BME SPANISH EXCHANGES COMMENTS ON EUROPEAN COMMISSION S CONSULTATION PAPER ON THE REVIEW OF THE MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE (MiFID)

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1 BME SPANISH EXCHANGES COMMENTS ON EUROPEAN COMMISSION S CONSULTATION PAPER ON THE REVIEW OF THE MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE (MiFID) Madrid, February 2 nd, 2011 Bolsas y Mercados Españoles (BME) integrates the companies that operate and manage the securities markets and financial systems in Spain. It brings together, under a single activity, decision-making and coordination unit, the Spanish equity, fixed-income and derivatives markets and their clearing and settlement systems. We welcome the Public Consultation on Review of the Markets in Financial Instruments Directive (MiFID) published by the European Commission on December. We take the opportunity to provide the following comments on this document: 1. INTRODUCTION Three years after the entry into force of MiFID, the process to reviews is reaching its end. During the last months the European Commission, CESR and the European Parliament have contributed to the debate on this issue. BME responded to CESR s consultations and welcome and agreed with most of the Swinburne Report 1. We note that the European Commission has unfortunately disregarded some of the suggestions and analyses of both bodies. The creation of a new category of trading venue, OTF, is against the recommendations of the Swinburne report. BME also notes that a proper impact assessment has not been carried out prior to this consultation. The most controversial issues involved (consolidated tape, BCNs...) merit a deep quantitative analysis in order to back any recommendation, especially if one considers that MiFID implementation has come along with the financial crisis, making it very difficult to isolate their individual effects. Some independent studies have demonstrated that a large portion of OTC and BCN trading is below SMS, so most firms should be categorized as SIs or MTFs. This consultation takes no account of an important category: issuers. When a company decides to go public and chooses one RM to be listed, it does so according to a set of reasons that, at the end of the day, involve a compromise between issuer and market 1 Report on regulation of trading in financial instruments dark pools, etc. Committee on Economic and 1

2 operator. This especial relationship is compromised by market fragmentation, which makes the issuer lose control on where his shares are being traded. BME also misses an analysis of what worked well and what did not. We welcome competition in the provision of investment services, including operation of trading venues, but we truly think that benefits of competition only can be reaped on a level playing field. Finally, BME would like to emphasise, in order to avoid the risk of duplications, contradictions or misunderstandings, the convenience to make a careful and joint revision of the different legislation proposals and public consultations that are currently being dealt with by the European Union in the financial sector, namely Legislation on Legal Certainty of Securities Holding and Dispositions, the Regulation on the OTC derivatives, central counterparties and trade repositories (EMIR) and the Legislation on Central Securities Depositories. 2. DEVELOPMENTS IN MARKET STRUCTURES 2.1. Defining admission to trading 1. What is your opinion on the suggested definition of admission to trading? Please explain the reasons for your views. As a preliminary comment, we would deem it relevant to note that for this and other instances throughout this Consultation Paper, it is of the utmost importance to be precise about what system means. In our view, definition of system should be broad (e.g. over the phone dealing should be included) and include facilities where transactions derive from pools of information irrespective the resulting transactions are effectively carried out on the system or bilaterally using the information obtained from the system. Considering the relevance of the exchange function for the EU real economy i.e., to facilitate the channelling of savings towards productive investments, not only the definition but also the content of admission to trading becomes essential when designing a sound and effective securities market. In this sense, the definition of admission to trading must guarantee that the conditions and obligations for an instrument to be traded are the same in every trading venue where the instrument is admitted in order to avoid regulatory and functioning asymmetries that would only work at the detriment of the EU Market as a whole. Such a regime for admission to trading must be, in our view, at least the same as the established for regulated markets, especially when the instrument is admitted in more than one trading venue without the consent of the issuer. In this line, there would be merit in clarifying that when an issuer chooses to ask their securities to be admitted to trading on a given regulated market/s the issuer shows its will 2

