ESMA Final Report on Draft RTS and ITS for MiFID II and MiFIR

28 September 2015 | ESMA/2015/1464
Final Report
Draft Regulatory and Implementing Technical Standards MiFID II/MiFIR

ESMA • CS 60747 – 103 rue de Grenelle • 75345 Paris Cedex 07 • France • Tel. +33 (0) 1 58 36 43 21 • www.esma.europa.eu Date: 28 September 2015 ESMA/2015/1464

Table of Contents

1. EXECUTIVE SUMMARY...............................................................................................14
2. TRANSPARENCY.........................................................................................................15
   2.1. Transparency requirements in respect of shares, depositary receipts, exchange￾traded funds, certificates and other similar financial instruments.......................................15
   2.1.1 Pre-trade transparency for trading venues..........................................................15
   I. Pre-trade information to be made public by type of trading system ............................15
   II. Most relevant market in terms of liquidity ...................................................................17
   III. Negotiated transactions..........................................................................................19
   IV. Order management facility waiver ..........................................................................23
   V. Large in scale waiver .................................................................................................24
   2.1.2 Pre-trade transparency for investment firms in respect of equity an equity-like
   financial instruments .........................................................................................................31
   I. Arrangements for the publication of a firm quote........................................................31
   II. Quotes reflecting prevailing market conditions...........................................................32
   III. Standard market size .............................................................................................33
   2.1.3 Trading obligation for shares ..............................................................................36
   I. Transaction in shares that do not contribute to the price discovery process...............36
   2.1.4 Post-trade transparency for trading venues and investment firms.......................39
   I. Content of the information to be made public.............................................................40
   II. Identifiers...................................................................................................................42
   III. Timing ....................................................................................................................44
   IV. Securities financing transactions and other transactions determined by factors other
   than the current market valuation of the financial instrument.............................................46
   V. Large in scale thresholds – shares and depositary receipts .......................................47
   VI. Large in scale thresholds – ETFs ...........................................................................51
   VII. Large in scale thresholds – Certificates..................................................................53
   2.2. Transparency requirements in respect of bonds, structured finance products,
   emission allowances and derivatives ................................................................................54
   2.2.1 Liquidity and pre-trade and post-trade transparency for non-equity instruments.......54
   I. Feedback to the CP and revised proposal applicable across all asset classes ..........54
   II. Asset class specific analysis ......................................................................................94
   A. Bonds.....................................................................................................................94
   B. Structured Finance Products ................................................................................100

C. Securitised Derivatives.........................................................................................102
D. Interest Rate Derivatives ......................................................................................104
E. Foreign Exchange (FX) Derivatives .........................................................................109
F. Credit Derivatives ....................................................................................................111
G. Equity Derivatives ................................................................................................117
H. Commodity derivatives .........................................................................................122
I. Exotic Derivatives (including C10 derivatives and emission allowance derivatives) .125
J. Contracts for Difference...........................................................................................131
K. Emission Allowances............................................................................................133
2.2.2 Elements common to all asset classes: analysis and approach .............................135
I. Trading Models........................................................................................................135
II. SSTI – Indicative prices ...........................................................................................138
III. Order management facility waiver ........................................................................139
IV. Content and timing of post-trade transparency requirements ...............................140
V. Application of post trade transparency regime to certain OTC transactions .............144
VI. Identification of the investment firm making the transaction public........................146
VII. Discretionary deferral regime ...............................................................................149
VIII. Package transactions...........................................................................................155
IX. Temporary suspension of transparency requirements ..........................................157
X. Exemptions from transparency requirements in respect of transactions executed by a
member of the ESCB......................................................................................................161
2.2.3 Implementing the new non-equities liquidity and transparency regime ...................163
I. Data collection, calculations and publication............................................................163
II. Reference data, treatment of newly issued instruments and instruments traded for the
first time..........................................................................................................................167
III. Transition .............................................................................................................168
2.3. Double volume cap mechanism and the provision of information for the purposes of
transparency and other calculations................................................................................169
2.3.1 Double volume cap mechanism ........................................................................169
2.3.2 Article 22, MiFIR: Providing information for the purposes of transparency and other
calculations.....................................................................................................................179
2.4. Criteria for determining whether derivatives should be subject to the trading
obligation (Article 32(6) of MiFIR)....................................................................................184
2.5. Criteria for determining whether derivatives have a direct, substantial and
foreseeable effect within the EU (Article 28(5) of MiFIR).................................................192

3. MICROSTRUCTURAL ISSUES ..................................................................................194
   3.1. Organisational requirements for investment firms engaged in algorithmic trading,
   providing direct electronic access and acting as general clearing members....................194
   3.2. Organisational requirements of regulated markets, multilateral trading facilities and
   organised trading facilities enabling or allowing algorithmic trading through their systems
   3.3. Market making, market making agreements and market making schemes...........225
   3.4. Ratio of unexecuted orders to transactions ..........................................................237
   3.5. Requirements to ensure co-location and fee structures are fair and non￾discriminatory..................................................................................................................241
   3.5.1 Co-location.............................................................................................................241
   3.5.2 Fee structures........................................................................................................244
   3.6. Tick size regime for shares, depositary receipts and exchange traded funds .......249
   3.7. Material markets in terms of liquidity relating to trading halt notifications ..............256
4. DATA PUBLICATION AND ACCESS..........................................................................260
   4.1. Authorisation, organisational requirements and the publication of transactions for
   data reporting service providers......................................................................................260
   4.1.2 Periodic reconciliations ..........................................................................................261
   4.1.3 Maximum recovery times .......................................................................................262
   4.1.4 Operational Hours..................................................................................................263
   4.1.5 General comments.................................................................................................263
   4.1.6 Publication chain....................................................................................................265
   4.1.7 Technical arrangements facilitating the consolidation of information - Machine
   readability .......................................................................................................................266
   4.1.8 Consolidation of information specific to equities and equity-like instruments ..........267
   4.1.9 Content of the information published by the equity CTP and the APA....................268
   4.1.10 Publication time for CTPs when trades take place on trading venues ..................270
   4.1.11 Accuracy of the publication timestamp .................................................................271
   4.1.12 Identification of the source contributing to the CTP ..............................................271
   4.2. Data disaggregation .............................................................................................273
   4.3. Access in respect of central counterparties and trading venues ...........................275
   4.3.1 Denial of access by a CCP or trading venue ..........................................................275
   4.3.2 Conditions under which an access request may be denied by a CCP to a trading
   venue – Article 35(6)(a) ..................................................................................................276
   4.3.3 Conditions under which an access request may be denied by a trading venue to a
   CCP – Article 36(6)(a) of MiFIR ......................................................................................282

4.3.4 Conditions under which granting access will threaten the smooth and orderly
functioning of the markets or would otherwise adversely affect systemic risk..................283
4.3.5 Conditions under which access is granted .............................................................285
4.3.6 Conditions for non-discriminatory treatment of contracts........................................288
4.3.7 Notification procedure and calculation of notional amount with regard to transitional
provisions .......................................................................................................................294
4.4. Access in respect of benchmarks.........................................................................297
4.4.1 Benchmark information ..........................................................................................297
4.4.2 Other conditions under which access must be granted ..........................................298
4.4.3 New benchmarks ...................................................................................................301
5. REQUIREMENTS APPLYING ON AND TO TRADING VENUES................................302
5.1. Admission of financial instruments to trading on regulated markets......................302
5.2. Suspension and removal of financial instruments from trading – connection between
a derivative and the underlying financial instrument........................................................311
5.3. Description of the functioning of MTFs and OTFs.................................................314
6. COMMODITY DERIVATIVES......................................................................................317
6.1. Establishing when an activity is to be considered ancillary to the main business..317
6.1.1 Trading activity thresholds (or Market Share test) ..................................................322
6.1.2 Minority of activities – ‘main business threshold’ ....................................................327
6.1.3 Privileged transactions ...........................................................................................332
6.1.4 Period for calculation in relation to exemption ........................................................334
6.2. Methodology for the calculation and application of position limits for commodity
derivatives traded on trading venues and economically equivalent OTC contracts .........337
6.2.1 Methodology for calculating position limits .............................................................337
6.2.2 Application of position limits ...................................................................................350
7. MARKET DATA REPORTING.....................................................................................360
7.1. Reporting obligations under Article 26 of MiFIR....................................................360
7.2. Obligation to supply financial instrument reference data under Article 27 of MiFIR
7.3. Maintenance of relevant data relating to orders in financial instruments...............382
7.4. Clock synchronisation ..........................................................................................386
8. POST-TRADING ISSUES ...........................................................................................389
8.1. Obligation to clear derivatives traded on regulated markets and timing of
acceptance for clearing (STP).........................................................................................389
9. BEST EXECUTION.....................................................................................................398

9.1. Information relating to best execution...................................................................398

Acronyms and definitions used
ADT Average daily turnover
ADNA Average daily notional amount
AIFMD Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (AIFMs) Aii Alternative instrument identifier ANNA Association of national numbering agencies APA Approved publication arrangement AVT Average value of transactions BIPM Bureau International des Poids and Mesures CDS Credit default swap CESR Committee of European Securities Regulators CCP Central counterparty CFD Contract for difference CFI Classification of Financial Instruments CFTC U.S. Commodities Futures Trading Commission COFIA Classes of financial instrument approach Commission European Commission CP Consultation Paper (2014/1570) published by ESMA on 19 December 2015 and its addendum (2015/319) published on 18 February 2015 CRD IV Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC

CRR Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 CSD Central securities depositary CT Consolidated tape CTP Consolidated tape provider DEA Direct electronic access DMA Direct market access DP Discussion Paper (2014/548) published on 22 May 2014 EBA European Banking Authority EC European Commission ECB European Central Bank EEA European Economic Area EEOTC Economically equivalent OTC contracts EFP Exchange for physical EIOPA European Insurance and Occupational Pension Authority EMIR European Market Infrastructures Regulation – Regulation (EU) 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories – also referred to as “the Regulation” EOD End of the day ESMA European Securities and Markets Authority ESMA Regulation Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC ETCs Echange traded commodities

ETD Exchange-traded derivative
ETF Exchange-traded fund
ETNs Exchange traded notes
EU European Union
FC Financial counterparty
FCD Financial Collateral Directive – Directive 2002/47/EC of the European Parliament and the Council. FESE Federation of European securities exchanges FIX Financial information exchange FIXML Financial information exchange markup language FpML Financial products markup language FRA Forward rate agreement FSB Financial Stability Board FX Foreign exchange HFT High frequency trading ISIN International Securities Identification Number: a 12-character alpha-numerical code that uniquely identifies a security. It is defined by ISO code 6166 IBIA Instrument by instrument approach ICAAP Internal Capital Adequacy Assessment Process IOI Indication of interest IOSCO International Organisation of Securities Commissions IPO Initial public offering IRS Interest rate swap ISO International Organization for Standardization ITS Implementing Technical Standards

LEI Legal entity identifier
LIS Large in scale
LOI letters of intent
MAD Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse MAR Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation). MIC Market identifier code MiFID or MiFID I Markets in Financial Instruments Directive – Directive 2004/39/EC of the European Parliament and the Council MiFID II Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU MiFIR Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments and amending Regulation (EU) No 648/2012 MO Market operator MS Member State MTF Multilateral trading facility MTN Medium-term note NCA National Competent Authority NDA Non-disclosure agreements NDF Non deliverable forward NTW Negotiated trade waiver OIS Overnight index swap OJ The Official Journal of the European Union OMF Order management facility

OTC Over-the-counter
OTF Organised trading facility
PPRB Person with proprietary rights to a benchmark Q&A Questions and Answers RDS Reference data system RFQ Request for quote RM Regulated market RPO Recovery point objective RPW Reference price waiver RTO Recovery time objective RTS Regulatory Technical Standards SA Sponsored access SFI Structured finance instrument SFP Structured finance product SI Systematic internaliser SME Small and medium sized enterprise SME-GM Small and medium sized enterprise – growth market SMS Standard market size SMSG Securities and Markets Stakeholder Group SSTI Size specific to the instrument SREP Supervisory Review and Evaluation Process STP Straight through processing TFEU Treaty on the Functioning of the European Union TR Trade repository

TREM Transaction reporting exchange mechanism
UPI Universal product identifier
TV Trading venue
UCITS Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009, on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) UTC Coordinated universal time XBRL Extensible business reporting language

1. EXECUTIVE SUMMARY
   Reasons for publication
   Directive 2014/65/EU and Regulation (EU) No 600/2014 (MiFID II and MiFIR) require ESMA to develop a multitude of Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS). The package of standards subject to this report was consulted upon in a Discussion Paper (DP) published in May 2014 and two Consultation Papers (CP) published in December 2014 and February 2015. With this report ESMA publishes its final proposals for a total of 28 draft technical standards. Contents This final report deals with technical standards from the areas of transparency (Standards 1- 5), market microstructure (Standards 6-12), data publication and access (Standards 13-16), requirements applying on and to trading venues (Standards 17-19), commodity derivatives (Standards 20 and 21), market data reporting (Standards 22-25), post-trading (Standard 26) and investor protection (Standards 27 and 28). It describes the feedback received in the public consultations and the rationale behind ESMA’s final proposals. Annexed to this final report are the draft technical standards themselves (Annex I) and the ESMA cost-benefit-analysis (Annex II). Next Steps The final report has been submitted to the European Commission on 28 September 2015. The Commission has three months to decide whether to endorse the technical standards.

2. TRANSPARENCY
   2.1. Transparency requirements in respect of shares, depositary
   receipts, exchange-traded funds, certificates and other similar financial instruments
   2.1.1 Pre-trade transparency for trading venues
   Background/Mandate
   Article 4(6) of MiFIR

3. ESMA shall develop draft regulatory technical standards specifying the following:
   (a) the range of bid and offer prices or designated market-maker quotes, and the depth of trading interest at those prices, to be made public for each class of financial instrument concerned in accordance with Article 3(1), taking into account the necessary calibration for different types of trading systems as referred to in Article 3(2); (b) most relevant market in terms of liquidity of a financial instrument in accordance with paragraph 1(a); (c) specific characteristics of a negotiated transaction in relation to the different ways the member or participant of a trading venue can execute such a transaction; (d) negotiated transactions that do not contribute to price formation which avail of the waiver provided for under paragraph 1(b)(iii); (e) the size of orders that are large in scale and the type and the minimum size of orders held in an order management facility of a trading venue pending disclosure for which pre-trade disclosure may be waived under paragraph 1 for each class of financial instrument concerned;
   I. Pre-trade information to be made public by type of
   trading system

4. MiFID II provides for two types of trading venues for shares, depositary receipts,
   exchange traded funds (ETFs), certificates and other similar financial instruments:
   regulated markets and multilateral trading facilities (MTFs). Under current MiFID within each of those two categories of trading venues, different types of trading systems may be operated in order to bring together buying and selling trading interests, such as quote driven systems, continuous auction order book systems and periodic auction systems.

