6. Transparency

6. Transparency

Who should read this chapter?

This chapter will be of interest to operators of trading venues, and to direct and indirect users such as investment banks, interdealer brokers, High Frequency Traders, and investment managers.

Introduction

MiFID II’s objective to improve the integrity, fairness and efficiency of financial markets introduces significant changes to transparency. It extends transparency from shares to other equity-like instruments such as depositary receipts, ETFs, certificates and to non-equities such as bonds, structured finance products, derivatives and emission allowances. Transparency applies to financial instruments, or classes of financial instruments, that are admitted to trading or traded on a trading venue. The concept of trading venues is extended to include RMs and MTFs plus the new category of OTFs for non-equities.

Proposed detailed rules on these matters and others have been set out by ESMA in draft RTSs: RTS 1[1] and RTS 2[2].

The MiFID II provisions which deal with transparency are directly applicable. We propose deletion of the existing provisions in the Handbook which deal with transparency, and we will provide links to the relevant directly applicable provisions in MiFID II. However, in a similar fashion to MiFID, MiFID II allows us and other competent authorities (CAs) to grant trading venues a waiver from the pre-trade transparency requirements. It also allows us to authorise deferrals of post-trade transparency to trading venues and investment firms under certain specified circumstances.

We will delete from the Handbook MAR 7 transparency requirements which address post-trade transparency for transitions that take place off venue. These requirements are now in MiFIR, and so no longer need to be in the Handbook.

This chapter consults on our approach to waivers and deferrals, and the remainder is split into equity and non-equity sections. We are not currently making any proposals for Handbook changes in relation to our proposed approach but will consider in the light of the feedback we receive whether to include guidance or other materials in a subsequent consultation.

Equity Waivers

For shares and other equity-like financial instruments such as ETFs, depositary receipts and certificates, MiFID II provides the same four types of waiver currently available to trading venues for shares admitted to trading on a regulated market. These waivers are:

  • systems matching orders where the price is derived from the trading venue where the financial instrument was first admitted to trading, or from the most relevant market in terms of liquidity
  • systems that formalise negotiated transactions
  • orders that are large in scale compared to normal market size, and
  • orders held in an order management facility pending disclosure

While the waivers in MiFID II mirror those listed under MiFID, MiFID II specifies different conditions. MiFID II also empowers the Commission to adopt delegated regulation governing the use of those waivers, on the basis of draft RTSs developed by ESMA.

At the time of the implementation of MiFID, the FSA decided to grant waivers in accordance with the framework directive and the implementing regulation. We also granted waivers across all UK trading venues, RMs and MTFs applying for a waiver, provided the conditions under MiFID were met.

We continue to believe that the waivers are important to ensure an appropriate balance between transparency and liquidity in equities markets. Therefore under MiFID II we propose to grant waivers to RMs and MTFs trading equity and equity-like instruments where the use of the waivers meets the conditions set out in the legislation.

Q7: Do you agree that we should be prepared to use our power to grant waivers from pre-trade transparency in shares, ETFs, and depositary receipts in relation to:

  • systems matching orders on the basis of a reference price
  • systems that formalise negotiated transactions
  • orders that are large in scale, and
  • orders held in an order management facility pending disclosure?
If not, please give your reasons why

Non-Equity Waivers

The expansion of transparency to non-equities comes with a number of pre-trade transparency waivers that are calibrated for the specific structure of the markets in those financial instruments.

Under MiFID II, CAs may grant a pre-trade transparency waiver to trading venues for

  • orders that are large in scale
  • orders held in an order management facility pending disclosure
  • actionable indications of interest in request-for-quote and voice trading systems that are above a size specific to the instrument, which would expose liquidity providers to undue risk, and
  • derivatives that are not subject to the trading obligation under article 28 of MiFIR, and other financial instruments for which there is not a liquid market

While the large in scale and the order management facility waivers are similar to those currently available under MiFID, MiFID II introduces two new types of waivers.

The first allows a CA to grant a waiver to trading venues operating request-for-quote or
voice trading systems in relation to actionable indications of interest above a certain size, as
determined in accordance with the draft RTSs. The venues must continue to make public the
indicative bid and offer prices that are close to the price of trading interest in the system. The
draft RTSs also define the key characteristics of a request-for-quote and voice trading system. 

The second waiver allows a CA to grant a waiver to trading venues in relation to financial instruments that are not sufficiently liquid for derivatives subject to the EMIR clearing obligation. The assessment of liquidity is carried out in accordance with MiFID II’s trading obligation.

We support greater transparency in non-equity markets. However, transparency in those markets, which are often characterised by lower and episodic liquidity, requires careful calibration. We believe that waivers established under MiFID II are appropriate and propose that waivers to trading venues are granted in accordance with the conditions set by the RTSs.     

Q8: Do you agree that we should use our power to grant waivers from pre-trade transparency in bonds, structured finance products, derivatives and emission allowances in relation to:

  • orders that are large in scale
  • orders held in an order management facility pending disclosure
  • actionable indications of interest in request-for-quote and voice trading systems, and
  • derivatives that are not subject to the trading obligation under article 28 of MiFIR, and other financial instruments for which there is not a liquid market?
If not, please give your reasons why

Waiver application process

As with MiFID, MiFID II gives us the power to grant waivers to trading venues. However, MiFID II establishes a new process to grant waivers that formalises the current approach of ESMA providing opinions in relation to the compliance of certain types of waivers. Consistent with the ESMA mandate, the purpose is to promote common supervisory approaches and practices across Europe.

