A Guide for Market Makers on ETFplus Effective 10 rd October 2018
1.0 Introduction 3 1.1 Scope 3 1.2 Summary 3 1.3 Registration Process 6 1.4 Monitoring and Reporting 7 2.0 Specialist 7 2.1 Benefits to being a Specialist 7 2.2 Requirements 8 2.3 Obligations 8 2.4 IT set up 10 2.5 How to become a Specialist 10 2.6 Resignation of status 10 3.0 Advanced Liquidity Provider (AdLP) 11 3.1 Benefits to being an AdLP 11 3.2 Requirements 12 3.3 Obligations 12 3.4 IT set up 13 3.5 How to become an AdLP 14 3.6 Resignation of status 14 4.0 MiFID II Market Maker 14 4.1 Benefits to being a MiFID II Market Maker 14 4.2 Requirements 15 4.3 Obligations 15 4.4 IT set up 16 4.5 How to become a MiFID II Market Maker 17 4.6 Resignation of status 17 5.0 Explanation of Monitoring 17 6.0 Contacts and Links 18 6.1 Contacts 18 6.2 Links 19 2
1.0 Introduction Borsa Italiana s ETFplus market is an order-driven environment, with integrated market maker liquidity provision, delivering stable two way prices, along with a minimum size and maximum spread obligation. The liquidity of each instrument listed on the ETFplus market is supported by at least one market maker; a Specialist, and potentially several other voluntary market makers. This document acts an informative guide for all three types of Market Makers, detailing; the benefits, requirements, technical set up and the process to become a Market Maker. This document is applicable to members that are currently providing liquidity on the ETFplus market, or are aiming to do so, through the posting and maintaining of firm quotes, complying with the specific size, price, presence and comparability obligations (detailed within this guide). 1.1 Scope The scope of this document applies to all ETFs, ETCs and ETNs listed on Borsa Italiana s ETFplus market. 1.2 Summary There are three types of Market Makers who can provide liquidity, in terms of two way prices and minimum size, to the instruments listed on the ETFplus market: - A Specialist (S) - Advanced Liquidity Provider (AdLP) - MiFID II Market Maker (MiFID II MM) 3
The below table summarises the key points for each Market Making scheme. A more granular explanation can be found under the relevant section of each scheme within this document. Specialist Advanced Liquidity Provider MiFID II Market Maker Motivation Mandatory for listing, appointed by the issuer. Requirement of one Specialist per instrument Providing additional liquidity voluntarily. There can be several AdLPs per instrument MiFID II market making strategy. There can be several MiFID II MMs per instrument Quoting obligation During auctions and continuous trading Continuous trading only Continuous trading only Daily compliance rate 60% 55% 50% Obligations during normal market conditions Max. spread Min. countervalue Max. spread = S max spread Min. countervalue: 10,000 Max. spread = S max spread Min. countervalue: 5,000 Obligation level The above obligations are set per instrument there is no standardisation among instruments All ETFplus instruments will follow the above obligation All ETFplus instruments will follow the above obligation Resignation 3 months notice, the continuity of the specialist function must be ensured No restrictions No restrictions Quote vs. Named quotes and Anonymous quotes Anonymous quotes 4
Specialist Advanced Liquidity Provider MiFID II Market Maker Order 1 named orders and/or standard orders and/or standard orders Stressed market conditions obligations Exceptional circumstances Size obligation check Spread obligation check Comparable size check Spread obligation is doubled and size obligation is reduced by 50% No obligations Total buy countervalue > Min coutervalue obligation Total sell countervalue > Min countervalue obligation (VWAP Sell VWAP Buy) divided by (VWAP Sell + VWAP Buy) / 2 <= Max Spread Max (Total Buy Quantity, Total Sell Quantity) = Max Min (Total Buy Quantity, Total Sell Quantity) = Min If ( Min < ( Max / 2 )) Then test has failed 1 Regardless of the Market Making scheme, the member must develop the relevant message on their trading system to conform with the relevant parameters and successfully pass the relevant set up test. For more information, please contact Client Technology Services. 5