5. ESMA, consistently with current MiFID, is of the view that the type of trading system
   should be the starting point for determining the appropriate level of pre-trade transparency which must be made public. In that regard Article 3(2) of MiFIR requires that “the transparency requirements referred to in paragraph 1 shall be calibrated for different types of trading systems including order-book, quote-driven, hybrid and periodic auction trading systems”. As a consequence and in order to ensure uniform applicable conditions between trading venues, the same pre-trade transparency requirements, calibrated according to the type of trading system operated, should apply equally to regulated markets and MTFs.

6. MiFIR empowers ESMA to calibrate the proper pre-trade transparency regime by
   defining the range of bid and offer prices or designated market-maker quotes, and the depth of trading interest at those prices, to be made public for each class of financial instrument concerned.

7. In the CP and based on the assumption that equity-like products are traded principally
   through the same trading systems as shares, ESMA proposed to calibrate the content of the pre-trade transparency requirements based on an amended version of Table 1 in
   Annex II of Implementing Regulation (EC) No 1287/2006 (which only applies to shares
   admitted to trading on a regulated market) regardless of the type of equity financial instrument traded. Furthermore, ESMA proposed to include in the table a definition of request for quote (RFQ) systems together with the pre-trade transparency requirements applicable to those systems. Analysis following feedback from stakeholders

8. The majority of responses supported the definition of RFQ systems and the
   corresponding pre-trade transparency requirements. Some respondents, which in principle agreed with the proposal, suggested that RFQ systems should not be permitted to bring together buying and selling interest for equities. Instead, they suggested that this trading system should be limited to equity-like instruments. The main concern was that RFQ systems for equities will have similar levels of transparency to systems operating under the pre-trade transparency waivers, but will not be regulated as such.

9. ESMA is of the view that RFQ systems will be subject to a prescribed level of pre-trade
   transparency under the draft RTS, as other trading systems were under Table 1 of
   Annex II of Implementing Regulation (EC) No 1287/2006 and will not be able to waive
   pre-trade transparency like systems operating under waiver programmes.

10. There was broad support for the pre-trade transparency requirements proposed for RFQ
    systems, albeit some respondents suggested that publishing quotes should not be part of the definition of the trading system; instead it should be part of the transparency requirements. ESMA agrees with the comments and has modified the definition of RFQ systems accordingly in Table 1 of Annex I of the draft RTS.

11. Some respondents were of the opinion that the proposed requirements would have a
    detrimental effect on the quality and quantity of the quotes provided on RFQ systems, and instead proposed a range of amendments to the pre-trade transparency requirements to make the requirement workable (i.e. publishing the average bids and offers and a volume band, and giving the system operator a window period to collect the quotes before making them available). ESMA is of the view that the proposed pre-trade transaprency requirements for RFQ systems should be sufficiently flexible to allow for differences between trading protocols, and to maintain the actual level of liquidity.

12. A number of respondents did not agree with the definition of hybrid systems due to the
    lack of clarity about the type of systems that would be caught under this category. Given the constant evolution of markets, and consequently of trading systems, ESMA proposes to retain the hybrid systems definition so as to have a category for trading systems that may develop in the future. Proposal

13. ESMA, in line with the CP, proposes to retain the amendment to the current Table 1 in
    Annex II of Implementing Regulation (EC) No 1287/2006 for the purpose of establishing
    the content of pre-trade information that trading venues shall make public depending on the type of trading system operated, extending the requirements to actionable indication of interests (IOIs) which are, according to Article 2(1)(33) of MiFIR, messages between members or participants of a trading venues containing all the necessary information to agree to a trade.

14. ESMA also proposes to retain the definition of RFQ systems as presented in the CP with
    one caveat, publishing quotes will be part of the requirements instead of part of the definition. Additionally, and in order to provide further flexibility and to avoid that members or participants who are providing their quotes to the requester first are put at a disadvantage, the final draft RTS allows for the publication of all submitted quotes in response to a RFQ at the same time, i.e. once all quotes have been provided and the moment they become executable, whereas in the CP ESMA proposed that those systems should disclose all executable bids and offers the moment they are received.
    II. Most relevant market in terms of liquidity

15. Under MiFIR, systems operating a trading methodology where orders are matched on
    the basis of a price derived from another system (the so-called reference price) can operate under a pre-trade transparency waiver provided that certain conditions are met. Firstly, the reference price must be widely published and regarded by market participants as a reliable reference price. Secondly, the set of eligible prices for matching orders within the systems operated by the trading venue is limited to the mid-point within the current bid and offer price or where not available, the opening or the closing price of the relevant session. Finally, the reference price can only be sourced from the trading venue

where that financial instrument was first admitted to trading or the most relevant market in terms of liquidity.
13. MiFIR empowers ESMA to draft regulatory technical standards specifying the most
relevant market in terms of liquidity for the purpose of the reference price waiver. In the CP, ESMA noted that the concept of the most relevant market in terms of liquidity is also relevant in the context of the obligation of investment firms to report transactions under
Article 26 MiFIR. However, in the CP, ESMA emphasised the different purposes of the
most relevant market in terms of liquidity for transaction reporting and for pre-trade transparency and proposed to adopt two different definitions. In the CP, ESMA proposed that the most relevant market in terms of liquidity for a financial instrument should be the trading venue with the highest level of liquidity for that financial instrument measured by the total value of transactions executed by the trading venue during the relevant calendar year. ESMA also proposed, in order to strike an appropriate compromise between accuracy and operational costs, that the determination of the most relevant market in terms of liquidity would occur on an annual basis. Analysis following feedback from stakeholders
14. While the majority of respondents were in favour of having a methodology to determine
the most relevant market in terms of liquidity based on the trading venue with the highest turnover, some respondents stated that the most relevant market in terms of liquidity should only be sourced from systems that provide continuous trading, excluding auctions and RFQ systems. It was also suggested that the calculation of turnover should include transactions executed under a pre-trade transparency waiver, especially transactions executed under an order management facility. With respect to the frequency, all respondents agreed with determining the most relevant market in terms of liquidity on an annual basis.
15. Finally, a few respondents expressed concerns about how to determine the most
relevant market when ETFs are dually listed in different currencies. ESMA appreciates that there might be merit in treating ETFs listed in several currencies as different financial instruments as they may have different liquidity profiles. However, the mandate of ESMA is limited here to defining the most relevant market in terms of liquidity and does not include the definition of what constitute a financial instrument. Proposal
16. ESMA proposes that the most relevant market in terms of liquidity for a share, depositary
receipt, ETF, certificate and other similar financial instrument should be the trading venue with the highest turnover for that share, depositary receipt, ETF, certificate or other similar financial instrument and regardless of the trading system (e.g. continuous trading order book, RFQ systems, etc.) under which the trading venue operates. The calculations shall take into account all relevant trading sessions (i.e. continuous and auction trading) and shall exclude reference price and negotiated transactions as well as pre-trade LIS transactions (i.e. a transaction executed on the basis of at least one order

that has benefitted from a large in scale waiver and where the transaction’s size is above the applicable large in scale threshold).
III. Negotiated transactions
17. A negotiated transaction is a transaction involving one or more members or participants
of a trading venue who negotiate privately the terms of the transaction which is then reported under the rules of the trading venue. For example, two members or participants bilaterally agree the price and volume of a trade before transmitting it to the trading venue. In some circumstances, the trade could not be executed under the systems operated by the trading venue (e.g. a consolidated limit order book) because of special conditions or requirements attached to the trade (e.g. portfolio trades or contingent transactions like delta-neutral equity hedges of a derivative) or because the transaction does not constitute liquidity addressable by market participants other than the counterparties negotiating the transaction (e.g. a give-up or give-in). The trading venue to which the negotiated transaction is reported remains responsible for ensuring that the negotiated transaction meets the relevant conditions for the negotiated trade and all other applicable requirements.
18. MiFIR allows, under certain circumstances, pre-trade transparency obligations to be
waived for systems that formalise negotiated transactions. In particular Article 4(1) of MiFIR specifies that:
Article 4, MiFIR

1. Competent authorities shall be able to waive the obligation for market operators and
   investment firms operating a trading venue to make public the information referred to in
   Article 3(1) for:
   […]
   (b) systems that formalise negotiated transactions which are:
   (i) made within the current volume weighted spread reflected on the order book or the quotes of the market makers of the trading venue operating that system, subject to the conditions set out in Article 5; (ii) in an illiquid share, depositary receipt, ETF, certificate or other similar financial instrument that does not fall within the meaning of a liquid market and are dealt within a percentage of a suitable reference price, being a percentage and a reference price set in advance by the system operator; or (iii) subject to conditions other than the current market price of that financial instrument;

2. Under MiFIR, negotiated transactions are subject to some restrictions on admissible
   execution prices depending on the type of the transaction and the characteristics of the financial instrument being traded.

3. Negotiated transactions which are subject to conditions other than the current market
   price can be executed at any price where otherwise permitted by the rules of the trading venue.

4. Negotiated transactions which are subject to the current market price must instead
   comply with price conditions depending on whether or not there is a liquid market for the instrument being traded:
   i. for liquid financial instruments, negotiated transactions must be executed within the
   spread - negotiated transactions falling under this limb are subject to the double volume cap mechanism as described in the relevant section of this document.
   ii. for illiquid financial instruments, negotiated transactions can be executed at any
   price falling within a certain percentage of a suitable reference price, provided both the reference price and the percentage are set in advance by the system operator. In ESMA’s view, this implies that operators of trading venues should set the reference price and the percentage in an objective and clear manner having regard to the nature of the market in the financial instrument and its overarching obligation to maintain fair and orderly trading.

5. With respect to negotiated transactions, MiFIR empowers ESMA to draft RTS specifying
   (i) the characteristics of a negotiated transaction in relation to the different ways the member or participant of a trading venue can execute such a transaction and (ii) the negotiated transactions that do not contribute to price formation which avail the waiver provided for under Article 4(1)(b)(iii) of MiFIR. Analysis following feedback from stakeholders

6. In the CP, ESMA clarified that negotiated transactions shall be executed under the rules
   of a trading venue and negotiated privately by members or participants of a trading venue and that negotiated trades shall not be restricted to transactions between members or participants dealing on own account but may involve a client or clients of the member or participants. For that reason, and consistently with the existing framework for negotiated transactions under the Implementing Regulation (EC) No 1287/2006, ESMA proposed that a member or participant of a trading venue can execute such a negotiated transaction by undertaking one of the following tasks:
   i. dealing on own account with another member or participant who acts for the account
   of a client;
   ii. dealing with another member or participant, where both are executing orders on own
   account;

iii. acting for the account of both the buyer and seller;
iv. acting for the account of the buyer, where another member or participant acts for the
account of the seller; and
v. trading for own account against a client order.
24. Respondents to the CP were in support of maintaining the current approach (i.e. the
approach adopted under Article 19 of the Implementing Regulation (EC) No 1287/2006) with regard to the different ways a member or participant of a trading venue can execute a negotiated transaction. However, a number of respondents suggested including circumstances where an investment firm is dealing on own account with another member or participant on behalf of a client, and not just for the account of a client. ESMA agrees that this is a possible characteristic of a negotiated transaction and, in order to take this concern into account, has replaced the expression “acting for the account of a client” with “acting on behalf of a client,” which should encompass all possible circumstances.
25. With regard to the negotiated transactions that do not contribute to price formation, in the
CP, ESMA proposed to include a transaction that:
i. is executed in reference to a price that is calculated over multiple time instances
according to a given benchmark, such as volume-weighted average price or time￾weighted average price;
ii. is part of a portfolio trade that involves the execution of 10 or more financial
instruments from the same client and at the same time and the components of the trade are meant to be executed only as a single lot;
iii. is a give-up or a give-in;
iv. is contingent on a derivative contract having the same underlying and where all the
components of the trade are meant to be executed only as a single lot; or
v. is contingent on technical characteristics of the transaction which are unrelated to
the current market valuation of that financial instrument.
26. A large number of respondents opposed having an exhaustive list of negotiated
transactions as the evolution of market practices may result in new types of transactions which need to be accommodated by the negotiated trade waiver. ESMA acknowledges the need to cater for future market developments and has added a final item in the list to provide sufficient flexibility to include new types of transactions that may develop in the future whilst providing legal clarity and a harmonized regulatory framework.
27. Furthermore, some respondents suggested that the list of transactions under Article 2
(transactions not contributing to the price discovery process for the purpose of the trading obligation for shares) and Article 6 (negotiated transactions subject to conditions

other than the current market price) of the draft RTS should be closely aligned where possible on the basis that there is no reason to exclude transactions outside the scope of Article 23 of MiFIR from the possibility of being traded under the rules of a trading venue, and thereby subjecting them to more control and surveillance, through the negotiated trade waiver.
28. Most respondents were in favour of the inclusion of non-standard/special settlement
trades to the list of transactions that do not contribute to the price formation process. However, after careful consideration, ESMA remains unconvinced that the arguments brought forward during the consultation constitute sufficient legitimate reasons to consider those transactions as not contributing to the price formation process. ESMA is also concerned about the potential risk of circumvention such an inclusion would represent and, hence, has decided not to add those types of transactions to its list.
29. Lastly, during the consultation, it was brought to ESMA attention that other types of
transactions should benefit from the negotiated trade waiver and be excluded from the trading obligation:
i. transactions carried out by a CCP or trading venue as part of its default
management processes, including liquidations of securities held originally as margin or transactions in instruments to close out the positions of defaulting members; and
ii. transactions carried out under the rules of a trading venue, CCP or Central
securities depositary (CSD) to effect buy-in of unsettled transactions.
30. ESMA recognises that there is some merit in including those types of transactions to the
list of transactions not contributing to the price discovery process since they are usually taking place in emergency situations that may require to have access to all possible trading channels and to trade in a non-transparent manner. For this reasons, ESMA has decided to add those specific transactions to the lists of:
i. transactions not contributing to the price discovery process as specified for the
purposes of the trading obligation; and,
ii. negotiated transactions subject to conditions other than the current market price.
Proposal
31. ESMA proposes to amend the specific characteristics of a negotiated transaction in
relation to the different ways a member or participant of a trading venue can execute such transaction in order to include instances when an investment firm is dealing on behalf of a client.
32. With regard to the types of negotiated transactions that do not contribute to the price
formation process, ESMA proposes an exhaustive list to have a clear regulatory

