the liquidity criteria _________________________ 122Applying the liquidity criteria to (classes of) financial instruments __________________ 123Temporary suspension of transparency requirements ___________________________ 128Annex 3.6.1. Financial instruments taxonomy and metrics for the calculation of the liquiditycriteria (average size of transaction) ______________________________________ 132Annex 3.6.2. Preliminary analysis for bonds _________________________________ 137Annex 3.6.3. COFIA versus IBIA _________________________________________ 147Pre-trade transparency requirements for non-equity instruments ___________________ 148Post-trade transparency requirements for non-equity instruments __________________ 155The transparency regime of non-equity large in scale orders and transactions ___________ 172Size specific to the instrument ___________________________________________ 181The Trading Obligation for Derivatives _____________________________________ 185Transparency Requirements for the Members of ESCB __________________________ 194Article 22, MiFIR: Providing information for the purposes of transparency and othercalculations _______________________________________________________ 1974.4.1.4.2.Microstructural issues ___________________________________________________ 201Microstructural issues: common elements for Articles 17, 48 and 49 MiFID II __________ 201Organisational requirements for investment firms (Article 17 MiFID II)_______________ 213Testing of trading systems, algorithms, and strategies __________________________ 213Monitoring and review of trading systems and algorithms ________________________ 2173
Page 4 and 5: 4.3.4.4.4.5.4.6.4.7.4.8.Security of
Page 6 and 7: 8.3.8.4.8.5.Rules to establish the
Page 8 and 9: CRD IVCRRCSDCSFCTCTPDADEADPEBAECECB
Page 10 and 11: NCANDFNTWNFCOISOJOTCOTFPRIIPsQ&ARDS
Page 12 and 13: 1.OverviewReasons for publication1.
Page 14 and 15: nical advice to the Commission. Res
Page 16 and 17: Forum of European Securities Commis
Page 18 and 19: (EU) No 575/2013 (Capital Requireme
Page 20: ii.Forecast information at an indiv
Page 23 and 24: 2.2. Freedom to provide investment
Page 25 and 26: 2.3. Best execution - publication o
Page 27 and 28: Q8: Do you agree data should be pro
Page 29 and 30: effective and realised spread: The
Page 31 and 32: There are alternative available app
Page 33 and 34: 29. ESMA’s objective in setting s
Page 35 and 36: Section B: United States SEC Rule 6
Page 37 and 38: 2.4.Best execution - publication of
Page 39 and 40: quality data and the venues that in
Page 41 and 42: minimum standard to constitute taki
Page 43 and 44: 32. Other European legislation prov
Page 45 and 46: Annex 2.4.1. Detail of proposals re
Page 47 and 48: 3.Transparency3.1.Pre-trade transpa
Page 49 and 50: 7. Under the current MiFID framewor
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24. ESMA is mindful, however, that
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Chart 2: Pre/post-trade transparenc
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an additional argument in favour of
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43. The analysis required two steps
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ADTNumber ofcertificates% of certif
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Q58: Do you agree with ESMA’s vie
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[…]2. The reference price referre
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[…](b) systems that formalise neg
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transactions between members or par
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carried out under the reference pri
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88. In addition, collecting data fr
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to the order book. Therefore these
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3.2.Post-trade transparency - Equit
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7. The existing Implementing Regula
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‘R’‘NTV’‘NTI’‘NTC’R
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Q82: Do you agree with the definiti
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i.ii.iii.to shorten the maximum del
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(which is the minimum pre-trade tra
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would be reduced by aligning pre-tr
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ETFsQ85: Which of the two options d
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Cla ss in ter m s of A DT A DT< 2 0
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during normal trading hours. Transp
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15. As part of the MiFID II review,
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MA believes the liquidity threshold
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Power is delegated to the Commissio
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prices according to a specified ben
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3.5. Introduction to the non-equity
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SharesMiFID II 4(44)(1)(a)ETFMiFID
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20. Structured Finance Products are
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guishing factor singled out in Sect
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47. More generally ESMA considers t
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Corporate bonds would be defined by
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mation for non-equity instruments f
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i.ii.Option 1: The ‘average size
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24. The requirements relating to tr
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Q110: Do you agree with the propose
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Periodic assessment of the liquidit
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Scenario Scenario Scenario Scenario
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on whether in its view the suspensi
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notification to ESMA, the relevant
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1. BondsFinancialinstrumentProduct
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Financialinstrum entProduct ty pesS
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Annex 3.6.2. Preliminary analysis f
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74. In general, when applying semi-
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Table 2.2 - Analysis results - scen
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Page 145 and 146:
Page 147 and 148:
Annex 3.6.3. COFIA versus IBIA147
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5. The definition of the scope in t
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Quote-driven trading systemPeriodic
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the pre-trade information being mad
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3.8. Post-trade transparency requir
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13. In summary, ESMA suggests publi
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Identifier Name of trade flag Venue
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Proposal29. Under the current trans
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secondly, it has to decide whether
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ten too long to ensure adequate tra
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Page 169 and 170:
Size of transactionDeferral period,
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views on which criteria and/or cond