Specialist Advanced Liquidity Provider MiFID II Market Maker CompID 2 CompID S is allowed to send named orders and quotes to the relevant instruments only CompID D is allowed to send orders and anonymous quotes. CompID F is allowed to send orders only, for the relevant instruments only. CompID M is allowed to send orders and anonymous quotes. CompID L is allowed to send orders only, for the relevant instruments only. Application Written undertaking Member Portal Member Portal 1.3 Registration Process The process to become a Market Maker differs depending on the type of Market Maker a member wishes to apply for. To apply for status as a Specialist, the member must be appointed by the relevant issuer and only then, may they apply for such status through a dedicated Specialist form. The Specialist form can be found in the instructions section on Borsa Italiana s website, here (Section: Applications for admission to listing and the documentation to be attached ).Please note that there are two separate Specialist forms, one for ETFs and one for ETCs/ETNs. To apply for status as either an Advanced Liquidity Provider or MiFID II Market Maker, the member must apply within the Member Portal. More information on how to become each type of Market Maker can be found in the relevant section within this document. 2 The member must decide which CompID they would like to be set up with when joining the relevant scheme. It is not possible to operate with different Comp IDs from the same Market Making scheme, i.e. for AdLP activity, the member must decide CompID D or F, it is not possible to have both.. 6
The list of current Market Makers are published on Borsa Italiana s website. 1.4 Monitoring and Reporting Market Makers will be monitored continuously by Borsa Italiana. Each Market Maker will have a daily compliance rate, with the assessment calculated on a monthly basis. Each Market Maker can consent to Borsa Italiana providing performance related data to the relevant issuer(s), for those relevant instruments which they are supporting. 2.0 Specialist A Specialist will be required to place compulsory comparable bid and ask orders which respect a maximum spread and minimum countervaule. There can only be one specialist per instrument the specialist is to be appointed by the relevant issuer. 2.1 Benefits to being a Specialist Specialists will receive a total exemption from the trading fees for transactions deriving from the fulfilment of trading specialist obligations. Specialists are also granted a number of free of charge transactions per second (tps), which is dependent on the number of instruments supported as Specialist. Number of instruments for which the specialist has undertaken to support liquidity for Total number of tps 1 50 50 tps 51 150 100 tps 150 + 200 tps 7
The free tps are attached to the specialist CompID only. 2.2 Requirements The Specialist must be appointed by the relevant issuer. 2.3 Obligations Specialist obligations are defined by Borsa Italiana. - Obligation to display bid and ask prices continuously. The Specialist shall comply with the obligation to enter simultaneous buy and sell orders for comparable quantities. - Obligation to display a minimum size. The Specialist must honour the obligation to display a minimum size for the instruments which it supports as Specialist. Each instrument has a defined minimum size. Borsa Italiana classifies each instrument into one of three liquidity categories (see table below). Borsa Italiana defines the minimum size for each instrument in relation to the liquidity category. The instrument is categorised into one of the three liquidity categories on the basis of the liquidity assessment of the underlying. Minimum Countervalue (Euro) Spread L1 50,000 Min: 3% - Max: 6% L2 100,000 Min:1% - Max: 3% L3 200,000 Max: 1% During stressed market conditions, the size is reduced by half. 8
- Maximum spread obligation. The Specialist s orders have to be entered at comparable competitive prices, i.e. the bid and ask prices must not diverge by the maximum spread. The maximum spread obligation is defined per instrument on the basis of the liquidity category which the instrument is in (as per the above table). During stressed market conditions, the spread is doubled. - Comparability obligation. The Specialist must make sure that the total bid size orders does not diverge more than 50% against the total ask size orders, according to the following formula: Max (Total Buy Quantity, Total Sell Quantity) = Max Min (Total Buy Quantity, Total Sell Quantity) = Min If ( Min < ( Max / 2 )) Then test has failed - Temporary suspensions. In exceptional circumstances, declared by Borsa Italiana s Trading Surveillance department, the Specialist may submit a request to Borsa Italiana for the suspension of quoting obligations for those instruments which they are a Specialist for. Borsa Italiana constantly updates the table on their website which summarises the minimum size and maximum spread obligations for each financial instrument traded on the ETFplus market. More information on Specialist obligations can be found in Borsa Italiana s Guide to the Parameters. Specialists are required to adhere to their obligations for 60% of each trading day. The assessment will be calculated and disseminated on a monthly basis. The daily compliance rate will be calculated in terms of four separate components: 9