framework, with the last item providing some flexibility to include types of trades that may appear in the future. The proposed list includes a transaction that:
i. is executed in reference to a price that is calculated over multiple time instances
according to a given benchmark, including transactions executed by reference to a volume-weighted average price or a time-weighted average price;
ii. is part of a portfolio trade;
iii. is contingent on the purchase, sale, creation or redemption of a derivative contract
or other financial instrument where all the components of the trade are meant to be executed only as a single lot such as exchanges for related positions;
iv. is executed by a management company as defined in Article 2(1)(b) of Directive
2009/65/EC or an alternative investment fund manager as defined in Article 4(1)(b) of Directive 2011/61/EU of the European Parliament and of the Council which transfers the beneficial ownership of financial instruments from one collective investment undertaking to another and where no investment firm is a party to the transaction;
v. is a give-up or a give-in transaction;
vi. has as its purpose the transferring of financial instruments as collateral in bilateral
transactions or in the context of central counterparty (CCP) margin or collateral requirements or as part of the default management process of a CCP;
vii. results in the delivery of financial instruments in the context of the exercise of
convertible bonds, options, covered warrants or other similar financial derivative;
viii. is a securities financing transaction;
ix. is carried out under the rules or procedures of a trading venue, a CCP or a central
securities depository to effect buy-in of unsettled transactions in accordance with Regulation (EU) No 909/2014;
x. any other transaction equivalent to those described in points (a) to (i) and which is
contingent on technical characteristics which are unrelated to the current market valuation of the financial instrument traded.
IV. Order management facility waiver
33. The order management facility waiver refers to functionalities operated by trading
venues where certain orders are exempted from pre-trade transparency pending their disclosure to the market (i.e. subject to being released to an order book prior execution). In absence of more specific requirements under MiFID I, CAs and ESMA have elaborated opinions aimed at ensuring supervisory convergence on the set of

functionalities deemed to be compliant with the waiver. In accordance with those opinions, contingent orders such as reserve or iceberg orders and stop orders are currently considered orders held on an order management facility compliant with MiFID I.
34. MiFIR empowers ESMA to draft RTS specifying the type and minimum size of orders
held in an order management facility.
Analysis following feedback from stakeholders
35. The vast majority of respondents agreed with ESMA’s definition of the key
characteristics of orders held in an order management facility, and with the minimum sizes proposed. Proposal
36. ESMA proposes to retain the proposed definition of the relevant characteristics of orders
held in an order management facility and not to restrict it to reserve and stop orders. With regard to the minimum size, ESMA maintains the proposal set in the CP that for all orders held in an order management facility, including stop orders, the minimum size should be, at the point of entry of the order, the minimum tradable quantity established by the trading venue. For reserve orders, the minimum size should be, at the point of entry and following any amendment, not smaller than EUR 10,000.
V. Large in scale waiver
37. Under MiFID I, orders that are large in scale (LIS) can benefit from a waiver from pre￾trade transparency. The waiver is designed to protect large orders from adverse market
impact and to avoid abrupt price movements that can cause market distortions. MiFIR recognises that mandatory public display of large orders can increase execution costs to the detriment of market liquidity and end-investors.
38. MiFIR empowers ESMA to draft RTS to specify the size of orders that are LIS compared
with normal market size for each class of shares, depositary receipts, ETFs, certificates and other similar financial instruments.
39. In the CP ESMA proposed to adopt for all equity and equity-like financial instruments an
approach using the average daily turnover (ADT) as a proxy for liquidity and market impact and allowing, for each financial instrument, the calibration of orders which may be considered LIS compared to the normal market size on this basis. Shares and depositary receipts Analysis following feedback from stakeholders

40. With respect to shares and depositary receipts, ESMA maintained in the CP the proposal
    made in the DP published in May 2014 and proposed to use for both shares and depositary receipts the following ADT classes and corresponding thresholds:
    Table 1: Shares and depositary receipts orders large in scale compared with
    normal market size (as proposed in the CP)
    Average daily turnover (ADT) in EUR
    ADT <
    100 000
    100 000 ≤
    ADT <
    500 000
    500 000 ≤
    ADT < 1
    000 000
    1 000 000
    ≤ ADT < 5
    000 000
    5 000 000
    ≤ ADT <
    25 000
    25 000
    000 ≤
    ADT < 50
    000 000
    50 000
    000 ≤
    ADT <
    100 000
    ADT ≥
    100 000
    Minimum size of orders qualifying as large in scale compared with normal market size in EUR 30 000 60 000 100 000 200 000 300 000 400 000 500 000 650 000
41. In line with the responses received to the May 2014 DP1
    , responses to the CP were split reasonably evenly between those supporting the ESMA proposal and those advocating a revision of the proposal.
42. The first group of respondents agreed that the ADT remains a valid measure which has
    worked in the past, is easy to calculate and well understood by market participants. They pointed out that, since building upon the existing regime, the proposal was also easy to implement for market participants who have already in place appropriate systems and procedures.
43. The second group of responses reiterated the arguments put forward in the responses to
    the DP against the use of the ADT which is viewed as a too simplistic measure of liquidity and market impact and proposed using different measures to substitute or to complement the ADT, such as the average value of transactions (AVT) or the depth of the order book. Some respondents also noted that the proposed yearly calculation fails to take into consideration the erratic variation of liquidity.
44. In concordance with the CP proposal, ESMA appreciates that approaches different from
    the proposed one based on the ADT are possible. However, it remains convinced that any approach has different pros and cons and that, for instance, the approaches based on order book data would be significantly more complex to use in practice. In ESMA’s views, while the ADT may not provide the best metric on which to establish the LIS threshold in all circumstances, it is a reliable metric positively correlated with liquidity which, from an operational perspective, can be collected and processed in a relatively simple way. Therefore, ESMA considers that the rationale provided in the CP supporting

1 ESMA/2014/548.

the use of ADT is still valid and has decided to maintain its initial proposal to use ADT as a proxy.
45. Similarly to the responses received to the DP, respondents expressed concerns about
the proposed thresholds for each class of ADT and in particular for less liquid shares (which often are shares issued by small and medium enterprises). In their views, the proposed thresholds would fail to capture a sufficient proportion of the orders as LIS and would entail very high trading costs in particular for the smallest ADT class (according to some responses, transaction costs might reach up to 200 bps for the class below EUR 100,000). ESMA appreciates those concerns and agrees that it is important that LIS thresholds are appropriate and in particular for less liquid shares such as SME shares. ESMA notes that, in the CP’s proposal, the greater level of granularity and the new ADT categories (and related thresholds) which have been added to the current MiFID I regime partially addressed those concerns. It is worth noting in this respect that under MiFID I the threshold for the shares with an ADT lower than EUR 100,000 (and up to EUR 500,000 EUR) is EUR 50,000 whereas under the proposed regime it was set at EUR 30,000.
46. However, ESMA appreciates that there is some merit in introducing further granularity
into the system in order to better take into consideration the less liquid shares such as SME shares. Therefore, in its final table, ESMA has added a new ADT category for shares with an ADT of less than EUR 50,000 with a corresponding threshold of EUR 15,000. The thresholds for deferred publication have also been modified on that basis.
47. Finally, some respondents asked for further clarification with respect to the transactions
that should be taken into consideration for the ADT calculations, supporting a broad approach in this respect, i.e. the inclusion of lit, dark and OTC transactions. ESMA confirms that the ADT calculations should include all transactions executed in the relevant financial instrument, regardless whether they are traded on- or off-venue. Proposal
48. In respect of shares and depositary receipts, ESMA reiterates its proposal to use the
ADT as the relevant metric to establish orders that are large in scale. However, the table presented in the CP has been slightly amended and a new ADT category for shares with an ADT below EUR 50,000 has been added.
Table 2: Shares and depositary receipts orders large in scale compared with
normal market size (as proposed in the final draft RTS) Average daily turnover (ADT) in EUR ADT < 50 000 50 000 ≤ ADT < 100 000 100 000 ≤ ADT < 500 000 500 000 ≤ ADT < 1 000 1 000 000 ≤ ADT < 5 000 000 5 000 000 ≤ ADT < 25 000 25 000 000 ≤ ADT < 50 000 50 000 000 ≤ ADT < 100 000 ADT ≥ 100 000

Minimum size of orders qualifying as large in scale compared with normal market size in EUR 15 000 30 000 60 000 100 000 200 000 300 000 400 000 500 000 650 000
49. ESMA also proposes to maintain the current recalibration frequency where the ADT of
each financial instrument is determined on an annual basis.
ETFs
50. The large in scale regime for ETFs proposed in the CP was similar to the one for shares
and depositary receipts in that the LIS thresholds would increase with the ADT of the financial instrument. However, following feedback received to the DP, ESMA also sought views in the CP on an alternative option under which a single large in scale threshold (EUR 1,000,000) would apply to all ETFs regardless of their liquidity or the liquidity of their underlying. Analysis following feedback from stakeholders
51. Similarly to the feedback received on the post-trade deferrals, respondents rejected
almost unanimously an LIS regime based on ADT and agreed with the alternative option to adopt a single large in scale threshold for ETFs that will apply across the board. In line with the comments on the DP received in May 2014, respondents stressed the unsuitability of the ADT as a measure of liquidity and market impact for ETFs, arguing for instance that ADT would not capture the actual liquidity of ETFs where the creation/redemption mechanism inherent to ETFs allows liquidity providers to access additional, non-displayed liquidity. They also noted that an ADT-based approach could result in having two ETFs with the same underlying assets being treated differently.
52. With respect to the threshold to be set, the vast majority of respondents supported the
EUR 1,000,000 threshold proposed by ESMA in the CP which is thus maintained as the final proposal.
53. It is worth noting that some respondents recommended ESMA to differentiate between
ETFs for which the creation/redemption process occurs just after the closing auction and those for which the creation/redemption process occurs at least 3 hours after the closing auction (e.g. ETFs which have an underlying trading in a different time zone - e.g. European ETF on Malaysian stock). However, ESMA believes that such a differentiation would bring too much complexity into the system and thus maintains its proposal to adopt a single threshold for all ETFs. Proposal

54. ESMA proposes to establish a single EUR 1,000,000 LIS threshold for all ETFs
    regardless of their underlying or their liquidity.
    Certificates
    Analysis following feedback from stakeholders
55. Certificates are defined by MiFIR as transferable securities which are negotiable on the
    capital market and which, in case of repayment of investment by the issuers, are ranked above shares but below unsecured bond instruments and other similar financial instruments. ESMA identified two types of financial instruments traded in the Union that would be considered certificates under the above definition: Spanish Participationes Preferentes and German Genusscheine.
56. For the DP, ESMA collected data on the trading of those instruments and proposed two
    possible scenarios based on a different classification of the ADT but did not advance any proposal for LIS thresholds. Based on feedback to the DP, ESMA proposed in the CP to establish a very simple regime for LIS orders for certificates with only two ADT classes and LIS thresholds. As for the other instruments, ESMA proposed to determine the ADT of each instrument on an annual basis.
57. ESMA received limited feedback on certificates, probably related to the fact that those
    financial instruments are available in very few jurisdictions. Some respondents highlighted that where a certificate is economically equivalent to a share issued from the same issuer, the calibration of the classes and the LIS thresholds should follow those applicable to shares. On the contrary, where the certificate is a distinct instrument (i.e. with different payoffs from the shares issued by the same issuer), then the LIS threshold should be calibrated based on its own liquidity features.
58. During the consultation, ESMA also received feedback suggesting including additional
    instruments in this category and in particular Rabobank-certificates. As stated in the advice to the Commission with respect to liquidity thresholds for equity instruments, ESMA believes that those instruments should indeed fall into the certificate category. Proposal
59. ESMA remains of the view that certificates have different payoffs from shares and are
    hence separate financial instruments which ought to be subject to a different transparency regime. ESMA has decided to maintain the table presented in the CP and which is reproduced below.
    Table 3: Certificates orders large in scale compared with normal market size
    Average daily turnover (ADT) in EUR ADT < 50
    ADT ≥ 50

Minimum size of orders qualifying as large in scale compared with normal market size in EUR 15 000 30 000 Stubs Analysis following feedback from stakeholders
60. A stub usually refers to the reminder of an order (i.e. a limit order that is not immediately
executed under prevailing market conditions) that was LIS at the time it was submitted to a trading venue and that was partially executed. Following partial execution, the order may fall below the relevant LIS threshold. In such circumstances it is not clear whether the LIS waiver continues to apply to the stub and, hence, whether the order has to be made transparent if and when remaining on the order book.
61. In the DP, ESMA evaluated the pros and cons of requiring stubs to meet the relevant LIS
threshold following partial execution to continue to be eligible to the LIS waiver. On the one hand, ESMA considered that allowing stubs to remain protected under the LIS waiver would result in a more consistent treatment of the whole order, greater protection for large orders and greater incentive to execute transaction on order books and ultimately in better quality of execution. On the other hand, requiring stubs to be made transparent when falling below the relevant threshold was considered as conducive to greater transparency and consistent with an approach where similar sized orders are, ceteris paribus, subject to equivalent transparency requirements. As a compromise, ESMA’s proposal in the DP was to require stubs to be made transparent only when, following partial execution, the size of the stub would fall below 75% of the relevant LIS threshold.
62. Overall, respondents to the DP did not support ESMA’s proposal to make stub orders
transparent when falling below a certain level below the LIS threshold and supported an approach where stubs would remain protected under the LIS waiver. The main reasons were that the proposed approach would hinder investors’ ability to execute large orders through order books by revealing sensitive information to the market and would be too complex and difficult to implement and, hence, would be disproportionate to the marginal benefits.
63. ESMA therefore proposed in the CP to clarify that LIS orders may remain protected
under the LIS waiver regime even when, following partial execution, they fall below the relevant LIS threshold provided that the price or other relevant conditions for execution are not amended following execution.
64. The majority of the respondents agreed with the new proposal. A few respondents were
in favour of having stubs transparent. However, ESMA remains of the view that subjecting stubs to transparency is difficult to implement and the costs of such an approach would be disproportionate to the benefits. Proposal