3 for its securities to be traded on a specific market environment so it can benefit from the market design, the supervisory procedures and the listing standards deployed by that concrete venue. Issuers increasingly complain to exchanges that despite their explicit selection (and the costs it entails), once the listing process ends up in a particular regulated market there is no chance for the issuer to prevent their securities to be traded on any of the existing venues. Issuers further complain that they often remain unable to even know where their securities are traded, again, despite their explicit selection. No matter the nature and trading features of the selected venue being it regulated and supervised or nonregulated or unsupervised venues, even where it is the case that the issuer does not agree with its securities being negotiated at such trading venue, the issuer is hand-tied. Existing asymmetries across different trading venues namely between supervised and non-supervised or venues very difficult to be supervised regarding the conditions for admission to trading as well as the conditions under which securities trading takes place only introduce uncertainty concerning where and how much trading is taking place. Hence it is the transparency of the market which is worsened. Such asymmetries contribute to artificially increase the volatility and hence the risk of the companies securities, and therefore the issuers and their shareholders themselves. Should it be the case that said asymmetries keep on existing, we would very much support EU legislation to recognize the right of issuers to decide on which venue or under which conditions their securities may be traded in venues different to that/those in which the issuer chose for its securities to be admitted to trading. Such a proposal would entail the right of issuers to be duly informed and, at least, asked for their acquiescence for their securities to be traded in venues different to that/those of issuance. 2.2 Organised trading facilities 2. What is your opinion on the introduction of, and suggested requirements for, a broad category of organised trading functionalities outside the current range of trading venues recognized by MiFID? Please explain the reasons for your views. 3. What is your opinion on the proposed definition of an organised trading facility? What should be included and excluded? 4. What is your opinion about creating a separate investment service for operating an organised trading facility? Do you consider that such an operator could passport the facility? The introduction of a new investment service for operating an organised trading facility a generic kind of trading venue not foreseen by MiFID with specific requirements different from those of already existing MiFID organised venues RMs, MTFs and SIs would challenge the MiFID functional approach of same business, same rules. 3

4 Current scheme of trading venues as per MiFID and its implementing legislation allows, where duly applied and enforced, for all trading flow to happen under any of the MiFID venues. All multilateral trading activity is formally foreseen to happen on regulated markets and/or MTFs, whereas bilateral trading may happen in SIs or in the OTC space, in this last case under the conditions pointed out by Recital 53 of the Directive 2 and following the rules set out in articles 21.3 and 28 of the Directive. Considering that every single trade can currently happens under one or more of the MiFID venues, the introduction of the OTF figure would not add but a new layer of complexity to the system, making it even harder to survey, at the detriment mainly of investor protection and the level playing field. Most of the alleged flaws of MiFID stem from the market fragmentation it has induced. Introducing a new category would deepen this fragmentation. According to the European Parliament 3 to ensure a level playing field, broker crossing networks (BCNs) should be subject to an in-depth investigation of their business models, to ensure that where they provide services which mean they are essentially functioning as RMs, MTFs or as SIs they are regulated as such,. Therefore, in addition to a deeper analysis of business models of any facility that could fit into the definition of OTF prior to further developing legislation, it can be noted that according to MiFID wording and spirit any facility which could be classified as OTF as per the Consultation Paper should be classified as one of the existing MiFID venues, in particular MTF or SI. A due observation and enforcement of MiFID rules on market structure would, besides, contribute to best execution and to the avoidance of potential market abuse. 5. What is your opinion about converting all alternative organised trading facilities to MTFs after reaching a specific threshold? How should this threshold be calculated, e.g. assessing the volume of trading per facility/venue compared with the global volume of trading per asset class/financial instrument? Should the activity outside regulated markets and MTFs be capped globally? Please explain the reasons for your views. 2 Recital 53 in MiFID reads: It is not the intention of this Directive to require the application of pre-trade transparency rules to transactions carried out on an OTC basis, the characteristics of which include that they are ad-hoc and irregular and are carried out with wholesale counterparties and are part of a business relationship which is itself characterised by dealings above standard market size, and where the deals are carried out outside the systems usually used by the firm concerned for its business as a systematic internaliser. 3 Report on regulation of trading in financial instruments dark pools etc. Whereas K. Committee on Economic and Monetary Affairs of the European Parliament. November

5 As abovementioned, MiFID scheme for the regulation of trading venues follows a same business, same rules functional approach. It is not any threshold quantitative measure, e.g. business volumes which defines the kind of business that is provided. Therefore, said thresholds must not determine the rules to be applied to it, but rather it is the very nature of the business/service itself which must determine the regime to be applied. Consequently, arrangements fitting under the OTF figure as per the Consultation Paper must be classified as MTF or SI depending on how the trading process occurs, whether multilaterally or bilaterally. Otherwise, and only when the conditions pointed out in Recital 53 of the Directive are duly met and verified, trading could keep on being classified as OTC. For the sake of a proper and balance regulation, we would encourage the EU regulator to undertake a deeper analysis of the business models of OTF arrangements in order to attain a clear picture of their nature and thus to find the most suitable regime to be applied to them. Though some fine-tuning might be necessary, as explained in our view current venue classification under MiFID provides with a wide regulated framework under which all trading activity can take place. Where such an assessment does not take place, the risk of further hampering the level playing field among competing trading venues will increase as well as the potential regulatory arbitrage between differently regulated similar venues. 6. What is your opinion on the introduction of, and suggested requirements for, a new sub-regime for crossing networks? Please explain the reasons for your views. As previously exposed, we do not consider the creation of a trading venue sub-regime to be appropriate. In our view, current MiFID legislation providing with a broad scope for trading to happen on the regulated space must be duly applied and enforced to effectively cover the whole trading flow. 7. What is your opinion on the suggested clarification that if a crossing system is executing its own proprietary share orders against client orders in the system then it would prima facie be treated as being a systematic internaliser and that if more than one firm is able to enter orders into a system it would be prima facie be treated as MTF? Please explain the reasons for your views. We agree with the clarification as long as it would be in line with the MiFID functional approach to regulation. 5