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ESMA shall develop draft regulatory
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. Disadvantages: the drawback to th
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23. In this preliminary phase, ESMA
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3.10.Size specific to the instrumen
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MiFIR, any transaction that is abov
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3.11.The Trading Obligation for Der
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8. The requirement under Article 28
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in Article 28(1), but for which no
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ceived authorisation’ (in the tab
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iii.iv.Whether the ‘average size
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9. The Commission shall be empowere
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3.13. Article 22, MiFIR: Providing
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in advance of the date on which the
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4.Microstructural issues4.1.Microst
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Q186: Do you agree with the definit
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23. In ESMA’s preliminary view,
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37. In undertaking this self-assess
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40. In that regard, an important co
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k. the firm’s ownership and gover
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4.2. Organisational requirements fo
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12. For algorithms and trading stra
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iv.the nature of the change.Q199: D
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vided by the trading venue to which
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44. ESMA does not envisage a specif
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and risk controls to ensure the tra
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compliance staff are aware when con
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Organisational requirements for inv
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84. Firms should maintain accurate,
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ProposalGeneral91. Investment firms
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101. In this context, ESMA would li
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112. To comply with these obligatio
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ii.iii.iv.v.vi.vii.viii.internal ri
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Q221: Are there any criteria other
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trading venues should have standard
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a. number of messages received per
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Trading venues’ capacityAnalysis1
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Q234: Do you agree with the above a
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iv.v.suspension of access;intervent
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ii.functional tests should include
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cess the market having those system
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ESMA shall develop draft regulatory
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i.ii.regardless of the system used
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4.4. Market making strategies, mark
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8. Firstly, Recital 60 of MiFID II
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Q264: Do you agree with the above a
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liquidity to the market on a regula
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. impede compliance with the obliga
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trade finance provider. Significant
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45. When establishing market making
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For example, one possible solution
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5. On the basis of this analysis an
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Q298: What is your view regarding a
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4.6.Co-location (Article 48(8) of M
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Fair, non-discriminatory and transp
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chargeable activity (an activity th
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undertake for the same purposes, fi
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although not prohibited, ESMA does
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4.8.Tick sizes (Article 48(6) and A
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Q330: Do you agree with the general
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ii.despite the extra granularity, t
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Financial instruments traded on a t
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ently traded with a tick of 0.01 ha
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is proposed not to implement any su
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55. In taking into account the liqu
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tick falls below two, apply SAF.Ann
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How the tick size regime would be k
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Annex 4.8.1. Technical Annex for Op
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83. Finally, the NCA made a statist
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90. Note that 90% of the turnover i
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per trading day. This indicator has
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done manually or by adding a new co
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Liquidityrange:200 - 499Liquidityra
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Annex 4.8.2. Technical Annex for Op
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110. The proposed regime will requi
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Step 2: Placing the instrument base
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of ISIN equitiesunchangedNumber ofe
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7. The material requirements that A
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329
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5.2. Additional requirements for pa
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cases where their name varies with
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4. The empowerments under Articles
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5.5.Data disaggregationBackground/M
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Q371: Do you agree that venues shou
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parties publish the trade, unsure o
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Article 36(6)(a), MiFIRESMA shall d
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come a clearing member of the CCP (
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Q386: Given there will be costs to
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Analysis and proposal34. Under Arti
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39. ESMA’s preliminary view is th
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Q403: The approach above relies on