65. ESMA has therefore retained the approach proposed in the CP.

2.1.2 Pre-trade transparency for investment firms in respect of
equity an equity-like financial instruments
Background/Mandate
Article 14(7) of MiFIR
7. In order to ensure the efficient valuation of shares, depositary receipts, ETFs,
certificates and other similar financial instruments and maximise the possibility of investment firms to obtain the best deal for their clients, ESMA shall develop draft regulatory technical standards to specify further the arrangements for the publication of a firm quote as referred to in paragraph 1, the determination of whether prices reflect prevailing market conditions as referred to in paragraph 3, and of the standard market size as referred to in paragraphs 2 and 4.
I. Arrangements for the publication of a firm quote
66. SIs are required to publish firm quotes in respect of equity and equity-like instruments
traded on a trading venue for which there is a liquid market, when dealing below standard market size (SMS). MiFIR already specifies or delegates through implementing measures various aspects of the obligation to make those quotes public. Those aspects include, among other things, the means by which a quote is made public such as the facilities of any regulated market that has admitted the financial instrument to trading, an approved publication arrangement (APA) or through proprietary arrangements. Analysis following feedback from stakeholders
67. The vast majority of respondents agreed with ESMA’s proposal to require SIs to adopt
arrangements for the publication which ensure that the information is sufficiently reliable and free of errors, that the information is capable of being consolidated with other similar data from other sources and that it is made available to market participants on a non￾discriminatory basis. Additionally, there was broad support for requiring SIs to make public the time quotes are entered or updated, supporting the two objectives of this provision:
i. A timestamp assigned by the SI might help to ensure its quotes are firm and reliable
by improving the audit chain of the publication to the benefit of market participants. It aims at avoiding potential disputes that may arise when a quote is changed close to the time a client order is entered and when, due to this change the client order fails to match the new systematic internaliser's quote. The risk is particularly serious when SIs use a website (which is allowed as a proprietary arrangement according to

Article 17(3)a of MiFIR) as the publication of quotes may suffer from the website
page slowing down and displaying outdated quotes.
ii. Moreover, the inclusion of the timestamp in the pre-trade information published by
the SI is a key information for the client to better analyse ex-post the quality of prices quoted by SIs, and in particular to assess with accuracy the responsiveness of the SI and the validity periods of quotes. Without a timestamp assigned by the SI itself, market participants would need to rely on the information potentially provided by data vendors, the timestamps of which would be less accurate, especially when quotes are published through a website as pointed out by some respondents to the question on access to the quotes of SIs. Proposal
68. Given the broad support from the respondents, ESMA is maintaining the proposal to
adopt arrangements for the publication which ensure that the information is sufficiently reliable and free of errors, that the information is capable of being consolidated with other similar data from other sources and that it is made available to market participants on a non-discriminatory basis. Moreover, SIs will be required to timestamp their quotes.
II. Quotes reflecting prevailing market conditions
69. Under Article 14(3) of MiFIR the prices published by SIs in accordance with Article 14(1)
of MiFIR must reflect the ‘prevailing market conditions’ for each financial instrument for which the investment firm is a SI. However, Article 15(2) of MiFIR permits SIs ‘in justified cases’ to execute orders at a better price than those quoted at the time of reception of the order, ‘provided that this price falls within a public range close to market conditions’. Analysis following feedback from stakeholders
70. Most respondents agreed to maintain the existing definition of prevailing market
condition of Article 24 of the Implementing Regulation (EC) No 1287/2006, according to which a quote or quotes reflect prevailing market conditions when they are close in price to comparable quotes for the same share on other trading venues. However, some respondents expressed concerns that SIs are not required to meet tick size requirements, which can create regulatory arbitrage. ESMA notes that although it appreciates the concern, it has no empowerment under Level 1 to mitigate this risk.
71. Other comments received by ESMA considered that the definition was too vague and
thus subject to diverging interpretations. ESMA appreciates the concern and shares the view that a more specific provision will provide more legal certainty and facilitate harmonised application across the Union. To this end, ESMA has slightly modified its original proposal so as to to provide further clarity by specifying the benchmark (most relevant market) and other elements of the comparability (time and the size elements) rather than simply referring to “other trading venues”.

Proposal
72. ESMA has slightly amended the definition proposed in the CP. Under this revised
provision, a price reflects prevailing market conditions if it is close in price to quotes of equivalent sizes for the same financial instrument on the most relevant market in terms of liquidity for that financial instrument at the time of publication.
III. Standard market size
73. A key aspect of the SI regime is the concept of the SMS. MiFIR requires SIs to compy
with pre-trade transparency requirements when dealing in sizes up to the SMS and to make public quotes - a firm bid and a firm offer – for sizes of at least 10% of the SMS for the share, depositary receipt, ETF or certificate for which they are SIs.
74. Article 14(4) of MiFIR requires shares, depositary receipts, ETFs and certificates to be
grouped together in classes on the basis of the arithmetic average value of the orders executed in the market for that financial instrument. The SMS must be of a size representative of the arithmetic average value of the orders executed in the market for the financial instruments included in each class. Analysis following feedback from stakeholders
75. On the basis of the responses to the DP and with the objective of maintaining and
enhancing transparency, ESMA proposed in the CP to establish equivalent classes by AVT for financial instruments with an AVT larger than €20,000. The SMS for the class with an AVT between 0 and €20,000 would be €10,000, the SMS for the next class (€20,000 - €40,000) would be €30,000 and so forth. ESMA also favoured a recalculation of the AVT for each financial instrument on an annual basis. In other words, ESMA proposed to amend the SMS under current MiFID I and to group the two smallest classes into a single class for shares with an AVT between zero and €20,000 and set a SMS of €10,000.
76. To recall, this corresponded to the second of the three option presented by ESMA in its
DP, which were;
i. Option 1: maintain the existing classes while lowering the SMS for the smallest class
by AVT from €7,500 to €5,000;
ii. Option 2: group the two smallest classes into a single class for shares with an AVT
between zero and €20,000 and set an SMS of €10,000; or
iii. Option 3: maintain the current classes and SMSs for each class as under Table 3 of
Annex II of the Implementing Regulation (EC) No 1287/2006 (status quo option).
77. A slight majority of respondents disagreed with the ESMA proposal. However, within
those respondents, half of them advocated for lower SMS whereas the other half was on

the contrary in favour of a more stringent regime. The arguments put forward included the following:
i. Those supporting lower SMSs stressed that, as showed in the DP, around 95% of
all trades have a volume of up to EUR 10,000. The introduction of a class with an AVT of up to EUR 20,000 and an SMS of EUR 10,000 as proposed by ESMA would hence result in almost every trade falling below the SMS. Whilst this would lead to increased transparency this must be, in the respondents’ view, weighed against the protection of SIs against unreasonable risks. For them, the right equilibrium cannot be achieved if nearly all trades are below the SMS. In this regard, ESMA would like to stress that, as already highlighted in the DP, it is vital to further reinforce the objective of increased transparency for SIs through well￾targeted implementing measures. However, ESMA is unconvinced that the reduction in the average size of transaction necessarily reflects greater market risk for SIs.
ii. Those supporting higher SMS thresholds stressed in particular that it is crucial to
avoid creating significantly less rigorous transparency regime for SIs compared to the one generally enforced by trading venues in respect to market makers. Some suggested an alignment of the quantitative thresholds between SIs (SMS thresholds) and trading venues (LIS threshold). In their view, the methodology for the calculation should be changed, with ADT also applied to the SI instead of AVT. For them, the weakness of the AVT approach is simply that as liquidity increases for a specific share, the average size of transaction usually tends to decrease, resulting in lower SMS threshold for that share above which one can trade in the dark, which is completely counter-intuitive. ESMA notes that MiFIR defines how the SMS should be calculated for shares and equity-like instruments and that that size shall reflect the average size of transaction for each class of financial instruments.
78. More generally, ESMA appreciates the concern raised by certain respondents with
regard to the unintended consequences that a significant misalignment of the respective transparency regimes for trading venues and SIs could have. Respondents noted in this respect that SIs do not truly contribute to price formation. Due to the volume caps that will apply to dark trading on trading venues and to the trading obligation for shares, SIs might become an increasingly attractive option for accommodating current trading activity. In order to address such a development, which would go against the Level 1 framework objective to foster transparency, a key point for regulators and policymakers should be to ensure the bilateral nature of SI activity.
79. According to those respondents, some recitals in MiFID II/MiFIR may be used by market
participants to argue that riskless counterparty trading can be undertaken by SIs, thus providing an alternative home for current OTC broker crossing business. Such a development, combined with the relatively light transparency regime applied to SIs (especially when compared to functionally equivalent market makers on multilateral

trading venues) together with their new ability to provide price improvement under MIFID II, would effectively see the re-introduction of an organised trading facility (OTF) category within the equity space. This is because, if ultimately allowed for the SI, riskless principal trading would de facto enable the matching of two client orders by interposing the SI own account between them for a fraction of time, i.e. taking very limited market/counterparty risk.
80. ESMA believes that this would indeed go against the political, technical and legal
agreement underpinning the Level 1 text. It is worth noting that ESMA has acknowledged this is an issue and raised it in its December 2014 Technical Advice to the Commission but ESMA cannot provide further clarity in the final draft RTS as it has no relevant empowerment to do so. Proposal
81. After careful consideration, ESMA has decided to maintain the proposal presented in the
CP which represents the best possible compromise between those requesting more stringent thresholds and those advocating for a more accommodating regime for SIs. The proposal is summarised in the table below.
Table 4: Standard market size
Average value of transactions
(AVT) in EUR
AVT< 20
20 000 ≤
AVT < 40
40 000 ≤
AVT < 60
60 000 ≤
AVT < 80
80 000 ≤
AVT < 100
100 000 ≤
AVT < 120
120 000 ≤
AVT < 140
Etc.
Standard market size 10 000 30 000 50 000 70 000 90 000 110 000 130 000 Etc.
82. In order to ensure consistent implementation in the Union, the methodology to be used
for calculating the average value of transactions has been specified in the final draft RTS which also clarifies that calculations should take into consideration all transactions executed in the Union whether executed on or outside a trading venue excluding reference price, negotiated and post-trade LIS transactions. In that context, post-trade LIS transactions are transactions for which deferred publication is permitted or, in other words, the smallest threshold for each ADT class set out in table 4 of Annex II of the final draft RTS.

2.1.3 Trading obligation for shares
I. Transaction in shares that do not contribute to the price
discovery process
Background/Mandate
Article 23(3) of MiFIR
3. ESMA shall develop draft regulatory technical standards to specify the particular
characteristics of those transactions in shares that do not contribute to the price discovery process as referred to in paragraph 1, taking into consideration cases such as:
(a) non-addressable liquidity transactions; or (b) where the exchange of such financial instruments is determined by factors other than the current market valuation of the financial instrument. ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.
83. In the DP, ESMA consulted on the interpretation of the first exemption from the trading
obligation (non-systematic, ad-hoc, irregular and infrequent), on the content of the proposed list of types of transactions not contributing to the price formation process and on whether the list should be exhaustive as well as whether benchmark and portfolio trades should be considered as transactions determined by factors other than the current market valuation of the financial instrument.
84. Many respondents generally agreed with ESMA that the exemption under Article 23 of
MiFIR requires greater clarity as its application raises a number of relevant issues for a variety of market participants including investment firms and institutional investors such as asset managers.
85. In the DP, amongst the topics that would benefit from further clarity, the following issues
were mentioned: (i) the link with the concept of frequent and substantial activity under the SI definition, (ii) the treatment of riskless principal transactions and (iii) the arrangements to allocate shares to final investors or other specific types of transactions or distribution procedures.

86. Lastly, most of respondents disagreed with ESMA´s proposal to establish an exhaustive
    list. However ESMA remains in favour of maintaining an exhaustive list since this will deliver a clearer and more harmonised regulatory framework in the Union. Analysis following feedback from stakeholders
87. In the CP, ESMA requested views on the proposed list of transactions not contributing to
    the price discovery process and, again, about its exhaustive character. A majority of respondents supported the proposal but some of them asked for clarifications or provided some drafting suggestions.
88. Responses received indicate that there are still certain areas apart from the ones
    highlighted in the DP where further guidance would be necessary. However, ESMA notes that this is mainly due to the limitation of the mandate to determine transactions not contributing to the price formation process. Various stakeholders requested more clarity about concepts that are out of the scope of the ESMA mandate. Nevertheless, should this be necessary, ESMA may consider developing further guidance in order to provide market stakeholders with more clarity and assist CAs in their supervisory duties.
89. In order to ensure consistent interpretations, ESMA has also adopted an approach
    where the list of transactions not contributing to the price discovery process has been established based on the attributes of the transactions rather than using market terminology (e.g. benchmark transaction). However, a number of respondents repeatedly requested clarification about whether exchange for physical transactions (EFPs) or exchanges for depositary receipts were included, about inter funds transfers or the treatment of non-segregated collateral. ESMA has taken into consideration those comments and has proposed an improved drafting accordingly.
90. A significant number of respondents pointed out the need for alignment of the different
    type of transactions that do not contribute to the price formation process under the different mandates such as the technical advice to the Commission on the definition of SI, the negotiated trade waiver and the trading obligation for shares. ESMA acknowledges the need for consistency and has aligned the definitions to the extent possible.
91. Views were divided about the exhaustive character of the list of transactions. The
    supportive respondents expressed a concern of a possible circumvention whereas those in favour of a non-exhaustive list claimed for the need of adding new types of transactions which might appear depending on market evolution. It should be noted that they did not provide any concrete example in this regard though. Taking into account all these elements and the ultimate regulatory goal, ESMA maintains the current proposal with some amendments aiming at mitigating the concerns and providing additional clarity.
92. In particular, it is worth noting that, as opposed to the list of negotiated transactions that
    do not contribute to the price formation, ESMA has decided here not to addan item that

provides a certain degree of flexibility and facilitate the inclusion of the potential new types of transactions that may develop in the future. With regard to the trading obligation, the exemption is indeed automatic and does not require any prior authorisation whereas in the case of negotiated transactions the granting of the exemption is subject to a assessment process through ESMA. There is hence some benefit in implementing the trading obligation exemption more narrowly. Proposal
93. With regard to the particular characteristics of those transactions in shares that do not
contribute to the price discovery process, ESMA proposes the following types of transactions to be included:
i. the transaction is executed by reference to a price that is calculated over multiple
time instances according to a given benchmark, including transactions executed by reference to a volume-weighted average price or a time-weighted average price;
ii. the transaction is part of a portfolio trade which includes five or more different
shares;
iii. the transaction is contingent on the purchase, sale, creation or redemption of a
derivative contract or other financial instrument where all the components of the trade are to be executed only as a single lot such as exchanges for related positions;
iv. the transaction is executed by a management company as defined in Article 2(1)(b)
of Directive 2009/65/EC or an alternative investment fund manager as defined in
Article 4(1)(b) of Directive 2011/61/EU which transfers the beneficial ownership of
shares from one collective investment undertaking to another and where no investment firm is a party to the transaction;
v. the transaction is a give-up or a give-in transaction;
vi. the transaction has as its purpose the transferring of shares as collateral in bilateral
transactions or in the context of CCP margin or collateral requirements or as part of the default management process of a CCP;
vii. the transaction results in the delivery of shares in the context of the exercise of
convertible bonds, options, covered warrants or other similar derivatives;
viii. the transaction is a securities financing transaction;
ix. the transaction is carried out under the rules or procedures of a trading venue, a
CCP or a central securities depository to effect a buy-in of unsettled transactions in accordance with Regulation (EU) No 909/2014 of the European Parliament and of the Council.