6 In the same line, the European Parliament 4 has asked for an investigation into OTC trading of equities [ ] with a view to ensuring that the use of RMs and MTFs in the execution of orders on a multilateral basis and of SIs in the execution of orders on a bilateral basis increases, and that the proportion of equities trading carried out of equities trading carried out OTC declines substantially. 8. What is your opinion of the introduction of a requirement that all all clearing eligible and sufficiently liquid derivatives should trade exclusively on regulated markets, MTFs, or organised trading facilities satisfying the conditions above? Please explain the reasons for your views. 9. Are the above conditions for an organised trading facility appropriate? Please explain the reasons for your views. 10. Which criteria could determine whether a derivative is sufficiently liquid to be required to be traded on such systems? Please explain the reasons for your views. 11. Which market features could additionally be taken into account in order to achieve benefits in terms of better transparency, competition, market oversight, and price formation? Please be specific whether this could consider for instance, a high rate of concentration of dealers in a specific financial instrument, a clear need from buy-side institutions for further transparency, or on demonstrable obstacles to effective oversight in a derivative trading OTC, etc. BME supports the introduction of a requirement that all clearing eligible and sufficiently liquid derivatives trade exclusively on RM or MTFs. According to G20 all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties. The Commission proposal on OTC Derivatives, CCPs and TRs claims a central role of ESMA in identifying the eligible classes of derivatives that must be centrally cleared. Criteria include reduction of systemic risk in the financial system, the liquidity of contracts, availability of pricing information, ability of the CCP to handle the volume of contracts and level of client protection provided by the CCP. Such kind of contracts is perfectly suitable to be traded on RMs or MTFs. An effort is needed to define what standard means. Getting a good definition of standard will ease the interpretations about clearing obligation and transparency. The following points should be considered: a) If the underlying of a derivative is traded on a RM or MTF, then the derivative is subject to be defined as standard. 4 Report on regulation of trading in financial instruments dark pools etc. Section 8. Committee on Economic and Monetary Affairs of the European Parliament. November

7 b) Differences in maturity, type of settlement, exercise prices and option s style are features that do not make the derivatives contract non-standard. c) A combination of contracts between one or more underlying is a standard contract. d) Only if the intrinsic characteristics of a contract are not admitted to trading on a RM or MTF (or other type of venues as the case may be) the contract is subject to be qualified as a non-standardized contract. e) The use of features in the design of a contract that are not incorporated in the standard contract but that make meaningless differences in the prices of the standard and the non-standard contract are not considered under d) above. Although the fundamental tool to reduce risk is the obligation to be centrally cleared and reported, trading on an organized market, such as a RM or an MTF, adds up to a more coherent solution: decreasing risk and increasing liquidity. 12. Are there existing OTC derivatives that could be required to be traded on regulated markets, MTFs or organised trading facilities? If yes, please justify. Are there some OTC derivatives for which mandatory trading on a regulated market, MTF, or organised trading facility would be seriously damaging to investors or market participants? Please explain the reasons for your views Automated trading and related issues 13. Is the definition of automated and high frequency trading provided above appropriate? Yes. 14. What is your opinion of the suggestion that all high frequency traders over a specified minimum quantitative threshold would be required to be authorized? We understand that the proposal is that high frequency traders over a specified threshold should be investment firms without an additional authorisation. From the perspective of the operational capacity of a venue which allows HFT, in our view, we do not think such an authorization as investment firm (hereinafter, IF ) is necessary. The venue s trading systems must be prepared to receive massive orders and to have in place the safeguards that guarantee an orderly trading and rules to avoid possible market abuse practices. 7

