MiFID II pre and post trade

transparency
Damian Carolan and Sidika Ulker
12 October 2017
© Allen & Overy 2017
Agenda

1 Overview of the MiFID II transparency regime

2 Extraterritorial considerations in respect of EU regulation

3 Extraterritorial reach of the MiFID II transparency requirements

4 Questions?

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 Overview of the transparency regime

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MiFID II EU market structure

Multilateral Organised Systematic

Regulated
trading facility trading facility Internaliser OTC
market (RM)
(MTF) (OTF) (SI)

Multilateral trading Bilateral trading

• Multilateral system: system or facility in which • Mandatory SI regime: where investment

multiple third party buying or selling trading interests in firms deals on own account when
financial instruments which are able to interact in the executing client orders meet SI thresholds
system. in respect of financial instruments/classes
• Trading venues (i.e. RMs, MTF, OTFs) are of financial instruments, they must be an
multilateral systems SI in respect of those financial
instruments/classes of financial
instruments
• Optional SI regime: investment firms
may opt in to become SIs in respect of
financial instruments
• OTC: residual category

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MiFID II transparency regime

Organised Multilateral
Regulated Systematic
trading facility trading facility OTC
market (RM) Internaliser (SI)
(OTF) (MTF)
Pre trade transparency

No equity on Trading venue equity pre trade SI equity pre trade

OTF transparency regime transparency regime
No pre trade
transparency
SI non-equity pre
Trading venue non-equity pre trade transparency regime trade transparency
regime
Transparency*

No equity on
Trading venue, SI and OTC equity post trade transparency regime
Post trade

OTF

Trading venue, SI and OTC non-equity post trade transparency regime

*Central principle that there should be only a single trade report for a transaction chain

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Pre trade: SI – equity and equity-like

– Equity instrument in which an

SI
– Equity instrument is ToTV
– Quote is smaller than SMS Scope? - Must disclose quotes to
clients upon request
– Minimum quote size ≥ 10% - Can determine clients to
SMS whom give access to quotes
– Make public two-way quotes on basis of commercial policy
on a regular and continuous Illiquid?
basis during normal market
hours
– Quotes must reflect prevailing
market conditions
– Quotes must be easily
accessible on a reasonable Liquid?
commercial basis
– Must execute orders received
from clients at quoted prices
– Can determine clients to whom
give access to quotes on basis
of commercial policy

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Pre trade: SI – non-equity
– Can decide whom to give
– Bonds, structured finance access on the basis of
products, emission allowances commercial policy and in an
and derivatives objective non-discriminatory
– Instrument/class (as way
appropriate) in which an SI Scope?
– Non-discriminatory limits on
– Instrument is ToTV number of transactions with
– Quote is smaller than SSTI clients
– Client asks for quote and SI – Public and available in a
agrees to provide a quote Access to manner that is easily
quotes? accessible on a reasonable
commercial basis
– Quotes must reflect prevailing
market conditions
– Quote must be made public
– Quote must be made available
to other clients on an Liquid?
executable basis - Must disclose quotes to
clients upon request
- Can determine clients to
whom give access to quotes
Illiquid? on basis of commercial policy
- Obligation may be waived

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Post trade – equity
– Conclusion of a transaction
– Share, depository receipts, – Give access to the
arrangements they employ for
ETFs, certificates and other
making public the information
similar financial instruments
on reasonable commercial
– Instrument is ToTV terms and on a non-
– For transactions concluded Scope? discriminatory basis
outside a trading venue, – Make available separately from
certain transactions are pre trade
excluded
– Make information public on a
Additional reasonable commercial basis
venue and ensure non-discriminatory
obligations?
access

– Publish Annex I Tables 3 and 4

RTS 1, including price, volume, – Competent authority discretion
time of transaction Close to – Large in scale trades –
real time as technically Obligation?
minimum qualifying size
possible and in any case within
one minute – End of trading day publication
if trade more than 2 hours
– Publication waterfall applies before end of trading day.
– Investment firms trading Deferrals? Otherwise, noon the next day
OTC or through SI must – Regime of the publication
publish through an APA entity applies
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Post trade – non-equity – Give access to the
– Conclusion of a transaction arrangements they employ for
making public the information
– Bonds, structured finance
on reasonable commercial
products, emission allowances
terms and on a non-
and derivatives
discriminatory basis
– Instrument is ToTV
– Make available separately from
– For transactions concluded Scope? pre trade
outside a trading venue,
– Make information public on a
certain transactions are
reasonable commercial basis
excluded
and ensure non-discriminatory
Additional access
venue
obligations?