2.1.4 Post-trade transparency for trading venues and
investment firms
Background/Mandate
Article 7(2) of MiFIR
2. ESMA shall develop draft regulatory technical standards to specify the following in
such a way as to enable the publication of information required under Article 64 of Directive 2014/65/EU:
(a) the details of transactions that investment firms, including systematic internalisers and market operators and investment firms operating a trading venue shall make available to the public for each class of financial instrument concerned in accordance with Article 6(1), s published under Article 6(1) and Article 20, distinguishing between those determined by factors linked primarily to the valuation of the financial instruments and those determined by other factors; (b) the time limit that would be deemed in compliance with the obligation to publish as close to real time as possible including when trades are executed outside ordinary trading hours. (c) the conditions for authorising investment firms, including systematic internalisers and market operators and investment firms operating a trading venue to provide for deferred publication of the details of transactions for each class of financial instruments concerned in accordance with paragraph 1 of this Article and with Article 20(1); (d) the criteria to be applied when deciding the transactions for which, due to their size or the type, including liquidity profile of the share, depositary receipt, ETF, certificate or other similar financial instrument involved, deferred publication is allowed for each class of financial instrument concerned.
Article 20(3), MiFIR
3. ESMA shall develop draft regulatory technical standards to specify the following:
(a) identifiers for the different types of transactions published under this Article, distinguishing between those determined by factors linked primarily to the valuation of the financial instruments and those determined by other factors; (b) the application of the obligation under paragraph 1 to transactions involving the use of those financial instruments for collateral, lending or other purposes where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument;

(c) the party to a transaction that has to make the transaction public in accordance with paragraph 1 if both parties to the transaction are investment firms.
94. ESMA is required to draft RTS implementing the new post-trade transparency regime for
equity and equity-like instruments. Those measures include the content and timing of the information to be made public, the identifiers for different types of transactions, the criteria and conditions for the deferred publication of transactions and, for OTC transactions, the application of post-trade transparency obligations in respect of transactions involving the use of equity and equity-like instruments for collateral, lending or other purposes where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument.
I. Content of the information to be made public
Analysis following feedback from stakeholders
95. In the CP, ESMA was of the view that the content of the information currently required to
be published for shares admitted to trading on a regulated market was still valid and applicable to all equity and equity-like instruments. The information that ESMA proposed to be made public in respect of transactions in shares, depositary receipts, ETFs, certificates and other similar financial instruments included the date and time of the transaction, the instrument identifier, the price and price notation, the quantity and the venue identifier.
96. Respondents were mostly in favour of maintaining the current regime for shares and to
extending it to all equity and equity-like instruments. In the CP, many respondents reiterated their support to the Market Model Typology developed by a number of market participants, including trading venues, aiming at improving the standardisation and content of post-trade information in Europe. ESMA agrees that the Market Model Typology is a valuable initiative, and it has considered the various flags proposed in the context of the identifiers for on-venue and OTC transactions. However, ESMA has to develop a flag regime that meets the specific requirements of MiFIR.
97. A few respondents were worried that the information under MiFIR post-trade
transparency may be inconsistent with EMIR requirements. Considering EMIR and MIFIR have quite a different scope of application, ESMA believes the risk of inconsistency between the two sets of obligations, especially for equities, is rather limited.
98. A larger number of respondents supported the addition of a trade identifier code which
would help following the execution chain, some stressing that a trade identifier code would support the uniqueness of trade identification. ESMA is of the opinion that a unique trade identifier would be valuable information to be added to the information to be published post-trade. Additionally, respondents largely supported the inclusion of the date and time of publication among the required fields.

99. Finally, based on the consultation feedback, ESMA believes it is necessary to publish
    post-trade the venue of publication in order to identify the trading venue, APA or consolidated tape provider (CTP) publishing the transaction. Proposal
100. ESMA, in line with the CP, proposes to require investment firms and trading venues
     to publish the following information in respect of transactions executed by them or under their rules:
     i. Trading date and time;
     ii. Instrument identification code;
     iii. Unit price;
     iv. Price currency;
     v. Quantity;
     vi. Venue of execution;
     vii. OTC trading;
     viii. Publication date and time;
     ix. Venue of Publication;
     x. Transaction identification code.
101. In order to ensure that the information to be made available to the public for the
     purpose of post-trade transparency is operational and meaningful for the interested stakeholders, a common format for provision of such information needs to be defined. Additionally, due to the fact that trading venues which are subset of entities subject to post-trade transparency requirements are obliged at the same time to report financial instrument reference data as per RTS 23, and an overlap exists between the data to be provided under both requirements, alignment of the formats for relevant data has been considered reasonable and beneficial.
102. The formats to be applied for the post-trade reports are therefore consistent with the
     ISO 20022, which has been chosen as most suitable for the purpose of reference data reporting under MiFIR Art. 27. ISO 20022 is a standardisation methodology which sets out guidelines, principles and formats that should be followed in the development of a common formal notation to describe financial processes.
103. The alignment with the formats used for reference data (and thus, with ISO 20022
     methodology) concerns only the way the information is represented, for example the

same codes are used to represent the same values. It does not affect the data requirements themselves nor the means of their collection or publishing (for example, no specific technical format, like XML, is required for the publication of data). In practical terms, it means that the additional burden resulting from the alignment is limited to the transformation of the data so that they are represented in a standard way, thus it can be considered marginal.
II. Identifiers
104. The main purpose of identifiers is to complement the information content of post-trade
reports by disclosing the technical characteristics of a transaction or the particular circumstances under which a transaction has occurred (such as a transaction executed under a pre-trade transparency waiver or which is subject to conditions other than the current market price). Identifiers hence improve price formation in the market and support achieving and monitoring best execution.
105. Under current MiFID trading venues and investment firms are already required to
make public additional information in the form of flags when a transaction is determined by factors other than the current market price, in the case of negotiated transactions and following any amendment of previously disclosed information. Analysis following feedback from stakeholders
106. In the CP, ESMA proposed a list of flags on the basis of the DP and the previous
work done by the Committee of European Securities Regulators (CESR) in its technical advice to the Commission on post-trade transparency standards (CESR/10-882). ESMA suggested enhancing this list to take into consideration the new transparency requirements imposed by MiFID II and in particular the implementation of the volume cap mechanism under Article 5 of MiFIR and the trading obligation for shares under Article 23 of MiFIR.
107. ESMA received a large number of responses which were generally supportive of the
greater granularity proposed by ESMA.
108. A number of respondents pointed out the possible inconsistency or overlap between
“G” and “T” flags which both relate to non-price forming trades. ESMA appreciates that the distinction between the two flags was not sufficiently clear and needs to be further clarified. Confusion is in particular due to the fact that several provisions in the RTS relate to similar concepts:
i. Transactions not contributing to the price discovery process and which are not
covered by the trading obligation for investment firms as set out under Article 23;
ii. Transactions where the exchange of financial instruments is determined by factors
other than the current market valuation of the financial instrument and which are

excluded from the post-trade reporting obligations when traded OTC (Article 20(3)(b) of MiFIR); and
iii. Negotiated transactions which are subject to conditions other than the current
market price (Article 4(1)(b)(iii) of MiFIR).
109. Although the three lists above are referring to similar transactions, they do not cover
the exact same range of transactions. Hence, in ESMA’s view, it remains appropriate to affect a specific flag to each of those types of transactions. This should allow the market stakeholders to be adequately informed about the nature of a published transaction and should ensure accurate monitoring and supervision of the practical implementation of those provisions.
110. Other respondents were concerned that introducing an identifier for orders that are
LIS for the purpose of the pre-trade transparency waiver under Article 4(1)(c) of MiFIR would expose them to the rest of the market (e.g. in case of partial execution) and discourage the execution of large orders through central order books. ESMA appreciates the concern raised and the flag on pre-trade LIS waiver has been deleted.
111. However, identifying non pre-trade transparent transactions remains necessary for
ESMA’s monitoring role (Article 52 of MiFIR) and for transparency calculations. Trading venues should therefore keep record of information about the transaction executed on their venue regardless of whether the information has been subject to a specific post￾trade flagging or not.
112. There was some opposition to the inclusion of an algorithmic trading flag.
Nevertheless, the need to include such identifier derives from Article 65(1)(h) of MiFID II where CTPs are required, where applicable, to collect and consolidate information about the fact that a computer algorithm was responsible for the investment firm decision and execution of the transaction. As consequence, ESMA maintains its proposal. Proposal
113. ESMA has reviewed the list of identifiers following responses to the CP and is
proposing to require the following flags to be included in post-trade reports:
i. Benchmark transactions;
ii. Agency cross transactions;
iii. Non-price forming transactions which are excluded from the post-trade reporting
obligations when traded OTC;
iv. Transaction not contributing to the price discovery process for the purposes of
Article 23 of Regulation (EU) No 600/2014 and as set out in Article 2

v. Special dividend transactions;
vi. Post-trade large in scale transactions;
vii. Reference price transactions;
viii. Negotiated transactions in liquid financial instruments;
ix. Negotiated transactions in illiquid financial instruments;
x. Negotiated transactions subject to conditions other than the current market price;
xi. Algorithmic transactions;
xii. Transactions above the SMS;
xiii. Transactions in illiquid instruments;
xiv. Transactions which have received price improvement;
xv. Cancellations;
xvi. Amendments;
xvii. Duplicative trade reports.
114. With regard to flags, it should also be stressed that the flags to be used have been
modified in order to comply with ISO 20022 standard (please see the section above on the content of the information to be made public). In practice, this means that the flags are now composed of 4 letters instead of one as initially proposed in the CP.
III. Timing
115. MiFIR empowers ESMA to establish draft RTS on the time limits that would be in
compliance with the obligation to publish the details of a transaction as close to real time as possible, including when a transaction is executed outside normal trading hours.
116. Under MiFID I, post-trade information relating to transactions taking place on trading
venues and within normal trading hours must be reported as close to real time as possible and in any case within three minutes of the relevant transaction. When a transaction occurs under the rules of a trading venue but outside normal trading hours (e.g. a negotiated transaction executed outside the systems operated by the trading venue to bring together buying and selling trading interest) the publication requirement is deemed to be complied with when the transaction is made public before the opening of the next trading day of the trading venue on which the transaction takes place (e.g. a trade occurring late in the evening must be published before the beginning of the trading day the following day). For transactions executed outside a trading venue (including

those executed under the systems of a SI) the time limits are set in respect of the trading day of the most relevant market in terms of liquidity or during the investment firm’s normal trading hours.
117. In the CP, ESMA consulted on the definition of normal trading hours and on the
maximum permissible delay of the publication of executed transactions. In line with the DP and with the previous CESR technical advice to the Commission on equity markets (CESR/10-208), ESMA proposed that, in order to improve the quality of post-trade information and the overall market transparency, the maximum permissible delay should be shortened to one minute after the relevant transaction for equity and equity-like instruments. Finally ESMA also consulted on whether different delays should be permissible depending on the type transaction. Analysis following feedback from stakeholders
118. Respondents expressed support for ESMA’s proposal to consider that the market
opening hours as published by the market operator should be considered as normal trading hours. However, a number of market participants had different views in respect of whether the ordinary hours shall include the opening and closing auctions which, in most markets and for most securities, set the start and the end of the trading day. ESMA is of the view that periodic auctions are systems that significantly contribute to the price discovery process (as market participants are able to execute larger than average transactions at a price which is generally considered reliable). For that reason, ESMA considers it important that normal trading hours for a trading venue include the phases during which an instrument is in a periodic auction in order to allow market participants to execute transactions with as much information set on recently executed transactions as possible.
119. In respect of the maximum permissible delay, ESMA received mixed views on the
shortening from three minutes to one minute. Some participants expressed the view that the one minute delay is challenging for non-electronic transactions (for manual transactions or transaction made over the phone). A few respondents considered that one minute delay was still too long.
120. ESMA appreciates that a maximum of one minute delay may be challenging under
the technical arrangements currently adopted by certain market participants. However, the aim of the MiFID review is to improve those arrangements and set more rigorous transparency requirement for the benefit of the quality of the price formation process.
121. Finally, some respondents considered that a longer delay should be envisaged for
portfolio transactions. One respondent also believed that ETFs should be granted a longer delay based on the fact that trading of these instruments is largely manual. Nevertheless, ESMA is of the view that there is no reason to have different maximum permissible delays for different classes of equity-like instruments. Besides, ESMA believes that the drafting of Article 17 of the draft RTS (CP version) on transparency requirements in respect of shares, depositary receipts, exchange-traded funds,

certificates already covered the specific case of post-trade transparency for portfolio transactions. Proposal
122. On the basis of the strong support to the proposed definition of ‘normal trading hours’,
ESMA suggests to maintain this definition. In order to respond to the MiFID II objective to increase market transparency and without any strong case against its initial proposal, ESMA suggests maintaining its proposal to shorten to one minute the maximum permissible delay to publish transaction details.
IV. Securities financing transactions and other transactions
determined by factors other than the current market valuation of the financial instrument
123. Article 20(3)(b) of MiFIR empowers ESMA to develop draft RTS in respect of post￾trade disclosure of OTC transactions involving the use of financial instruments for
collateral, lending or other purposes where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument.
124. ESMA notes that a similar empowerment exists under Article 28 of current MiFID. On
the basis of that empowerment Article 5 of the Implementing Regulation (EC) No 1287/2006 does not consider transactions, for the purpose of the transparency regime, securities financing transaction, the exercise of options or of covered warrants and primary market transactions.
125. However, as mentioned above, ESMA notes that the empowerment under Article
20(3)(b) concerns OTC transactions only and that the level 1 text does not provide a similar empowerment for on-venue trades which, therefore, will have to comply with the general post-trade transparency obligations. Analysis following feedback from stakeholders
126. In the CP, ESMA consulted on whether specific flags for securities financing
transactions and other types of transactions determined by factors other than the current market valuation of the financial instrument would be necessary. A significant number of respondents were of the view that securities financing transactions should not be considered as reportable transactions as the publication of those transactions would not contribute to the price discovery process while the administrative burden and costs for market parties would be substantial. ESMA also proposed to exclude from transparency obligations transfers of financial instruments as segregated collateral as they are non￾price forming transactions. However, quite a number of respondents explained that there was no reason to restrict this exemption only to segregated collateral.