8 The current and increasing trading volume that HFT currently accounts for, both globally and in the EU, makes HFT to play a truly relevant role more and more influential in the market. According to a report of the European Parliament 5 [ ] HFT strategies are a relatively new phenomenon in Europe and are now estimated to make up 35% of the market by volume. Hence, the potential impact of HFT on the securities markets cannot be dismissed. Therefore, the introduction of an authorization requirement as IF for HFT providers under certain circumstances may be a step forward in safeguarding investor protection. In this sense, where HFT takes place on behalf of clients, or where HFT volumes on the broker/dealer s own account achieve such a size that make it systemic relevant, the requirement to operate under the IF regulated regime which implies fulfilment of organisation duties and due supervision would only come at the benefit of the safety and soundness of the securities market in general, and of the protection of investors in particular. 15. What is your opinion of the suggestion to require specific risk controls to be put in place by firms engaged in automated trading or by firms who allow their systems to be used by other traders? The requirements and internal control procedures asked to firms to be authorised to trade are already high. In this context, there would not be a need for additional regulatory requirements provided that the real time filters and controls established by firms and the platforms with regard to the necessary arrangements and conditions to deliver such activity are suitable. 16. What is your opinion of the suggestion for risk controls (such as circuit breakers) to be put in place by trading venues? Circuit breakers allow the fluctuation of prices in an orderly manner and help to minimize potential mispricing. When implemented they have contributed to achieve efficient trading even in highly volatile markets. Circuit breakers have been in place in the systems of the regulated markets for many years. As a matter of fact, regulated markets have performed flawlessly even under the most extreme circumstances during the recent financial markets crisis. In our view, it is of the utmost relevance that there is coordination amongst all the trading venues in relation to risk controls in order to avoid problems in the system. In this line, the 5 Report on regulation of trading in financial instruments dark pools etc. Whereas N. Committee on Economic and Monetary Affairs of the European Parliament. November

9 European Parliament 6 has asked ESMA for supervision and definition by implementing acts of robust volatility interrupts and circuit breakers which operate simultaneously across all EU trading venues in order to prevent a US-style flash crash event. Otherwise, such a lack of level playing field might lead to a twofold effect: - whereas trading in a given instrument is halted on a venue providing with the highest standards of safety and integrity, trading could keep on occurring on those that have not implemented said risk controls; making the business case less and less appealing for the former ones, besides giving birth to an unbalanced situation; - the resilience of the whole system would diminish down to the resiliency of the weakest venue in case a crash happens. To this end, the rules established by the regulated markets must be taken as a reference, because of their demonstrated good performance in the past, based on the highest standards. 17. What is your opinion about co-location facilities needing to be offered on a non-discriminatory basis? Venues must guarantee a non discretionary access to their systems in terms of different levels of capacity available and infrastructure needed, for all participants. Participants must have the possibility to choose the capacity with which they access the market according to their needs, resources and strategies. Co-location services are accessible not only to the market members trading on own account but also to those trading on third account. The use of this service will depend on the needs and the strategies of the members. As long as co-location services are offered on a commercial and non discretionary basis they must not pose any issue on fair access. 18. Is it necessary that minimum tick sizes are prescribed? Please explain why. The tick size level applied to an instrument is relevant for the liquidity of that instrument. An appropriate minimum tick size must be implemented for every instrument in order to achieve a positive effect on liquidity. Minimum tick sizes must be harmonised between venues as already done 7 between regulated markets and MTFs. 6 Report on regulation of trading in financial instruments dark pools etc, Section 30. Committee on Economic and Monetary Affairs of the European Parliament. November

10 19. What is your opinion of the suggestion that high frequency traders might be required to provide liquidity on an ongoing basis where they actively trade in a financial instrument under similar conditions as apply to market makers? Under what conditions should this be required? HFT plays an important role in the provision of liquidity for some financial instruments. Such activity is, in some aspects, similar to the function delivered by market makers. However, the nature of the service in both cases differs each other. While market makers receive a mandate by an issuer or venue to ensure the liquidity of a given instrument which might happen in different ways, HFT as per the Consultation Paper can be linked to market making or not. Therefore, where HFT has no agreement in place with the issuer of a given instrument or with the trading venue/s where such instrument is traded, we do not see the need to require from the high frequency trader any obligation to provide liquidity on an ongoing basis. 20. What is your opinion about requiring orders to rest on the order book for a minimum period of time? How should the minimum period be prescribed? What is your opinion of the alternative, namely of introducing requirements to limit the ratio of orders to transactions executed by any given participant? What would be the impact on market efficiency of such a requirement? We would not support the requirement for orders to rest on the order book for a minimum period of time as long as they are showed immediately in the order book and fully accessible by any participant. Requirements to limit the ratio of orders to transactions executed by any given participant must only be implemented in order to guarantee an efficient use of the system Systematic internalisers 21. What is your opinion about clarifying the criteria for determining when a firm is a SI? If you are in favour of quantitative thresholds, how could these be articulated? Please explain the reasons for your views. Following the functional approach followed by MiFID, all bilateral trading must happen in a SI, except for those transactions occurring according to the conditions pointed out by Recital 53 of the Directive, which may follow the rules set out in articles 21.3 and 28 of the Directive. A loose definition of SI, together with the lack a proper enforcement of it, might have contributed to the current level of OTC trading

