ACRONYMS AHOY! MiFID II – Part 1: rules, trading, and transparency

In Showbiz you know you’ve made it when people know you by your first name (think Elvis, Madonna, Rihanna). In finance, it’s different: be you a firm, a financial instrument, a regulator, a regulation or trade association, you’re really looking to be known by a short jumble of letters – your acronym. This is the first in a series of posts called “Acronyms ahoy” to help you navigate through these letter strewn waters. There really is an embarrassment of riches in the financial sector but for the inaugural post there can only be one choice – MiFID II, and there are so many of them, this is a three-parter.

ACRONYMS AHOY! MiFID II – Part 1: rules, trading, and transparency

The MiFID II rules themselves

  • MiFID: Markets in Financial Instruments Directive
  • MiFIR: Markets in Financial Instruments Regulation
  • RTS: Regulatory Technical Standards
  • ITS: Implementing Technical Standards

If you’d like to know more about the rules and what are directives, regulations, RTS and ITS, click on my article Looking for the MiFID II rules? This will save you time!

The trading venues

Under MiFID II there are three types of trading venues: RMs, MTFs and OTFs.

  • RMs: Regulated Markets – type of trading venue more commonly known as an “exchange”, often a country’s flagship trading venue. RMs are multilateral trading systems meaning they bring multiple third party buyers and sellers together (the multilateral bit) on their platforms in accordance with non-discretionary rules: they don’t intervene to bring about the execution of specific orders.
    • Examples: London Stock Exchange, ICE, Euronext, Deutsche Borse.
  • MTFs: Multilateral Trading Facilities – a type of trading venue which is very similar to an RM. In terms of trading activities/ functionalities, RMs and MTFs are basically the same (multilateral trading systems, non-discretionary rules). The main difference lies in the rules governing listing financial instruments on them: MTFs have fewer restrictions surrounding the admittance of financial instruments for trading than RMs. A further important difference is that an investment firm can operate an MTF but not an RM. However, RMs can, and do, also operate MTFs.
    • Examples: Turquoise, SIGMA X (owned by Goldman Sachs), Liquidnet Europe Fixed Income, Euronext Growth.
  • OTFs: Organised Trading Facilities – new type of trading venue introduced by MiFID II for non-equities only (e.g. bonds and derivatives). OTFs are also multilateral trading systems but differ from RMs and MTFs in that (1) they are for non-equities only, (2) the operator can use some discretion in the execution of an order (e.g. decide not to match a client order with other orders in the system), (3) can engage in matched principal trading where the client consents, and (4) the operator can even use its own capital for illiquid sovereign bonds.
    • Examples: Marex Spectron, Tradeweb, Tullett Prebon Europe.

The non-trading venue places to trade

In the EU under MiFID II, if trading doesn’t occur on a trading venue (see above), then it takes place in an SI or OTC.

  • SIs: Systematic Internalisers – an investment firm which uses its own capital to trade against client orders in significant volume rather than sending the client orders to trading venues for execution. SIs differ to trading venues because SIs engage in bilateral trading where the SI (the investment firm) is the counterparty to the trade.
    • Examples: HSBC, JP Morgan Securities, Jump Trading International operate SIs.
  • OTC: Over the Counter – used to describe trading which takes place outside a trading venue and an SI (although worth noting that trading in SIs is often also called OTC trading as it takes place outside a trading venue). MiFID II places a number of restrictions on what OTC trading is permitted as part of the G20 post financial crisis commitment to promote trading on organised trading venues.

The transparency-related acronyms

There are some waivers from the pre trade transparency obligations and deferrals from the post trade transparency obligations available to trades above certain size thresholds – LIS and SSTI. In addition, SMS and SSTI size thresholds are used to determine SIs’ pre-trade transparency and quoting obligations. (Want to know more about pre and post trade transparency, read my article Understand what pre and post trade transparency means in less than 8 minutes). How do you know a specific financial instrument’s LIS, SMS or SSTI? ESMA publishes this information and periodically updates it.

  • LIS: large in scale: waivers and deferrals are available for trades above LIS thresholds for equities, equity-like instruments and non-equity instruments.
    • For equity/equity-like financial instrument’s, the LIS is based on the average daily turnover (ADT) calculation – e.g, if a share’s order ADT is less than €50k, a waiver’s available for orders of €15k and above.
    • For non-equity instruments, different calculation methodologies are used for different asset classes.

Worth noting: LIS thresholds for orders (related to pre trade transparency) differ to post trade LIS thresholds (related to post trade transparency).

  • SMS: standard market size: SIs in equities and equity-like instruments need to comply with pre trade transparency requirements and quoting obligations when dealing in sizes below the SMS thresholds. The SMS is calculated on the basis of the average value of transactions (AVT). E.g. if the AVT of a share is less than €20k, the SMS is €10k.
  • SSTI: size specific to the instrument: waivers (in limited circumstances) and deferrals are available for trades above SSTI thresholds for non-equities only. In addition, SIs in non-equities only need to comply with pre trade transparency requirements and quoting obligations when dealing in sizes below the SSTI thresholds. Different calculation methodologies are used to calculate the SSTI for different asset classes.
  • DVC: double volume cap: new, controversial rules aimed at limiting the volume of shares and equity-like instruments (exchange traded funds, depositary receipts and certificates), traded in dark pools. The DVC rules set a cap on how much trading can be done in shares under certain waivers on both individual trading venues (no more than 4% per EU trading venue i.e. a RM or MTF – DVC is not relevant to OTFs because only non-equity instruments are traded on them, as noted above) and across the EU as a whole (no more than 8% in total on all EU trading venues combined).

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