127. Finally, according to one respondent transactions executed by trading venues and
     CCPs pursuant to buy-in rules should be treated as non-price forming trades for the purpose of post trade transparency. As explained above, ESMA has decided to include those types of transactions to the list of transactions not contributing to the price discovery process as specified for the purposes of the trading obligation and to the list of negotiated transactions subject to conditions other than the current market price. While ESMA consider that there is merit in excluding those transactions from the trading obligation and, where traded on-venue, to allow them to be eligible to the negotiated trade waiver as per Article 4(1)(b)(iii) of MiFIR, ESMA remains unconvinced that those transactions should be exempted from post-trade transparency when traded OTC. On the contrary, ESMA believes that the same post-trade transparency regime should apply regardless of whether the buy-in transaction is executed on-venue (under the negotiated trade waiver) or outside the rules of a trading venue. Proposal
128. ESMA agrees that certain OTC non price forming transactions should not be
     considered as reportable trades for the purpose of the post-trade transparency regime. Consistently with current MiFID, ESMA proposes to establish a list of types of transactions determined by factors other than the current market valuation of the financial instrument to which Article 20 of MiFIR would not apply. The list includes:
     i. excluded transactions for the purpose of Article 26 of Regulation (EU) No 600/2014
     as specified in RTS 22 on obligation to report transactions;
     ii. transactions executed by a management company as defined in Article 2(1)(b) of
     Directive 2009/65/EC or an alternative investment fund manager as defined in
     Article 4(1)(b) of Directive 2011/61/EU which transfers the beneficial ownership of
     financial instruments from one collective investment undertaking to another and where no investment firm is a party to the transaction;
     iii. give-ups and give-ins; and
     iv. transfers of financial instruments as collateral in bilateral transactions or in the
     context of a CCP margin and collateral requirements or as part of the default management process of a CCP.
     V. Large in scale thresholds – shares and depositary
     receipts
129. Under current MiFID, as specified in the MiFID Implementing Regulation
     (Implementing Regulation (EC) No 1287/2006), LIS thresholds for deferred post-trade transparency are determined on the basis of the ADT of the share and the length of the deferral. The minimum qualifying size for an LIS transaction increases with the liquidity (using ADT as a proxy) of the share and the length of the deferral.

Analysis following feedback from stakeholders
130. In the DP already, and consistently with the recalibration of the liquidity classes in the
context of the pre-trade waiver for LIS orders, ESMA had proposed a new table with 8 liquidity classes and, for each class, three thresholds increasing with the length of the deferral (60 minutes, 120 minutes and end of day (EOD)) applying to both, shares and depositary receipts. The table proposed by ESMA in the CP is reproduced below for information purposes.
Table 5: Post-trade LIS thresholds for shares and depositary receipts (as
proposed in the CP)
Average daily turnover
(ADT) in EUR
Minimum qualifying size of transaction for permitted delay in EUR Timing of publication after the transaction

100m
10,000,000 60 minutes
20,000,000 120 minutes
35,000,000 EOD
50m – 100m
7,000,000 60 minutes
15,000,000 120 minutes
25,000,000 EOD
25m – 50m
5,000,000 60 minutes
10,000,000 120 minutes
12,000,000 EOD
5m – 25m
2,500,000 60 minutes
4,000,000 120 minutes
5,000,000 EOD
1m – 5m
450,000 60 minutes
750,000 120 minutes
1,000,000 EOD
500,000 – 1m
75,000 60 minutes
150,000 120 minutes
225,000 EOD
100,000 – 500,000
30,000 60 minutes
80,000 120 minutes
120,000 EOD
< 100 k
15,000 60 minutes
30,000 120 minutes
50,000 EOD

131. Many respondents criticised that implementing this table would have a negative
     impact on liquidity, pricing, volatility of and investment in SME stocks, in particular. They also pointed out that the LIS threshold represents a much higher percentage of the ADT

for transactions in less liquid sharesthan for transactions in more liquid ones. Respondents representing small issuers stressed that some stocks are so illiquid that an EOD deferral may turn out to be meaningless, market makers becoming cautious or ultimately stopping performing market making in highly illiquid stocks altogether. Respondents concluded that the ESMA proposal would not be aligned with the Capital Markets Union focus on promoting access of SMEs to capital markets.
132. Some respondents offered specific proposals to address this issue, including allowing
more generous deferral periods for illiquid stocks (up to EOD +5), creating a specific class for highly illiquid stocks or linking the size of eligible trades to a percentage of ADT.
133. ESMA is aware of the goals of the Capital Markets Union and does not intend to
make it more difficult capital market funding for SMEs. At the same time, ESMA also has to consider that a huge proportion, in terms of number of instruments, of shares traded on EU trading venues are concentrated in the lower liquidity bands of the table. MiFID II intends to introduce meaningful transparency for those shares and this objective would be challenged if deferrals of EOD + 5 were to be implemented.
134. Therefore, ESMA opted for a compromise solution whereby a new class for highly
illiquid stock and depositary receipts (below EUR 50,000) is created with a lower LIS threshold and also grants an EOD + 1 deferral for the largest transactions in that new liquidity band.
135. ESMA clarified in the CP that an EOD means that market participants would have to
publish the transaction (i) after the closing auction of the same trading day, if the transaction was concluded more than two hours away from the end of the trading day or (ii) before the start of the following trading day, if the transaction was concluded within the last two hours of the same trading day.
136. While a number of respondents were in favour of this solution, other respondents
considered this as too onerous and ultimately as damaging liquidity, particularly in the already lower liquid bands. These respondents advocated maintaining the delays foreseen in the MiFID I Level 2 Implementing Regulation or at least allowing for a deferral until noon on the next trading day.
137. ESMA decided as a compromise to slightly amend its proposal and indeed allow for
the largest transactions in each liquidity band to be published at noon local time on the following trading day at the latest. Proposal
138. In respect of shares, ESMA retains the proposal to increase the number of liquidity
bands and, thus, to align pre-trade and post-trade regimes in this regard so as to simplify implementation for investment firms and trading venues.

139. However, in response to the feedback received to the CP, ESMA introduces a new
     liquidity band of below EUR 50,000 where large trades can be granted a delay of publication of EOD + 1. ESMA therefore proposes to establish the thresholds and corresponding delays as specified in the table below:
     Table 6: Deferred publication thresholds and delays for shares and depositary
     receipts (as included in the final draft RTS)
     Average daily turnover
     (ADT) in EUR
     Minimum qualifying size of transaction for permitted delay in EUR Timing of publication after the transaction

100m
10,000,000 60 minutes
20,000,000 120 minutes
35,000,000 EOD
50m – 100m
7,000,000 60 minutes
15,000,000 120 minutes
25,000,000 EOD
25m – 50m
5,000,000 60 minutes
10,000,000 120 minutes
12,000,000 EOD
5m – 25m
2,500,000 60 minutes
4,000,000 120 minutes
5,000,000 EOD
1m – 5m
450,000 60 minutes
750,000 120 minutes
1,000,000 EOD
500,000 – 1m
75,000 60 minutes
150,000 120 minutes
225,000 EOD
100,000 – 500,000
30,000 60 minutes
80,000 120 minutes
120,000 EOD
50,000 – 100,000
15,000 60 minutes
30,000 120 minutes
50,000 EOD
< 50,000
7,500 60 minutes
15,000 120 minutes
25,000 EOD + 1

140. In detail, therefore the following regime would apply to shares and depositary
     receipts:

i. Transactions eligible to a 60 or 120 minute delay in accordance with the above table
have to be published respectively within 60 or 120 minutes after the transaction.
ii. The largest transactions in each liquidity band (those eligible for an end of day
publication) also have to be published as close to real as possible after the end of the closing auction if concluded earlier than 120 minutes before the end of the present trading day. If they are concluded within 120 minutes from the end of the trading day, they shall be published by 12.00 local time of the next trading day at the latest.
iii. The largest transactions (greater than EUR 25,000) in the liquidity band below EUR
50,000 ADT have to be published after the end of the closing auction of the following trading day, regardless of the time when they were executed during the present trading day.
VI. Large in scale thresholds – ETFs
Analysis following feedback from stakeholders
141. In the CP, ESMA proposed two alternative options for establishing the LIS thresholds
for ETFs.
142. The first option was based on using the ADT of the actual ETF for setting the LIS
thresholds while applying the same set of liquidity bands for post-trade deferrals as those ESMA had proposed for pre-trade waivers.
143. The second option ESMA had published for consultation in reaction to feedback
received to the DP was to establish a simple regime where the minimum LIS qualifying size for all ETFs, regardless of their liquidity, is set at EUR 5,000,000 and where the publication for any trade beyond that threshold should occur at the end of the trading day.
144. Respondents almost unanimously rejected the first option based on the ADT of the
ETFs themselves arguing that the liquidity of an ETF depends on the liquidity of the underlying and that setting the thresholds based on the ADT of the ETFs themselves may install different thresholds for ETFs of identical liquidity and as a consequence may create incentives for an inefficient capital allocation.
145. The large majority of respondents preferred the creation of a simple and transparent
regime where all ETFs are treated equally by either establishing a single monetary threshold triggering a uniform deferral for all or by imposing a two-step monetary threshold system where exceeding the first threshold triggers a shorter delay while exceeding the second threshold a longer one. A minority of respondents also favoured a simple regime but wanted to link the length of the deferral period to the point in time when the creation and redemption process of each specific ETF occurs.

146. A large group of respondents including a broad range of different market participants
     proposed a system where all transactions up to a size of EUR 10,000,000 would be made transparent in real-time, transactions of a size between EUR 10,000,000 and EUR 50,000,000 would benefit from a deferred publication of 60 minutes while transactions in a size exceeding EUR 50,000,000 would be published at the end of the trading day.
147. Taking into account the specificities of the ETF market and the importance of post￾trade transparency, in particular, in a market environment where a large proportion of
     trading is conducted OTC, ESMA has decided to adopt the system as proposed by this group of respondents.
148. ESMA considers that an ambitious post-trade transparency regime for ETFs would
     contribute to creating a level-playing field between on-venue and OTC trading of ETFs in the Union, would stimulate competition and overall improve the price discovery system and the quality of execution for the end-investor. Proposal
149. ESMA therefore proposes the following regime:
     Table 7: Deferred publication thresholds and delays for ETFs (as included in the
     final draft RTS)
     Minimum qualifying size of transaction for permitted delay in EUR Timing of publication after the transaction 10 000 000 60 minutes 50 000 000 End of the day

VII. Large in scale thresholds – Certificates
Analysis following feedback from stakeholders
150. In the CP, ESMA proposed to establish two classes of liquidity: ADT above and below
EUR 50.000 with time deferrals of 120 minutes or EOD depending on the size of the transaction within each liquidity class. Few stakeholders commented on the proposal and there was no significant opposition to this proposal. ESMA clarifies that the authorisation of deferred publication is at the discretion of the CA. Proposal
151. ESMA proposes to establish two classes of liquidity, ADT above and below EUR 50
000 with deferrals of 120 minutes till end of the trading day according to the following
table. These LIS thresholds would also apply to “other similar financial instruments”.
Table 8: Deferred publication thresholds and delays for certificates and other
similar financial instruments (as included in the final draft RTS) Average daily turnover (ADT) in EUR Minimum qualifying size of transaction for permitted delay in EUR Timing of publication after the transaction ADT < 50 000 15 000 120 minutes 30 000 End of the day ADT ≥ 50 000 30 000 120 minutes 60 000 End of the day

2.2. Transparency requirements in respect of bonds, structured
finance products, emission allowances and derivatives
2.2.1 Liquidity and pre-trade and post-trade transparency for non￾equity instruments
I. Feedback to the CP and revised proposal applicable
across all asset classes
Background/Mandate
Articles 9(5)(c), (d), and (e) of MiFIR
5. ESMA shall develop draft regulatory technical standards to specify the following:
[…]
(c) the size of orders that are large in scale and the type and the minimum size of orders held in an order management facility pending disclosure for which pre-trade disclosure may be waived under paragraph 1 for each class of financial instrument concerned; (d) the size specific to the financial instrument referred to in paragraph 1(b) and the definition of re-quest-for-quote and voice trading systems for which pre-trade disclosure may be waived under paragraph 1; (e) the financial instruments or the classes of financial instruments for which there is not a liquid market where pre-trade disclosure may be waived under paragraph 1. Articles 11(4)(c) of MiFIR
4. ESMA shall develop draft regulatory technical standards to specify the following in
such a way as to enable the publication of information required under Article 64 of Directive 2014/65/EU:
[…]
(c) the conditions for authorising investment firms, including systematic internalisers, and market operators and investment firms operating a trading venue, to provide for deferred publication of the details of transactions for each class of financial instrument concerned in accordance with paragraph 1 of this Article and with Article 21(4); ESMA shall submit those draft regulatory technical standards to the Commission by 3 July
2015. Power is delegated to the Commission to adopt the regulatory technical standards
referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation

(EU) No 1095/2010.

1. This section summarises ESMA’s proposal for the liquidity assessment of non-equity
   instruments and the setting of thresholds for waivers from pre-trade transparency and deferrals from post-trade transparency presented in the December CP. It presents general feedback applicable across all asset classes received to the CP and describes the revised general approach set out in the draft RTS for the liquidity assessment, the thresholds for waivers from pre-trade transparency and the deferrals from post-trade transparency applicable to all non-equity instruments. Asset-class specific feedback, as well as, an explanation of the revised approach to reflect the specific market structure of the various asset classes are presented in sections A to K of this chapter.
2. MiFIR introduces transparency requirements for bonds, structured finance products,
   emission allowances and derivatives (including securitised derivatives) with powers for CAs under Article 9(1) of MiFIR to waive the obligation for market operators and investment firms operating a trading venue to make public pre-trade information for:
   i. orders that are large in scale compared with normal market size;
   ii. orders held in an order management facility of the trading venue pending disclosure;
   iii. actionable indications of interest in request-for-quote and voice trading systems that
   are above a size specific to the financial instrument, which would expose liquidity providers to undue risk and takes into account whether the relevant market participants are retail or wholesale investors; and
   iv. derivatives which are not subject to the trading obligation and other financial
   instruments for which there is not a liquid market.
3. Similarly, on the post-trade side CAs may, under Article 11(1) of MiFIR, authorise market
   operators and investment firms to provide for deferred publication in respect of transactions that are:
   i. large in scale compared with the normal market size for the financial instrument or
   for the class of financial instruments;
   ii. related to financial instruments or to the related class of financial instruments for
   which there is not a liquid market; and
   iii. above a size specific to that financial instrument or that class of financial instruments
   traded on a trading venue, which would expose liquidity providers to undue risk and takes into account whether the relevant market participants are retail or wholesale investors. Liquidity

CP proposal
4. The concept of a liquid market for non-equity instruments is defined in Article 2(1)(17)(a)
of MiFIR. On the basis of this definition and the mandates to define the classes of non￾equity financial instruments for which a waiver/deferral may be granted because there is not a liquid market for them, ESMA is required to specify the non-equity financial instruments or classes of financial instruments for which there is not a liquid market.
5. In the CP ESMA proposed to use COFIA as the basis for determining the liquidity of all
non-equity financial instruments. The proposed approach provided for the segmentation of non-equity financial instruments into specific sub-classes defined on the basis of a set of criteria (e.g. maturity, currency, underlying instrument, etc.) taking into account the specificities of the various asset classes. On this basis, sub-classes (and all the instruments belonging to those sub-classes) were deemed to be liquid or illiquid on the basis of the liquidity criteria listed under Article 2(1)(17)(a) and as further described in the December CP. Any newly issued instrument would have been classified as liquid if it belonged to one of the pre-defined liquid classes and as illiquid otherwise.
6. The assessment of the different non-equity instruments was carried out on data samples
from trade repositories and trading venues for securitised derivatives, derivatives and emission allowances and from transaction reporting data for bonds and structured finance products (SFPs).
7. Under the proposal in the CP, classes deemed to be liquid would have been established
until the RTS was reviewed.
Feedback from stakeholders
8. Overall, most respondents expressed strong concerns about the static nature of ESMA’s
approach and the level of the liquidity thresholds used to identify liquid classes. Most stakeholders recommended instead a methodology based on a periodic assessment of liquidity to reflect the episodic trading patterns of many non-equity instruments.
9. With regard to the liquidity thresholds, most stakeholders considered that ESMA had set
the levels too low to adequately separate liquid classes from illiquid classes. There were also some concerns that not all liquidity criteria set out in Article 2(1)(17)(a) were applied (e.g. the presence of market makers was only considered for securitised derivatives). As a solution to address both those shortcoming, respondents recommended ESMA set more stringent liquidity thresholds. Derivatives
10. A number of concerns applicable only to the liquidity assessment for derivatives were
raised.