- Presence - Size - Spread - Comparability check. 2.4 IT set up Transactions entered to fulfil the quotation obligations must be Named Quotes or Named Orders. Named Quotes allow the specialist to contextually submit bid and ask orders, whilst also identifying the orders as coming from a specialist. New specialists must test the Named Quote or Named Order or both functionalities before starting the activity. Specialist is to decide which functionality they will be using. Specialists are given a dedicated interface (CompID S ) to the market that can be used for specialist activity only and only for the instruments which they support as Specialist. 2.5 How to become a Specialist The Specialist must be appointed by the issuer for the relevant instrument(s) and only then, can they proceed with signing the agreement to become a Specialist, which is signed through a dedicated Specialist form. The Specialist form can be found within the instructions section on Borsa Italiana s website, here. 2.6 Resignation of status In order for a Specialist to terminate the agreement to fulfil their obligations as a Specialist, Borsa Italiana must be notified in writing at last three months before the effective date of the termination. Borsa Italiana may accept shorter notice if the continuity of the Specialist function is ensured by another entity entering into 10
the undertakings of the obligations to be fulfilled by the Specialist for the relevant instrument(s). It is the responsibility of the issuer to ensure that there is an entity available to replace the current Specialist for the relevant instrument(s) prior to the termination of the current Specialist s agreement. More information can be found in Borsa Italiana s rules. 3.0 Advanced Liquidity Provider (AdLP) An AdLP, as a voluntary Market Maker, will be required to provide liquidity by placing comparable competitive bid and/or ask orders on their own account, which respect a maximum spread and minimum countervalue. As the AdLP scheme is voluntary, there may be unlimited AdLPs per instrument. An entity can freely apply to be an AdLP for any instrument. 3.1 Benefits to being an AdLP AdLPs will receive a 100% discount on their passive executed orders, provided that on the instrument(s) they are registered as an AdLP, they: i) achieve a 20% share of trading (calculated as AdLPs turnover as a percentage of the total turnover for the instrument, multiplied by 2) and ii) respect quoting obligations set by Borsa Italiana. AdLPs will also receive 50tps free of charge if they support more than 50 instruments as an AdLP. Number of instruments for which the AdLP has undertaken to support liquidity for Total number of tps 1 50 0 tps 50 + 50 tps An AdLP will see the discounted trades in their monthly bill. 11
3.2 Requirements No requirements. An entity must only sign the agreement with Borsa Italiana, which is managed through Member Portal. An AdLP can voluntary apply to support the liquidity of any instrument. 3.3 Obligations AdLP obligations are defined by Borsa Italiana. - Obligation to display bid and ask prices continuously. The AdLP shall comply with the obligation to enter simultaneous buy and sell orders for comparable quantities. - Obligation to display a minimum size. The AdLP must comply with the obligation to display a minimum size of 10,000 for all instruments in which they support as an AdLP. During stressed market conditions, the size is reduced by half. - Maximum spread obligation. The AdLP must comply with the same maximum spread obligation that is set for the Specialist for the instrument(s) they support as an AdLP. Specialist s spread can be found on our website, here. During stressed market conditions, the spread is doubled. - Comparability obligation. The AdLP must make sure that the total bid size orders does not diverge more than 50% against the total ask size orders, according to the following formula: Max (Total Buy Quantity, Total Sell Quantity) = Max Min (Total Buy Quantity, Total Sell Quantity) = Min If ( Min < ( Max / 2 )) Then test has failed 12