11 For the sake of improving certainty, there would be merit in clarifying some of the criteria for a firm to qualify as SI in order to, in European Parliament s own words 8, ensure that this regime [SI] is used for execution of orders on a bilateral basis with the financial counterparty. In this regard, we would support further clarification as follows: where an IF has an arrangement be it a system or a procedure which is implemented and available to its customers in order to provide them with counterparty for such customers transactions, said IF should be classified as SI. Hence it must be the very nature of the activity, rather than the effective level of it, which determines that the firm is categorized as SI. 22. What is your opinion about requiring SIs to publish two sided quotes and about establishing a minimum quote size? Please explain the reasons for your views. We agree with the view that the SIs must publish two sided quotes with a minimum quote size in order to guarantee transparency and consistency with the market situation and to effectively contribute to liquidity. Quotes must be representative of what the SI is willing to buy or sell. In this sense, CESR 9 has recognized that CESR is of the view that there is a strong case for making SI information more meaningful, and has recommended amending the SI quoting obligations to make them more reflective of and useful to the type of business being undertaken. In particular, CESR recommends that: a. SIs be required to maintain two-side quotes; b. SIs be required to maintain a minimum quote size equivalent to 10% of the standard market size of any liquid share in which they are a systematic internaliser; [ ] 2.5. Further alignment and reinforcement of organizational and market surveillance requirements for MTFs and regulated markets as well as organised trading facilities 23. What is your opinion of the suggestions to further align organizational requirements for regulated markets and MTFs? 8 Report on regulation of trading in financial instruments dark pools etc, Section 4. Committee on Economic and Monetary Affairs of the European Parliament. November CESR Technical Advice to the European Commission in the Context of the MiFID Review - Equity Markets. Section , paragraphs 91 and 96. Ref. CESR/ July 29,

12 We agree that organizational requirements should be aligned for RMs and MTFs. Business models being similar, they must be similarly regulated, particularly risks and conflicts of interest. Besides this alignment, and in the light of the increasing importance given to market infrastructures (legislative initiatives on CSD and EMIR), we consider convenient to explicitly require that RM and MTF s authorization procedure require the adoption and publication by such trading venues of clear rules regarding the use of CCPs and/or CSDs for the settlement of their transactions. 24. What is your opinion of the suggestion to require regulated markets, MTFs and organised trading facilities trading the same financial instruments to cooperate in an immediate manner on market surveillance, including informing one another on trade disruptions, suspensions and conduct involving market abuse? As stated in our response to Q16, risk controls must be set and trigger the same actions across all the venues where the risk has the same source. To this end, exchange of information is key. This is important not only for investor protection, but also to prevent market abuse SME markets 25. What is your opinion of the suggestion to introduce a new definition of SME market and a tailored regime for SME markets under the framework of regulated markets and MTFs? What would be the potential benefits of creating such a regime? BME supports the introduction of a definition of SME market. SMEs should have the possibility to raise capital in the financial markets through the most convenient instrument: public issue of equity or bonds. Given the particular characteristics of these companies, the market structure must be adapted to their specific conditions. Besides, and provided that these companies are closely linked to their local financial communities, BME does not envisage as a priority in this field the creation of inter-linkages between markets for this purpose. Current experiences in the MTF markets for SMEs in the EU are particularly positive, so a regime like that described in the document could be more suitable for those MTFs. It is worth mentioning the topic of a document other than the prospectus for these companies to offer their instruments. This document, gathering all the relevant information, should be valid for both admission to trading and capital increases. 26. Do you consider that the criteria suggested for differentiating the SME markets (i.e. thresholds, market capitalisation) are adequate and sufficient? 12

13 The two proposed criteria have different nature. The capitalisation criterion could fail as it is a very variable factor across markets. In our opinion, the criterion laid down in the Prospectus Directive is more appropriate. 3. PRE- AND POST-TRADE TRANSPARENCY 3.1. Equity markets 27. What is your opinion of the suggested changes to the framework directive to ensure that waivers are applied more consistently? We support the suggested changes. In our view all and each piece of regulation intended to strength market integrity will contribute to consolidating the legal certainty. By means of it, the risk of interpretation conflicts between member states in the EU would be highly mitigated, when not avoided, and therefore a more consistent and uniform application of this regime would be achieved across Member States. In the same line, it is worth noting that the European Parliament 10 has asked for a uniform application of pre-trade waivers across Member States to limit implementing differences that can lead to uncertainty, regulatory arbitrage and an uneven playing field and has suggested that technical standards defined by ESMA could be an appropriate way of achieving this, in keeping with the concept of a single rule book for financial services. 28. What is your opinion about providing that actionable indications of interest would be treated as orders and required to be pre-trade transparent? Please explain the reasons for your views. We strongly support this idea. In our view, as currently known and existing, an IOI constitutes a selective source of information for a group of participants, whereas an order displayed in a trading venue becomes a source of information and accessible liquidity for the whole market. There are no based grounds to provide figures that, de facto, reflect a similar reality the trading interest of a given party with different regulatory treatments. In this regard, CESR 11 has recommended that MiFID be amended to clarify that actionable indications of interest (IOIs) are considered to be orders and as such subject to pre-trade transparency requirements. 10 Report on regulation of trading in financial instruments dark pools etc, Section 11. Committee on Economic and Monetary Affairs of the European Parliament. November CESR Technical Advice to the European Commission in the Context of the MiFID Review - Equity Markets. Executive summary. Ref. CESR/ July 29,