Under MiFID II, we are required, before granting a waiver, to notify other CAs and ESMA of the
intended use of each individual waiver and to provide an explanation regarding its functioning.
We must submit our notification at least four months before the intended use of the waiver.
Within two months of the date of notification, ESMA is expected to issue a non-binding opinion
in accordance with article 29 of ESMA Regulation.[3] If CAs disagree about a waiver, ESMA may
use its powers to facilitate conciliation and ultimately settle those disagreements. 

In light of the wider scope of waivers from an asset class and trading venue perspective, and the larger number of waivers, we will seek to ensure that sufficient clarity is provided to UK trading venues in relation to the process of waiver applications. We will consider at a later date what changes, if any, are necessary to our sourcebooks in relation to the FCA waiver application process, including the minimum information that we expect to receive from trading venues.

We will in due course publish a MiFID II Permissions and Notifications Guide, to share more specific step-by-step information about how to apply for waivers.

Q9: Do you agree that our sourcebooks should provide more clarity in relation to: the process of applying for a pre-trade transparency waiver, and the information that we deem necessary in order to evaluate an application? If not, please give reasons why

Q10: Should the sourcebooks include templates setting the minimum information content that trading venues should provide to us when applying for a waiver? If not, please give reasons why

Deferrals

Post-trade transparency has a wider scope than pre-trade transparency as it includes investment firms dealing OTC (i.e. outside the systems and/or the rules of a trading venue). The content of the post-trade information includes the time, price, volume and venue of executed transactions. MiFIR acknowledges that, in some circumstances, the immediate public disclosure of an executed transaction may reduce liquidity and increase the cost of execution for investors.

In accordance with MiFID, MiFID II gives us and other competent authorities the power to grant authorisation for post-trade deferrals. We will extend the current practice, and require market operators and investment firms operating a trading venue to apply for authorisation to defer the publication of details of the transactions. Under MiFID II the ability to defer the publication of post-trade information in relation to shares admitted to trading on an RM will be available to  investment firms dealing OTC, should they meet a set of requirements.

Equity Deferrals

In equities, the draft RTSs allow the deferral of the publication of transactions above a certain size, where the transaction is between an investment firm dealing on its own account with a counterparty (excluding matched principal transactions). The length of the deferral is calibrated on the basis of the size of the transaction and by asset class, but it is no later than the end of the trading day (with some additional deferral, until noon of the next trading day, for trades conducted late in the first trading day).

Maintaining consistency with the approach taken under MiFID, we are inclined to authorise deferrals to large in scale transactions in accordance with the draft RTSs.  

Q11: Do you agree that we should be prepared to authorise operators of trading venues and investment firms to defer the publication of post-trade information in relation to large in scale transactions in shares, ETFs, and depositary receipts executed by investment firms acting in a principal capacity?

If yes, should we provide guidance in the Handbook on the process for applying for deferrals? If not, please give reasons why

Non-Equity Deferrals

For non-equities, MiFID II and the draft RTSs establish a wider set of conditions for deferrals. These include transactions that are:

  • large in scale compared with normal market size
  • in instruments for which there is not a liquid market
  • above the size specific to the instrument where the investment firm is dealing on its own account other than on a matched principal basis, and
  • package transactions meeting certain requirements

The standard deferral for transactions complying with the above is the second trading day after the day of the trade. 

We believe that transactions which meet the above conditions should benefit from a deferral. We are inclined to use our powers to authorise the deferred publication by both trading venues and investment firms dealing OTC.

Q12: Do you agree that we should authorise operators of trading venues and investment firms to provide for deferred publication in relation to transactions that are:

  • large in scale
  • in financial instruments for which there is not a liquid market
  • above the size specific to the instrument, and
  • packages

If yes, do you agree that we should set up the process for the use of guidance in the Handbook for the application of deferrals? If not, please give reasons why

Where the above conditions are met, MiFIR article 11(3) also permits operators of trading venues and investment firms further to calibrate the deferral. The provision allows the publication of certain information before the end of the deferral, or to defer or to aggregate certain information for an extended time (or indefinitely, in the case of sovereign bonds only).

The draft RTS 12[4] sets the conditions for CAs to exercise their power under article 11(3) of MiFIR. At a high level, those conditions allow a CA to require:

  • the publication of all the details of a transaction as close to real time as possible, with only the exception of the volume, which is disclosed at the end of the standard deferral
  • the daily aggregation of a minimum number of transactions to be disclosed before 9 am the following trading day
  • the omission of the publication of the volume of individual transactions for a period of four weeks after the day of the trade
  • for non-equity instruments other than sovereign debt, the publication of aggregated information of all transactions over the course of the calendar week to be published by 9 am on Tuesday of the following week, and
  • for sovereign debt, the publication of aggregated information of all transactions over the course of the calendar week to be published by 9 am on Tuesday of the following week

We are considering whether to use our powers under article 11(3) of MiFIR to allow trading venues and investment firms to use any of the options set out above. Therefore we are interested in views on whether one or more of the options should be made available to UK trading venues and investment firms.

Q13: Should we:

  • use our powers under article 11(3) of MiFIR further to calibrate post-trade deferrals in accordance with the above options
  • require additional information to be made public during the deferral period? 
    and/or, should we:
  • permit the omission of the volume, or the aggregation of information, for an extended time period of four weeks?
If not, please give reasons why

 


Footnotes

  1. ^ RTS 1 - Draft regulatory technical standards on transparency requirements in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments.
  2. ^ RTS 2 - Draft regulatory technical standards on transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives.
  3. ^ Regulation (EU) No 1095/2010 of the European Parliament and of the Council.
  4. ^ RTS 12 - Draft regulatory technical standards on the determination of a material market in terms of liquidity relating to trading halt notifications.