AdLPs are required to adhere to their obligations for 55% of each trading day. The assessment will be calculated and disseminated on a monthly basis. The daily compliance rate will be calculated in terms of four separate components: - Presence - Size - Spread - Comparability check 3.4 IT set up Orders entered to fulfil the AdLP quoting obligations must be Anonymous Quotes and Single Orders or Single Orders. Anonymous Quotes allow the AdLP to contextually submit bid and ask orders, whilst also identifying that they are from an AdLP. A new AdLP must test the anonymous quote, should they wish to use this functionality, before starting the activity. AdLPs are given the option of two dedicated interfaces for the relevant instruments: - CompID D for those AdLPs that wish to submit both orders and anonymous quotes - CompID F for those AdLPs that wish to submit orders only An AdLP must decide which interface they wish to use when signing the agreement to be an AdLP. The AdLP activity should be covered using only one naming convention (CompID D or CompID F ), but the member can set up more CompID s of the same type. The D or F CompID may be used for AdLP activity only and only for those instruments which the entity supports as an AdLP. 13
3.5 How to become an AdLP The agreement to become an AdLP is signed through Member Portal. When signing the agreement you will be able to select the instruments that you would like to support as an AdLP and which interface. 3.6 Resignation of status The discontinuation of the activity of an AdLP must be communicated to Borsa Italiana and the resignation of status as an AdLP is managed through Member Portal. The resignation shall entry in force from the date specified by Borsa Italiana in agreement with the AdLP. 4.0 MiFID II Market Maker This section is for those who perform Market Making strategies according to MiFID II, which requires the entity to enter into an agreement with the relevant exchange, Borsa Italiana in this instance. Please let it be noted, that Borsa Italiana will not perform any monitoring to analyse and alert a member as to whether they are performing a Market Making strategy according to MiFID II. It is the responsibility of the entity in question to determine as to whether they are performing Market Making strategies according to MiFID II. A MiFID II Market Maker will be required to provide liquidity by placing comparable competitive bid and/or ask orders on their own account, which respect a maximum spread and minimum countervalue, as defined by Borsa Italiana. There may be unlimited MiFID II Market Makers per instrument (or none). 4.1 Benefits to being a MiFID II Market Maker There will be a monetary incentive for those members which respect the obligations of a MiFID II Market Maker in stressed market conditions. This benefit is defined in the Price List for trading services. 14
4.2 Requirements No requirements. An entity must only sign the agreement with Borsa Italiana, which is managed through Member Portal. There are no limits to the number of products a single entity can support as a MiFID II Market Maker. 4.3 Obligations MiFID II Market Maker obligations are defined by Borsa Italiana. - Obligation to display bid and ask prices continuously. The MiFID II Market Maker shall comply with the obligation to enter simultaneous buy and sell orders for comparable quantities. - Obligation to display a minimum size. The MiFID II Market Maker must comply with the obligation to display a minimum size of 5,000 for all instruments in which they support as a MiFID II Market Maker. During stressed market conditions, the size is reduced by half. - Maximum spread obligation. The MiFID II Market Maker must comply with the same maximum spread obligation that is set for the Specialist for the instrument(s) they support as an MiFID II Market Maker. Specialist s spread can be found on our website, here. During stressed market conditions, the spread is doubled. - Comparability obligation The MiFID II Market Maker must make sure that the total bid size orders does not diverge more than 50% against the total ask size orders, according to the following formula: 15
Max (Total Buy Quantity, Total Sell Quantity) = Max Min (Total Buy Quantity, Total Sell Quantity) = Min If ( Min < ( Max / 2 )) Then test has failed MIFID II Market Makers are required to adhere to their obligations for 50% of each trading day. The assessment will be calculated and disseminated on a monthly basis. The daily compliance rate will be calculated in terms of four separate components: - Presence - Size - Spread - Comparability check 4.4 IT set up Orders entered to fulfil the MiFID II Market Maker quoting obligations must be Anonymous Quotes and Single Orders or Single Orders. Anonymous Quotes allow the MiFID II Market Maker to contextually submit bid and ask orders. A new MiFID II Market must test the Anonymous Quote, should they wish to use this functionality, before starting the activity. MiFID II Market Makers are given the option of two dedicated interfaces for the relevant instruments: - CompID M for those MiFID II Market Makers that wish to submit both orders and anonymous quotes - CompID L for those MiFID II Market Makers that wish to submit orders only. 16