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ferent trading venues as to whether
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5.8. Non- discriminatory access to
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Figure 3: this diagram illustrates
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order to ensure their users underst
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Methodology25. ESMA notes that the
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Q427: Do you agree that trading ven
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iii.Termination: These are standard
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(ii) Termination should not be trig
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meaningfully different from any exi
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6.Requirements applying on and to t
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3. When assessing whether units in
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transferable securities, units in c
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arrangements and ask for experience
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vi.The notified CAs communicate the
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the communication of the lifting of
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27. Regarding the timing, ESMA cons
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group level. When specifying the cr
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anking activities should not be con
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MiFID scope: exemptnot exemptPhysic
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16. Article 2(4) of MiFID II furthe
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Q464: Do you see any difficulties i
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30. The term ‘capital’ may be i
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37. The size of the trading activit
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43. In accordance with EMIR impleme
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50. Recital 21 of MiFID II stipulat
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qualify for an exemption from MiFID
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7. There is no text with equivalent
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that the definition is “a natural
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delivery (e.g. quantity per lot, gr
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38. In ensuring that the position l
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Q501: Do you agree with ESMA’s ap
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61. Article 57(3) MiFID II sets out
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ipants may lead to a participant ha
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90. “All months” forward positi
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Q522: Do you agree with this approa
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Q525: What trading venues or jurisd
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7.3.Position ReportingBackground/Ma
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lowances that are held by certain c
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21. Both Article 58(2) and Article
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Q537: What are your views on these
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tion limit regime will also need to
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Numberof positionholdersin eachcate
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What constitutes a transaction and
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12. For the avoidance of doubt, ESM
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Transmission of an order17. Investm
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a designation to identify the perso
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if the client has a place of reside
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count (beneficiary) is not necessar
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discretionary mandate to makeinvest
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An order worked manuallyi.e. where
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ii.Article 9(1) of MiFIR - Granting
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93. ESMA proposes that this informa
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client as principal and the client
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sets out below a number of consider
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The application of transaction repo
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142. The reports of transactions in
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Annex 8.1.1. Table of fieldsFIELDDE
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171819ConsiderationVenue of executi
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different fromcounterparty) -identi
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identification code typeLegal entit
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welcome feedback on this issue.62In
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Where the reporting firm acted in a
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Annex 8.1.2. Diagram on client ID47
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a. When the instrument ceases to be
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instruments being rejected, the nex
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der the ISO 10962 standard 219 , se
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LEI, which is provided in the ‘Is
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lying index where applicableCountry
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Field nameInstrument classification
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Rules to establish the Relevant Com
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495Termination (delisting)date of t
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5. Regarding the requirement to kee
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Disadvantages of option 216. This w
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Q578: In your view, which option (a
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firm responsible for the investment
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Q584: Do you believe that this appr
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i.ii.1: Limit Order 224 ; and2: Sto
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Good-Til-SpecifiedDate and TimeVali
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Identification code of theinstrumen
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NewRejectedReceipt of a new order b
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Q598: Do you foresee any difficulti
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5. This Discussion Paper deals with
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ii.iii.each placed order’s sequen
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7. IOSCO’s report on Technologica
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Q602: Would you prefer a synchronis
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5. When specifying the relevant fra
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CM to the CCP. In fact, the CCP wou
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24. When the CCP has received the i
Page 531 and 532:
Q613: What are your views on the tr
Page 533:
2), whereas MIFIR provides that bec
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