– Competent authority discretion

– Publish Annex II Tables 2 and – Large in scale trades, SSTI for
3 RTS 2, including price, non-MPT trades, illiquid
volume, time of transaction instruments, order
Close to real time as Obligation? management facility
technically possible and in any
– T+2 deferral if no
case within 15 minutes
supplementary deferral
– Publication waterfall applies
– Supplementary deferral: (a)
– Investment firms trading Deferrals? price information before T+2;
OTC or through SI must (b) extended volume deferral;
publish through an APA (c) aggregation

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 Extraterritorial considerations in respect
of EU regulation

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Non-EU entities that may have an EU nexus

Non-EU legal Non-EU legal EU legal

entity entity with an entity with a
interacting EU branch third country
with the EU* branch

EU nexus

*Local licensing issues will need to be considered

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Basis of the EU’s extraterritorial reach

The EU’s ability to legislate extraterritorially is based on principles of international law.

There are various types of EU nexus which potentially brings business in scope, such as:

EU incorporated MiFID regulated entity (e.g.

Impact on EU markets (e.g. where there is a
where an entity is acting through a non-EU
foreseeable effect on EU secondary
branch but the rules are expressed to apply
markets)
to the legal entity without restriction)

Non-EU entity has EU clients/counterparties Trading in respect of EU products

Interaction with EU infrastructure (e.g.

Issuing and listing products on EU markets
trading on EU platforms)

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Ways EU’s extraterritorial reach could impact third
country entities

• Directly applicable obligations

• Indirectly applicable obligations

‒ Applicable to counterparties
‒ Applicable to trading venues
‒ Applicable to products
‒ EU behaviour (e.g. reliance on EU trading desks)

• Environmental impacts
Changes to EU infrastructure that impacts the interaction of the third country entity
with that infrastructure

Note: This presentation does not address the third country equivalence regime under MiFIR

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 Extraterritorial reach of the MiFID II
transparency requirements

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Extraterritorial reach of MiFID II pre and post trade
transparency

1 Who?

2 What?

3 When?

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Non-EU legal entity interacting with the EU
market (no EU branch)
Direct impacts
• Transparency requirements do not apply to
non-EU investment firms
Non-EU legal
- Pre trade transparency applies to SIs and entity
EU trading venues
- Post trade transparency applies to EU
authorised investment firms and market
operators
EU client/ Non-EU client/
• Local licensing considerations relevant if counterparty counterparty
providing execution services to EU clients

Indirect impacts
• EU counterparties and trading venues could
be subject to the transparency requirements

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Non-EU legal entity with an EU branch

Direct impacts
• Transparency requirements do not apply to
non-EU investment firms Non-EU legal
entity
• EU branch will be subject to the local
regulatory regime
– “No better off” principal: expect local EU branch
regimes to require EU branches to
undertake SI calculations and comply with
the transparency requirements
– Should consider when activities constitute
“branch business” EU client/
counterparty
Non-EU client/
counterparty

Indirect impacts
• EU counterparties and trading venues could
be subject to the transparency requirements

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Examples of factors to consider when determining
whether execution activity is “branch business”

Booking Location of the client

location relationship/interaction
(e.g. sales team)

Examples of factors
to consider

Where pricing of the Location of

trade takes place the client

Client documentation

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EU investment firm with a third country branch
Direct impacts
• Rules are not clear as to whether or how the
rules apply to non-EU branches (there is
conflicting guidance under MiFID I) EU investment
firm
• Rules are expressed at legal entity level
without restriction
• EU clients
– EU passporting legislation does not Non-EU branch

contemplate non-EU branches of EU firms

providing services back into the EU
– Home state/local law needs to be
considered for exceptional cases
EU client/ Non-EU client/
• Non-EU clients counterparty counterparty

– Arguable pre trade applies to SIs and post

trade to EU investment firms even where
activity undertaken in non-EU branch
– May need to consider non-EU branch
trades in SI calculations
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Extraterritorial reach of MiFID II pre and post trade
transparency

1 Who?

2 What?

3 When?

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Instruments in respect of which pre and post trade
transparency apply
Impact
• Pre and post trade transparency apply in
respect of instruments “traded on a trading
venue” (ToTV) • Shares dual-listed in Europe within scope

• Expect shares and bonds that are made • Bonds and shares only need to be made
available for trading on EU trading venues available for trading by one MTF or OTF
to be in scope (relevant for bonds) to be within scope