14 29. What is your opinion about the treatment of order stubs? Should they not benefit from the large in scale waiver? Please explain the reasons for your views. From our point of view stubs should not benefit from the large in scale waiver, where they are under the established waiver thresholds. The large in scale waiver was created to avoid the market impact of large orders. As long as the residual of a large order does not reach the limit of the waiver, it will not have market impact according to MiFID s provision, and therefore market would not need to be protected from impact through the waiver. 30. What is your opinion about prohibiting embedding of fees in prices in the price reference waiver? What is your opinion about subjecting the use of the waiver to a minimum order size? If so, please explain why and how the size should be calculated. We agree with this banning. Fees must be explicit as far as possible for the sake of transparency, to ease the assessment of best execution and, therefore investor protection. In this line, CESR 12 recommends to clarify that venues using the reference price waiver should not embed a fee in the price of trades. 31. What is your opinion about keeping the large in scale waiver thresholds in their current format? Please explain the reasons for your views. We agree with keeping the large in scale waiver thresholds in the current format. Whereas it has been said that the standard order size has reduced in the last years, it must be noted that the liquidity in the market measured by the spreads or by market depth remains at similar levels compared to that time lapse. Considering that on gross average trading volume remains stable, a reduction in the size of orders could be ascribed to the increasing use of slice and dice trading strategies. These strategies allow the intermediary to split an order into several smaller orders, which may then be routed to single or different venues for their execution. Where such smaller orders are below the LIS threshold, each of them would be executed without causing any market impact, and therefore investors can have their initially large orders executed at the market price. Following the rationale for the LIS waiver, where there is no market impact to be avoided, there is no need to specifically protect the market in this sense. Furthermore, according to 12 CESR Technical Advice to the European Commission in the Context of the MiFID Review - Equity Markets. Executive summary. Ref. CESR/ July 29,

15 the European Parliament 13 [ ] in total around half of trades are currently not covered by pre-trade transparency requirements, but half of OTC transactions are below market size and therefore do not require protection against market impact. A reduction in the LIS waiver thresholds would lead a reduction in the orders actionable for the whole market in the visible order book, which is the source of liquidity. In other words, lowering LIS thresholds would increase the amount of trading happening in the dark, which is in contradiction with the very aim of pre-trade transparency waivers that, as acknowledged by the European Parliament 14, ( ) were intended to facilitate a shift towards more regulated and transparent venues. 32. What is your opinion about the suggestions for reducing delays in the publication of the trade data? Please explain the reasons for your views. We agree with the reduction in the delays. The transparency and accuracy in the post trade is necessary to improve the market quality. In the same line, the European Parliament 15 has called for a reduction in the time limit for deferred publication so transactions are reported to the regulators within twenty-four hours of taking place; takes the view, with regard to publication of transactions, that in ordinary circumstances delays of more than one minute should be considered unacceptable Equity-like instruments 33. What is your opinion about extending transparency requirements to depositary receipts, exchange traded funds and certificates issued by companies? Are there any further products (e.g. UCITS) which could be considered? Please explain the reasons for your views. In our view, transparency requirements must be extended to the mentioned equity-like instruments. This view can be also found at the positions of both, the European Parliament 16 and CESR 17. There are strong interrelations between said instruments and equity instruments in their daily trading. A more transparent market contributes to 13 Report on regulation of trading in financial instruments dark pools etc, Whereas J. Committee on Economic and Monetary Affairs of the European Parliament. November Report on regulation of trading in financial instruments dark pools etc, Whereas F. Committee on Economic and Monetary Affairs of the European Parliament. November Report on regulation of trading in financial instruments dark pools etc, Section 16. Committee on Economic and Monetary Affairs of the European Parliament. November Report on regulation of trading in financial instruments dark pools etc, Section 33. Committee on Economic and Monetary Affairs of the European Parliament. November CESR Technical Advice to the European Commission in the Context of the MiFID Review - Equity Markets. Executive summary. Ref. CESR/ July 29,