11. Firstly, most responses expressed strong reservations about the data used for the
    liquidity assessments, in particular for those assessments based on data from trade repositories (TRs). Overall, stakeholders considered that the data collection period of three months was too short and recommended the use of a data sample covering at least one year. Respondents raised concerns about the quality of TR data in general, stressing that reporting and data quality is, to date, very low and that reported data is not granular enough. While respondents appreciated that ESMA had cleaned the data before performing the calculations the resulting dataset was not considered to be of sufficient quality for the purpose of the analysis. Regarding trading venues’ data which was used for ETDs, the general view was that it covered too few trading venues and that the sample size should be increased to cover both more EU trading venues as well as trading venues from third countries.
12. Secondly, stakeholders considered that the level of granularity for constructing the
    classes was insufficient to build homogeneous classes and recommended ESMA to further develop the taxonomy more in line with market practice. Some classes were considered too broad (e.g. the contract for difference (CFD) definition considered to include equity swaps), insufficiently precise, or not in line with market practice (e.g. spread bets for FX derivatives). This lack of granularity results, in the stakeholders’ view, in inconsistent classes which are, at times, too heterogeneous. Respondents recommended using a more granular COFIA, which takes into account more asset-class specific criteria (e.g underlying for single name credit default swaps (CDS) and options/futures on stocks) for the definition of classes, and equivalent liquidity thresholds where classes are broken down to an equivalent level of granularity. Furthermore, responses highlighted some missing classes (e.g. new categories of commodities that are financial instruments under the new MiFID II/MiFIR regime).
13. Thirdly, many respondents considered that the consequence of deficiencies in data
    quality and the lack of granularity resulted in significant misclassifications of illiquid classes as liquid and vice versa (although to a lower degree).
14. Finally, many respondents were concerned that the liquidity assessment did not
    distinguish between exchange traded derivatives (ETDs) and OTC derivatives which would result in market distortions. In particular, stakeholders were concerned that for some asset classes (e.g. equity derivatives) only data from trading venues had been taken into consideration and OTC trades not considered.
15. Further details pertinent to a specific derivative asset class are provided in the dedicated
    section of each asset class.
    Bonds and structured finance products
16. Overall, feedback on the proposal for bonds and structured finance instruments was split
    into two groups. While some supported the proposed COFIA, mainly from the buy-side and exchanges, many respondents, mainly from the sell-side, asked ESMA to reconsider using IBIA. It should also be noted that most respondents in favour of COFIA considered

necessary to accompany this approach with a recalibration of the LIS and SSTI thresholds to address the problem of wrongly qualified bonds. Sections A and B of this
chapter summarise in more detail the feedback for bonds and structured finance
products.
Securitised derivatives
17. Overall, responses supported ESMA’s approach to declare all securitised derivatives as
liquid. The feedback for securitised derivatives is summarised in section C. Emission allowances
18. ESMA received only very limited feedback for emission allowances. The feedback for
emission allowances is summarised in section K.
Proposal
19. ESMA proposes to use a revised and more granular COFIA as the basis for determining
the liquidity of all classes of non-equity financial instruments. For bonds IBIA will be used. Derivatives and emission allowances
20. For derivatives and emission allowances, the changes ESMA has made are described in
the following paragraphs.
21. A periodic (yearly) liquidity assessment has been introduced which will allow the regular
reassessment of liquidity. In consequence, the draft RTS does not set out anymore the classes that have a liquid market or do not have a liquid market. The revised draft RTS provides instead for (1) a detailed taxonomy in the annex, including the segmentation criteria for defining the classes and their related granularity for the liquidity assessment (2) the quantitative liquidity criteria and related thresholds and/or the qualitative criteria to be used for the liquidity assessment. As suggested by respondents to the CP, the revised proposal provides for a greater level of granularity, which will result in more homogeneous classes. To address possible market distortions stemming from the inconsistent treatment of OTC derivatives compared to ETDs, ESMA categorises these instruments in the same class, where appropriate.
22. To appropriately reflect the very diverse characteristics of the various non-equity
instruments, ESMA distinguishes in the draft RTS between three levels of granularity for classifying non-equity instruments (in order of increasing granularity): asset class, sub￾asset class and sub-class. The liquidity assessment is carried out on the highest level of granularity. While this is in most cases the sub-class level, it has to be noted that not all non-equity instruments require the use of the highest level of granularity and in some cases granularity at the sub-asset class is sufficient (e.g. emission allowances) Table 9

provides an illustration of the various levels using the example of interest rate derivatives.
Table 9: Example of the level of granularity applied – interest rate derivatives
Level of granularity Type of instrument
Asset class Interest rate derivatives
Sub-asset class Bond futures
Sub-class
Bond future whose underlying bond is of a specific issuer with a specific term and whose time to maturity (of the future) is within a specific time-to-maturity bucket
23. Annex III of the draft RTS specifies the segmentation criteria for constructing the various
sub-asset classes and sub-classes and defines the level of granularity to be used for the liquidity assessment.
24. Concerning, the criteria against which to assess liquidity, ESMA maintained its approach
to use the same assessment based on two liquidity criteria as in the CP, i.e. average daily notional amount and average daily number of trades. To better reflect the specific market structure of derivatives covered, ESMA introduces in some cases additional criteria (e.g. distinguishing between on-the-run and off-the-run status for credit derivatives).
25. Finally, ESMA increased the liquidity thresholds against which the liquidity of a sub-asset
class or a sub-class will be assessed. To the extent possible, ESMA proposes the use of equivalent thresholds for equivalent sub-asset classes or sub-classes to avoid market distortions and to take into account that derivatives may have comparable economic terms but are transacted in different forms (e.g. EUA- emission allowance and CER￾emission allowances).
26. ESMA considers that those changes, taken together, ensure a more accurate
determination of the liquidity. It is expected that fewer instruments will be considered liquid due to the more granular definition of sub(-asset)classes and the increased liquidity thresholds.
27. Last but not least, ESMA provides for an alternative methodology with respect to the one
described above for certain sub-asset classes and for the asset class of foreign exchange derivatives. Table 10 below provides a summary of the methodology applied to each sub-asset class. However, further details are provided in the dedicated section of each asset class (sections D to K). Last but not least, details on transitioning into the new regime are provided in section III of chapter 2.2.3. Bonds and structured finance products

28. In light of the feedback ESMA suggests to apply IBIA for bonds. For SFPs ESMA has
    reviewed the proposal and suggests a two-step assessment based on two tests of the liquidity of these instruments which build on one another and will ensure that SFPs will be subject to an appropriate transparency regime should the overall market for these instruments become more liquid again. The proposal for bonds and structured finance products is summarised in sections A and B. Securitised derivatives
29. ESMA has maintained the main elements of its proposal for securitised derivatives. More
    details are presented in section C.

Table 10: Methodology for assessing liquidity applied to each sub-asset class
ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
BONDS
Sovereign Bonds x
Other Public Bonds x
Convertible Bonds x
Covered Bonds x
Corporate Bonds x
ETCs x
ETNs x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

62 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
BONDS
Other Bonds all illiquid
SFPs
EMISSION ALLOWANCES
European Union
Allowances (EUA) x
European Union Aviation
Allowances (EUAA) x x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

63 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
EMISSION ALLOWANCES
Certified Emission
Reductions (CER) x
Emission Reduction
Units (ERU) x
Other Emission
Allowances all illiquid
SECURITISED DERIVATIVES all liquid
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

64 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
C10 DERIVATIVES
Freight derivatives x
Other C10 derivative all illiquid
EMISSION ALLOWANCE DERIVATIVES
Emission Allowance
Derivatives - (EUA) x
Emission Allowance
Derivatives - (EUAA) x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

65 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
EMISSION ALLOWANCE DERIVATIVES
Emission Allowance
Derivatives - (CER) x
Emission Allowance
Derivatives - (ERU) x
Other Emission
Allowance Derivatives all illiquid
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

66 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
INTEREST RATE DERIVATIVES
Bond futures/forwards x
Bond options x
IR futures and FRA x
IR options x
Swaptions x
Fixed-to-Float 'multi currency swaps' and
Futures/Forwards on
Fixed-to-Float 'multi currency swaps' x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

67 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
INTEREST RATE DERIVATIVES
Float-to-Float 'multi currency swaps' and
Futures/Forwards on
Float-to-Float 'multi currency swaps' x
Fixed-to-Fixed 'multi currency swaps' and
Futures/Forwards on
Fixed-to-Fixed 'multi currency swaps' x
Overnight Index Swap
(OIS) 'multi currency swaps' and
Futures/Forwards on
Overnight Index Swap
(OIS) 'multi currency swaps' x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)

68 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
INTEREST RATE DERIVATIVES
Inflation 'multi currency swaps' and
Futures/Forwards on
Inflation 'multi currency swaps' x
Fixed-to-Float 'single currency swaps' and
Futures/Forwards on
Fixed-to-Float 'single currency swaps' x
Float-to-Float 'single currency swaps' and
Futures/Forwards on
Float-to-Float 'single currency swaps' x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)

69 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
INTEREST RATE DERIVATIVES
Fixed-to-Fixed 'single currency swaps' and
Futures/Forwards on
Fixed-to-Fixed 'single currency swaps' x
Overnight Index Swap
(OIS) 'single currency swaps' and
Futures/Forwards on
Overnight Index Swap
(OIS) 'single currency swaps' x
Inflation 'single currency swaps' and
Futures/Forwards on
Inflation 'single currency swaps' x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)

70 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
INTEREST RATE DERIVATIVES
Other Interest Rate
Derivatives all illiquid
EQUITY DERIVATIVES
Index options all liquid
Index futures/forwards all liquid
Stock options all liquid
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

71 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
EQUITY DERIVATIVES
Stock futures/forwards all liquid
Stock dividend options all liquid
Stock dividend futures/forwards all liquid
Dividend index options all liquid
Dividend index futures/forwards all liquid
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

72 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
EQUITY DERIVATIVES
Volatility index options all liquid
Volatility index futures/forwards all liquid
ETF options all liquid
ETF futures/forwards all liquid
Swaps x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

73 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
EQUITY DERIVATIVES
Portfolio Swaps x
Other equity derivatives all illiquid
COMMODITY DERIVATIVES
Metal commodity futures/forwards x
Metal commodity options x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

74 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
COMMODITY DERIVATIVES
Metal commodity swaps x
Energy commodity futures/forwards x
Energy commodity options x
Energy commodity swaps x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

75 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
COMMODITY DERIVATIVES
Agricultural commodity futures/forwards x
Agricultural commodity options x
Agricultural commodity swaps x
Other commodity derivatives all illiquid
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

76 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
FX DERIVATIVES
Non-deliverable forward
(NDF) all illiquid
Deliverable forward (DF) all illiquid
Non-Deliverable FX options (NDO) all illiquid
Deliverable FX options
(DO) all illiquid
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

77 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
FX DERIVATIVES
Non-Deliverable FX swaps (NDS) all illiquid
Deliverable FX swaps
(DS) all illiquid
FX futures all illiquid
Other Foreign Exchange
Derivatives all illiquid
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

78 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
CREDIT DERIVATIVES
Index credit default swap
(CDS ) x
Single name credit default swap (CDS ) x
CDS index options x
Single name CDS options x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

79 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
CREDIT DERIVATIVES
Other credit derivatives all illiquid
CFDs
Currency CFDs x
Commodity CFDs x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

80 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
CFDs
Equity CFDs x
Bond CFDs x
CFDs on future/forward on an equity x
CFDs on option on an equity x
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

81 ASSET CLASS
ASSESSMENT - BASED
ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
IBIA -BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE
LIQUIDITY
CRITERIA (QT)
BASED ON
QUANTITATIVE (QT) AND
QUALITATIVE (QL)
LIQUIDITY CRITERIA
BASED ON
QUALITATIVE
LIQUIDITY
CRITERIA (QL)
STATIC
QT#1 - average daily turnover
(ADT)
QT#1 - average daily turnover
(ADT)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#1 - average daily notional amount (ADNA)
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#2 - average daily number of trades
QT#3 - percentage of days traded
QT#3 - percentage of days traded
QL#3 as described in the
section above
CFDs
Other CFDs all illiquid
LIQUIDITY ASSESSMENT
IBIA 2-TESTS APPROACH COFIA
BASED ON QUANTITATIVE
LIQUIDITY CRITERIA (QT)
Qualitative liquidity criteria as described in the section above QT#2 - average daily number of trades QT#2 - average daily number of trades

Deferral period and pre-trade and post-trade transparency thresholds CP proposal
30. ESMA proposed in the CP the following approach:
i. to set the deferral period which competent authorities may authorise for transactions
that are large in scale, transactions above the size specific to the instrument if carried out on own account other than matched principal, and transactions in illiquid instruments, at 48 hours;
ii. to set identical large in scale and size specific thresholds for both pre-trade and
post-trade purposes;
iii. to determine the large in scale threshold for each asset class defined in accordance
with the COFIA approach;
iv. to set the size specific to the instrument threshold equal to 50% of the large in scale
threshold. Indicative prices which are close to the price of the trading interests to be published when using the waiver should be calculated and displayed by the operator of the trading venue in a transparent fashion; and
v. to set large in scale and size specific thresholds according to the volume measure
included in Annex II, Table 3 of the draft RTS in the December CP.
31. In addition, ESMA proposed two options in the CP with regard to setting the large in
scale and size specific to the instrument thresholds:
Option 1
32. A static determination of the LIS and SSTI thresholds as the greater of a pre-determined
floor based on expert judgement and a threshold meeting the policy objective to capture at least 90% of the trades below the large in scale threshold for both liquid and illiquid classes2 .
33. Under this option, concrete thresholds would be specified in the RTS and, thus, a
revision of the thresholds would have implied a revision of the RTS itself. Option 2

In order to set the threshold of illiquid classes for interest rate derivatives traded OTC, for which trade repositories data was used, a 70% coverage ratio was applied instead of 90%. For more details on the methodology and results refer to the section “Interest rate derivatives – Pilot exercise on setting the large in scale thresholds” in the December CP. Furthermore, for ETD contracts, i.e. bond futures and interest rate futures, the related thresholds were calculated on the whole distribution of trades related to both sub-classes. The same applied to bond options and interest rate options. Moreover, for equity derivatives only the thresholds for index options and futures and for stock options and futures are based on the 90% coverage ratio in terms of number of trades, while those for the other classes were derived from those 4 values. Finally, the thresholds set for emission allowances were set on the basis of the average amount of tons of carbon dioxide traded and not according to any the policy of objective to capture x% of the trading volume.