• ESMA has provided guidance on the - MTFs and OTFs may not have formal
meaning of ToTV for OTC derivatives*: listing procedures
- OTC derivatives that share same
reference data details as derivatives - OTFs are likely to be interdealer brokers,
traded on a trading venue considered to which traditionally offer a broad scope of
be ToTV products
- Sharing same reference details means
sharing the same values as ones reported • OTC derivatives may be within scope
by trading venues under the reference
data obligations (except fields 5 to 12)
*https://www.esma.europa.eu/file/22204/download?token=-DLnIjMW

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Extraterritorial reach of MiFID II pre and post trade
transparency

1 Who?

2 What?

3 When?

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Counterparties and clients – pre trade transparency
• Quotes must be made available to clients
(in accordance with the requirements) Impact

• For non-equities, the pre trade obligations • Possible that the ESMA guidance on the
are triggered when a client requests a meaning of “executing client orders” applies
quote and the investment firm agrees to more broadly
provide the quote
- Intragroup trades should be considered
• ESMA Q&A for SI calculations on the
meaning of “executing client orders”:
- Trades with non-EU financial institutions
- an investment firm is executing client may be considered to be trades with non-
orders if dealing with a counterparty that financial institutions
is not a financial institution authorised or
regulated in the Union or under national
law of a Member State; or
- when the counterparty is not a financial
institution, one party is always acting in a
client capacity

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Counterparties and clients – post trade transparency

- Investment firms trading off-venue must

make public the details of the transaction
Impact
according to the waterfall in the RTS
• Certain transactions on third country trading
venues will not fall within the MiFID II post
- ESMA guidance* that for a transaction trade transparency regime (whilst others
concluded on a non-EU trading venue, the will)
firm does not need to publish the trade if the
venue is considered to be equivalent for the
purposes of post trade transparency (ESMA
will maintain a list)

*https://www.esma.europa.eu/sites/default/files/library/esma70-154-165_smsc_opinion_transparency_third_countries.pdf

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Timing – non-equity post trade transparency
• For non-equity post trade transparency,
ESMA Q&A has clarified that transactions Impact
that take place outside daily trading hours
of trading venues should be made public
• Practical issues checking the daily trading
before the opening of trading of trading
hours of all relevant trading venues
venues on the next trading day:

• Publication timing of “out of hours”

- “Daily trading hours” has been clarified to
transactions need to be considered
mean the trading hours of the trading
venues trading the (relevant) instruments
- Where there is more than one trading • Issues regarding APA service hours
venue trading the instrument, investment
firms/APAs are expected to check whether
the transaction took place during trading
hours of any of the (relevant) trading
venues

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Questions?

These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.

Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term
partner is used to refer to a member of Allen & Overy LLP or an employee or consultant
with equivalent standing and qualifications or an individual with equivalent status in one
of Allen & Overy LLP’s affiliated undertakings.
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 Appendix

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Pre trade: venues – equity and equity-like
– Applicable to RMs and MTFs
– Extended to cover shares,
depositary receipts, ETFs, Subject to national discretion
certificates and other similar FI
– Reference price waiver
(‘equity and equity like’)
Scope? – Negotiated transactions waiver
– AIOIs within scope
– Large in scale orders
– Transaction with a member of
the ESCB for financial stability – Orders held in trading venue’s
purposes are exempt order management facility

Waivers?
– Current bid and offer prices
and depth of trading interests
at those prices
– Available on a continuous – In respect of reference price
basis during normal trading and negotiated price waivers
hours Action? – Total volume of all Union
– Calibrated by trading system trading in that instrument in
– Reasonable terms and non- previous 12 months subject to
discriminatory waivers capped at (i) 4% per
– Free of charge after 15 trading venue and (ii) 8%
minutes Cap? across all Union venues
– Pre and post trade provided
separately
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Pre trade: trading venues – non-equity
– Applicable to all trading venues
Bonds, structured finance
products, emission allowances
and derivatives
– AIOIs in scope
Scope?
Subject to national discretion
– Large in scale orders
– Current bid and offer prices – Orders held in order
and depth of trading interests management facility
at those prices Waivers? – For RFQ/voice trading
– Available on a continuous systems, AIOIs above SSTI
basis during normal trading – Illiquid instruments
hours
– Calibrated by trading system
– Reasonable terms and non-
discriminatory Action? – Derivative transactions of
– Free of charge after 15 NFCs entered into for hedging
minutes purposes
– Pre and post trade provided – Transaction with a member of
separately the ESCB for financial stability
Exempt? purposes
– Indicative prices to be
published where a waiver other – Money market instruments
than SSTI applies
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