16 information and opportunities symmetries for all market players; pre- and post-trade transparency is also key for the proper enforcement of the Market Abuse Directive provisions and therefore for the safety and integrity of the EU securities markets. In our view, the wider the scope of MiFID in terms of instruments, the fairer and more efficient the market will be. Though adapted as needed, trade transparency regime must apply to other equity-like instruments. 34. Can the transparency requirements be articulated along the same system of thresholds used for equities? If not, how could specific thresholds be defined? Can you provide criteria for the definition of these thresholds for each of the categories of instruments mentioned above? Yes. In our view, the transparency requirements for equity-like instruments can be articulated along the same system of thresholds and waivers used for equities. These instruments are normally traded in the same markets and systems than equities and, as previously said, there is great correlation between both types of product. Therefore, it would seem reasonable to have similar transparency regime applying to both of them. The only difference is that normally they need an external liquidity provider, but even in some cases there are also liquidity providers for equities. In this regard, CESR 18 believes that given the equity-like instruments trade like equities and on the same platforms, the existing calibration regime for shares is likely to be appropriate for equity-like instruments Trade transparency regime for shares traded only on MTFs of organised trading facilities 35. What is your opinion about reinforcing and harmonizing the trade transparency requirements for shares traded only on MTFs or organised trading facilities? Please explain the reasons for your views. In our view, transparency requirements must be reinforced and harmonized for shares traded only on MTFs, compared to those traded on regulated markets. Additionally, we think there is a regulatory asymmetry as long as shares admitted to trading in a regulated market can be admitted to trading in other venues, but shares admitted to trading only in MTFs cannot be admitted to trading in regulated markets. More opaque venues can lead to a regulatory arbitrage in favour of darkest venues with a decline in the transparency of the market as a whole with the consequent lost for investors. 36. What is your opinion about introducing a calibrated approach for SME markets? 18 CESR Technical Advice to the European Commission in the Context of the MiFID Review - Equity Markets. Section 3, paragraph 130. Ref. CESR/ July 29,

17 BME does not consider necessary to introduce any calibrated approach for pre and post transparency, even for SME markets Non-equity markets 37. What is your opinion on the suggested modification to the MiFID framework directive in terms of scope of instruments and content of overarching transparency requirements? Please explain the reasons for your views. We fully agree with the extension of the scope of MiFID so as that pre- and post-trade transparency regime is also applicable to derivatives and fixed income instruments. In this sense, it is worth noting that the European Parliament 19 has asked the Commission and ESMA to consider introducing a transparency requirement, pre- and post-trade, on all non-equity financial instruments, including government and corporate bond markets and CCP eligible derivatives, to be applied in a manner that differentiates across asset classes where appropriate and at the same time combines with measures that bring about further standardisation of OTC derivative products in order to enable greater application of transparency. With regard to derivatives markets, in our view, all standard derivatives should have pre and post-trading transparency rules. On the pre-trade transparency side, RMs and MTFs provide sufficient information to reasonably ensure that trades are executed at market prices. The post-transparency rules should apply to all derivatives contracts with rules of delayed information that appropriately protect the parties of a trade. Calibration by asset class and by type of instrument is necessary. For derivative contracts, thresholds and requisites should be equivalent to those for the underlying asset, when possible. Further identification and flagging of OTC trades are useful. The complexity of a trade should not be used to avoid post-trade publicity of a trade. Nobody will argue that a complex quantum equation should not be made public because of its complexity; by the same token, a much simpler derivatives trade should not be made secret to the public. With regard to bond markets, BME has been demanding the extension of transparency obligations, both pre and post, to these instruments, irrespective of the venue they are traded in. Therefore, we agree that transparency requirements must apply to any bond, whether it is or not admitted to trading on a RM or MTF. Otherwise non admitted to trading bonds would have a regulatory advantage over admitted to trading ones, which could be an incentive not to list them and therefore would further foster their lack of transparency. 19 Report on regulation of trading in financial instruments dark pools etc, Section 34. Committee on Economic and Monetary Affairs of the European Parliament. November