A MiFID II Market Maker must decide which interface they wish to use when signing the agreement to be a MiFID II Market Maker. The MiFID II Market Maker activity should be covered using only one naming convention (CompID M or CompID L ), but the member can set up more CompID s of the same type. The M or L CompID may be used for MiFID II Market Maker activity only and only for those instruments which the entity supports as a MifID II Market Maker. 4.5 How to become a MiFID II Market Maker The agreement to become a MiFID II Market Maker is signed through Member Portal. When signing the agreement you will be able to select the instruments that you would like to support as a MiFID II Market Maker and which interface. 4.6 Resignation of status The discontinuation of the activity of an MiFID II Market Maker must be communicated to Borsa Italiana and the resignation of status as an MiFID II Market Maker is managed through Member Portal. The resignation shall entry in force from the date specified by Borsa Italiana in agreement with the MIFID II Market Maker. 5.0 Explanation of Monitoring Under each Market Maker scheme, Borsa Italiana will perform continuous monitoring of each entity to ensure that they are fulfilling their obligations as detailed in the relevant agreement. Borsa Italiana will assess each entity against the components of; presence, size, spread and comparability as detailed within this document, on a daily basis. Each Market Maker can consent to Borsa Italiana providing performance related data to the relevant issuer(s), for those relevant instruments which they are supporting. 17
The assessment of the daily compliance rate will be aggregated to a monthly compliance rate assessment. 6.0 Setting up a CompID Prior to starting the Market Making activity of any of the three schemes detailed within this document, the entity must first, request for the relevant CompID to be set up. The request can be managed through the Member Portal. For any queries related to requesting or setting up the CompID, please contact our Client Technology set up team on Clients-services@borsaitaliana.it 7.0 Contacts and Links 7.1 Contacts For general ETP queries, please contact our ETF team on: ETFItaly@Borsaitaliana.it or +39020726419 For any queries on the technology set up, please contact our Client Technology Services on: Clients-services@borsaitaliana.it For first level support, please contact our Service Desk on: Service-desk@borsaitaliana.it 18
7.2 Links Borsa Italiana s ETF home page Member Portal Borsa Italiana's Rules Borsa Italiana's Instructions Borsa Italiana's Price List Borsa Italiana's Specialist Obligations per Instrument Borsa Italiana's Guide to the Parameters 19
Disclaimer The publication of this document does not represent solicitation, by Borsa Italiana S.p.A., of public saving and is not to be considered as a recommendation by Borsa Italiana as to the suitability of the investment, if any, herein described. This document has not to be considered complete and it is meant for information and discussion purposes only. Borsa Italiana accepts no liability, arising, without limitation to the generality of the foregoing, from inaccuracies and/or mistakes, for decisions and/or actions taken by any party based on this documents. Trademarks Borsa Italiana and Borsa Italiana's logo, ETFplus, IDEM, MOT, MTA, STAR, SeDeX, MIB, IDEX, BIt Club, Academy, MiniFIB, DDM, EuroMOT, Market Connect, NIS, Borsa Virtuale, ExtraMOT, MIV BIt Systems Piazza Affari Gestione e Servizi, Palazzo Mezzanotte Congress and Training Centre and PAGS are owned by Borsa Italiana S.p.A. FTSE is a registered trademark of London Stock Exchange plc and The Financial Times Limited and is used by FTSE International Limited under licence. London Stock Exchange, the coat of arms device and AIM are a registered trade mark of London Stock Exchange plc. The above trademarks and any other trademark owned by the London Stock Exchange Group cannot be used without express written consent by the Company having the ownership of the same. Borsa Italiana S.p.A. and its subsidiaries are subject to direction and coordination of London Stock Exchange Group Holdings (Italy) Ltd Italian branch. The Group promotes and offers the post-trading services of Cassa di Compensazione e Garanzia S.p.A. and Monte Titoli S.p.A. in an equitable, transparent and non-discriminatory manner and on the basis of criteria and procedure aimed at assuring interoperability, security and equal treatment among market infrastructures, to all subjects who so request and are qualified in accordance with national and community legislation, applicable rules and decisions of the competent Authorities. @October 2018 London Stock Exchange Group plc All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieve system without prior permission from the copyright owners.