18 38. What is your opinion about the precise pre-trade information that regulated markets, MTFs and organised trading facilities as per section above would have to publish on non-equity instruments traded on their system? Please be specific in terms of asset-class and nature of the trading system (e.g. order or quote driven). Bonds are by large OTC traded. The share of RMs and MTFs amounts to about 10-15% of the total volume. Price formation of these instruments is carried out, therefore, on a nontransparent basis. This leads to information asymmetries and difficult valuation of the relevant price components, producing wide spreads and price gaps. Supply and demand information is key, as it is in equity, so a pre-trade transparency regime should be applied. Securities markets count on different structures. We believe that, in the case of less liquid instruments like bonds, a quote-driven market is, in principle, a good structure to trade and find right prices. But, as in the case of order-driven markets, transparency of prices and volumes is a key element. Also as in the case of equities, a transparency regime should include a mechanism of thresholds, waivers, frequency and delays according to some chosen parameters. 39. What is your opinion about applying requirements to investment firms executing trades OTC to ensure that their quotes are accessible to a large number of investors, reflect a price which is not too far from market value for comparable or identical instrument traded on organised venues, and are binding below a certain transaction size? Please indicate what transaction size would be appropriate for the various asset classes. We agree with the Commission s view of increasing transparency in the OTC trading. IFs involved must make quotes publicly available according to a regime whose characteristics should be well designed following the lines of RMs and MTFs trading. See response to Q In view of calibrating the exact post-trade transparency obligations for each asset class and type, what is your opinion of the suggested parameters, namely that the regime be transaction-based, and predicated on a set of thresholds by transaction size? Please explain the reasons for your views. We support a transaction size based regime with full post-trade transparency (trade price and size) for all executed trades. However, for large blocks (above retail size) deferred publication (i.e. end of day) should be the rule to avoid potential arbitrage situations for those entities that have executed the orders in the market. In case it is necessary, this post-trade transparency regime can be calibrated using the issue size of the security to adapt the reporting obligation to the significance of the trade for the market and to fix specific time thresholds for large orders. 18

19 41. What is your opinion about factoring in another measure besides transaction size to account for liquidity? What is your opinion about whether a specific additional factor (e.g. issuance size, frequency of trading) could be considered for determining when the regime or a threshold applies? Please justify. As it has been detailed in the previous question, we agree large trades should have a specific post trade transparency regime with a deferred publication of their main characteristics. This regime could not be based only on the absolute size of the transaction, but also calibrated by an additional factor linked with the issue outstanding volume of the security and therefore with the trade s relevance for the market. We believe establishing a regime based on the frequency of trading will be ideal to measure the relevance of the trades but, as it has been stated in our previous answers to the European Commission and CESR s Consultation Papers, due to the lack of transparency existing nowadays in fixed income markets there is an absence of global statistics on bonds secondary market activity that can make it difficult implementing such policies Over the counter trading 42. Could further identification and flagging of OTC trades be useful? Please explain the reasons. Yes. We believe that, it will be helpful for supervisory purposes establishing any kind of flagging of OTC trades as these tags will let supervisors to know exactly where the trades have been executed and to monitor their conditions. For trades executed in the systems managed by RMs and MTFs, the trades conditions can be completely checked as these market s infrastructures inform and provide their supervising entities full information about their operations since the orders are included in the order books up to their settlement. On this matter, the European Parliament 20 has called [ ] for the introduction of specific flags in pre- and post-trade transparency for OTC trades with a view to further understanding the characteristics of such OTC trades and assessing which types of transaction can legitimately be done OTC owing to their specific characteristics. 4. DATA CONSOLIDATION 4.1. Improving the quality of raw data and ensuring it is provided in a consistent format 43. What is your opinion of the suggestions regarding reporting to be through approved publication arrangements (APAs)? Please explain the reasons for your views. 20 Report on regulation of trading in financial instruments dark pools etc, Section 17. Committee on Economic and Monetary Affairs of the European Parliament. November

20 We consider that, given that the current difficulties that market participants experience in order to get a full picture of trade data in shares stem from the opacity, poor quality and lack of consolidability of OTC and SI data, APAs could play a key role in improving the standards of such data and in helping to consolidate them with the high quality data of RMs and MTFs on a reasonable commercial basis provided that their provision of services remains open to competition. Moreover, should IF and SI be required to publish the list of APAs to whom they send their trade reports and regulation amended to clarify which IF is obliged to report an OTC transaction, APAs could also solve the problems posed by IF sending reports to far away locations in order to avoid market scrutiny as well as the distortions caused by multiple reporting. In this sense, the European Parliament 21 has asked the Commission [ ] to consider the introduction of Approved Publication Arrangements (APAs) in order to introduce quality standards for trade publication and reduce the number of venues that trades can be reported to. 44. What is your opinion of the criteria identified for an APA to be approved by competent authorities? Please explain the reasons for your views. We generally agree with the criteria indentified for an APA to be approved by competent authorities as put forward in the Commission s Consultation Paper. However, and in order to avoid potential misunderstandings on the requirements that APAs must comply with, it will be very helpful: - to oblige IFs to declare what APAs they are using to publish their data and to make such information available to the public in ESMA website; - to clearly state be through the implementing regulation or through binding level 3 standards that data publication via website does not meet the criterion to consider that the APA can facilitate the consolidation of the data ; - to clearly define which will be the scope of ongoing supervision by the competent authority ; - to clearly define what the Commission expects from an APA regarding assist to improve the quality of information in trade reports. If the source information is of bad quality APA can reformat it and try to consolidate it but at the end it will be low quality data anyway; - to explain how quality should be understood; 21 Report on regulation of trading in financial instruments dark pools etc, Section 15. Committee on Economic and Monetary Affairs of the European Parliament. November