34. The second option provided for a more dynamic regime. Under this proposal, the
    thresholds defined under option 1 would have been applied only for the year 2017 and, from 2018 onwards, the thresholds would have been recalculated on a yearly basis according to a pre-determined methodology: the LIS thresholds would have been set for each sub-class as the greater of:
    i. the threshold determined so that at least 90% of the trades would lie below the
    threshold (criterion 1);
    ii. the threshold determined so that at least 70% of the total volume traded for that sub￾class would lie below the threshold (criterion 2) or;
    iii. the threshold floor determined for the class as provided in Annex III, Table 47 of
    draft RTS3 as published in the December CP.
35. ESMA expressed in the CP a preference for option 2.
    Analysis following feedback from stakeholders and proposal Alignment of pre-trade and post-trade thresholds
36. Most stakeholders did not agree with ESMA’s proposal to align thresholds for pre-trade
    and post-trade purposes, supporting differentiated thresholds, and in particular lower pre-trade thresholds. While some stakeholders supported using the same pre-trade and post-trade thresholds, this support was in most cases qualified on the basis that pre￾trade and post trade transparency thresholds should be lowered overall and that if thresholds were not lowered, they would prefer at least that pre-trade thresholds were lower than post-trade thresholds.
37. In light of comments received, ESMA has revisited its proposal so that the pre-trade
    thresholds for LIS and SSTI are set at a lower level than the post-trade thresholds for LIS and SSTI. The methodology for determining the SSTI and LIS thresholds is described in the following paragraphs. LIS and SSTI thresholds
38. Many respondents expressed concerns about the LIS and SSTI thresholds proposed in
    the CP, arguing that:
    i. the thresholds were generally too high, especially for pre-trade transparency and for
    trading in illiquid instruments;

In other words, the thresholds floors would represent the minimum applicable thresholds, replicating to a large extent the thresholds applicable for 2017.

ii. the calculation of the SSTI as 50% of LIS was inappropriate, did not sufficiently
reflect the mandate given in Level 1 and resulted in too high thresholds with sometimes a too small percentage of trades between the LIS and the corresponding SSTI threshold; and
iii. the use of threshold floors and volume measures to calculate the transparency
thresholds was not appropriate, provided unpredictable and biased outcomes and could result in unintended consequences.
39. Respondents made various and wide-ranging proposals for determining the SSTI,
ranging from setting the SSTI as a percentage of the LIS (e.g. from 5-10% to 95% as requested by various trading venues) to setting the SSTI based on a percentile as it was the case for the LIS threshold in relation to the trades covered (e.g. the median of the distribution of trades). Derivatives (excluding equity derivatives) and emission allowances
40. Following feedback to the consultation, ESMA has revisited its proposal and suggests for
emission allowances and all derivatives with the exception of equity derivatives the approach described below.
i. For sub-asset classes or sub-classes with a liquid market ESMA suggests to
determine the pre-trade and post-trade thresholds on a yearly basis according to the following methodology:
a. Pre-trade SSTI: The higher of the 60th trade percentile or the threshold floor b. Pre-trade LIS: The higher of the 70th trade percentile or the threshold floor.
c. Post-trade SSTI: The higher of the 80
th trade percentile, the 60th volume percentile4 or the threshold floor. d. Post-trade LIS: The higher of the 90th trade percentile, the 70th volume percentile or the threshold floor. In all cases, the volume percentile for determining the LIS and SSTI thresholds is applied only if the trade size related to the LIS volume percentile is not higher than the 97.5th trade percentile, in this case the trade percentile should then prevail. Last but not least, whenever a statistically sufficient number of trades, set to 1000, is not available for the calculations of the percentiles the threshold floors should apply.

The volume percentile is not used for emission allowances and emission allowance derivatives for which only the trade percentile and the threshold floor are applied.

ii. For sub-asset classes or sub-classes that do not have a liquid market ESMA
proposed to set fixed threshold values which are set at the same level as the respective threshold floor of liquid classes within the same asset class. This approach caters for the difficulty to determine meaningful thresholds for classes that are not liquid and where only very few trades (and of a very variable volumes) may take place.
41. ESMA is aware that many respondents raised concerns about the use of threshold
floors. Nevertheless ESMA considered those floors necessary to avoid that transparency for instruments traded already on exchanges does not decrease after the introduction of the new transparency regime. The objective of MiFIR/MiFID II is to increase transparency and it would appear counterintuitive if the new regime resulted in a less transparent regime for exchange traded instruments or potentially trigger a race to the bottom. However, ESMA recalibrated the threshold floors proposed and considered the specific market structure of the respective asset class when setting them. Furthermore, to avoid distortions within one asset class, the same threshold floors per asset class are proposed5 , for respectively the pre-trade and post-trade SSTI and LIS.
42. The draft RTS provide instructions which transactions should be taken into account for
determining the SSTI and LIS thresholds. The baseline is that thresholds should be calculated at the sub-class level and include all transaction executed in financial instruments belonging to that sub-class. In some cases, where the taxonomy does not provide for a sub-class (e.g. emission allowances and emission allowance derivatives) the calculations will be calculated at the sub-asset-class level.
43. A detailed overview of the approach per asset class is provided in table 11, further
details on the methodology applicable to each asset class are included in the relevant
section of the asset class (sections D to K).
44. Respondents did broadly agree, however, that the LIS and SSTI thresholds should be
set according to the proposed volume measure (e.g. notional amount in EUR of traded contracts for derivatives) presented in the CP. For some classes, e.g. commodity derivatives, some respondents were however suggesting using a different volume measure, such as lots. ESMA has not amended its proposal but allows trading venues to convert such thresholds in lots and maintain those sizes fixed over the year.
45. Taken together these changes allow for a more accurate determination of the
transparency thresholds, taking into account the specific market structures and the needs to protect liquidity providers from undue risk (pre-trade SSTI). Bonds and structured finance products

5 With the exception of emission allowances, emission allowance derivatives and interest rate derivatives.

46. ESMA proposes to calculate the SSTI and LIS thresholds in line with the revised
    dynamic approach for determining the transparency thresholds. In particular, for liquid and illiquid bonds the SSTI and LIS thresholds will be calculated in relation to percentiles in terms of trade count. A similar approach is proposed for SFPs, with the difference that threshold floors are used in addition for liquid SFPs and fixed value thresholds are used for illiquid SFPs. The proposal for bonds and structured finance products is summarised in sections A and B respectively. Securitised derivatives
47. ESMA proposed to define static SSTI and LIS thresholds for securitised derivatives. The
    proposal for securitised derivatives is summarised in section C Equity derivatives
48. ESMA revised its approach for equity derivatives and proposes an approach similar to
    the one applicable to shares for liquid classes, i.e. the applicable SSTI and LIS thresholds will be calibrated in relation to the average daily notional amount. The analysis of the feedback and the proposal for equity derivatives is summarised in section G.

Table 11: Overview of methodology to set the pre-trade and post-trade SSTI and LIS
Trade - percentile Threshold floor Threshold value Trade - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value BONDS ETCs - liquid - - EUR 1,000,000 - - EUR 1,000,000 - - - EUR 50,000,000 - - - EUR 50,000,000 ETCs - illiquid - - EUR 900,000 - - EUR 900,000 - - - EUR 45,000,000 - - - EUR 45,000,000 ETNs - liquid - - EUR 1,000,000 - - EUR 1,000,000 - - - EUR 50,000,000 - - - EUR 50,000,000 ETNs - illiquid - - EUR 900,000 - - EUR 900,000 - - - EUR 45,000,000 - - - EUR 45,000,000 Covered bonds 40 - - 70 - - 80 - - - 90 - - - For all other bond types 60 - - 70 - - 80 - - - 90 - - -

88 Trade - percentile Threshold floor Threshold value Trade - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value SFPs Test-1 (SFPs - asset class assessment) and Test-2 (financial instrument assessment) both passed 60 - EUR 100,000 70 - EUR 250,000 80 - - EUR 500,000 90 - - EUR 1,000,000 Test-1 (SFPs - asset class assessment) passed but Test￾2 (financial instrument assessment) not passed

• • EUR 100,000 - - EUR 250,000 - - - EUR 500,000 - - - EUR 1,000,000
    Test-1 (SFPs - asset class assessment) not passed
• • EUR 100,000 - - EUR 250,000 - - - EUR 500,000 - - - EUR 1,000,000

89 Trade - percentile Threshold floor Threshold value Trade - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value EMISSION ALLOWANCES For European Union Allowances (EUA) Liquid sub￾asset classes 60 40,000 tons of Carbon Dioxide - 70 50,000 tons of Carbon Dioxide - 80 - 90,000 tons of Carbon Dioxide - 90 - 100,000 tons of Carbon Dioxide - Illiquid sub￾asset classes

• -
  40,000 tons of
  Carbon Dioxide - -
  50,000 tons of
  Carbon Dioxide - - -
  90,000 tons of
  Carbon Dioxide - - -
  100,000 tons of
  Carbon Dioxide
  For emission allowances other than EUA
  Liquid sub￾asset classes
  60 20,000 tons of
  Carbon Dioxide - 70 25,000 tons of
  Carbon Dioxide - 80 -
  40,000 tons of
  Carbon Dioxide - 90 -
  50,000 tons of
  Carbon Dioxide -
  Illiquid sub￾asset classes

20,000 tons of
Carbon Dioxide - -
25,000 tons of
Carbon Dioxide - - -
40,000 tons of
Carbon Dioxide - - -
50,000 tons of
Carbon Dioxide
EMISSION ALLOWANCE DERIVATIVES
For European Union Allowances (EUA)
Liquid sub￾asset classes
60 40,000 tons of
Carbon Dioxide - 70 50,000 tons of
Carbon Dioxide - 80 -
90,000 tons of
Carbon Dioxide - 90 -
100,000 tons of
Carbon Dioxide -
Illiquid sub￾asset classes

• -
  40,000 tons of
  Carbon Dioxide - -
  50,000 tons of
  Carbon Dioxide - - -
  90,000 tons of
  Carbon Dioxide - - -
  100,000 tons of
  Carbon Dioxide

Trade - percentile Threshold floor Threshold value Trade - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value EMISSION ALLOWANCE DERIVATIVES For emission allowances other than EUA Liquid sub￾asset classes 60 20,000 tons of Carbon Dioxide - 70 25,000 tons of Carbon Dioxide - 80 - 40,000 tons of Carbon Dioxide - 90 - 50,000 tons of Carbon Dioxide - Illiquid sub￾asset classes - - 20,000 tons of Carbon Dioxide - - 25,000 tons of Carbon Dioxide - - - 40,000 tons of Carbon Dioxide - - - 50,000 tons of Carbon Dioxide C10 DERIVATIVES Liquid sub￾asset classes 60 EUR 25,000 - 70 EUR 50,000 - 80 60 EUR 75,000 - 90 70 EUR 100,000 - Illiquid sub￾asset classes

• • EUR 25,000 - - EUR 50,000 - - - EUR 75,000 - - - EUR 100,000
    INTEREST RATE DERIVATIVES
    Bond futures/forwards, bond options liquid sub￾classes 60 EUR 4,000,000 - 70 EUR 5,000,000 - 80 60 EUR 20,000,000 - 90 70 EUR 25,000,000 - Bond futures/forwards, bond options illiquid sub￾classes
• • EUR 4,000,000 - - EUR 5,000,000 - - - EUR 20,000,000 - - - EUR 25,000,000

Trade - percentile Threshold floor Threshold value Trade - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value INTEREST RATE DERIVATIVES IR futures and FRA, IR options liquid sub￾classes 60 EUR 5,000,000 - 70 EUR 10,000,000 - 80 60 EUR 20,000,000 - 90 70 EUR 25,000,000 - IR futures and FRA, IR options illiquid sub￾classes

• • EUR 5,000,000 - - EUR 10,000,000 - - - EUR 20,000,000 - - - EUR 25,000,000
    Liquid sub￾classes for all other IR sub￾asset classes 60 EUR 4,000,000 - 70 EUR 5,000,000 - 80 60 EUR 9,000,000 - 90 70 EUR 10,000,000 - Illiquid sub￾classes for all other IR sub￾asset classes
• • EUR 4,000,000 - - EUR 5,000,000 - - - EUR 9,000,000 - - - EUR 10,000,000
    EQUITY DERIVATIVES
    A different methotology applies to liquid sub-classes. For each sub-asset class ADNA bands are defined and for each band a threshold value is specified. Refer to the relevant section for further details. Illiquid sub￾classes of swaps and portfolio swaps
• • EUR 20,000 - - EUR 25,000 - - - EUR 100,000 - - - EUR 150,000

Trade - percentile Threshold floor Threshold value Trade - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value Trade - percentile Volume - percentile Threshold floor Threshold value COMMODITY DERIVATIVES Liquid sub￾asset classes 60 EUR 250,000 - 70 EUR 500,000 - 80 60 EUR 750,000 - 90 70 EUR 1,000,000 - Illiquid sub￾asset classes

• • EUR 250,000 - - EUR 500,000 - - - EUR 750,000 - - - EUR 1,000,000
    FX DERIVATIVES
• • EUR 4,000,000 - - EUR 5,000,000 - - - EUR 20,000,000 - - - EUR 25,000,000
    CREDIT DERIVATIVES
    Liquid sub￾asset classes
    60 EUR 2,500,000 - 70 EUR 5,000,000 - 80 60 EUR 7,500,000 - 90 70 EUR 10,000,000 - Illiquid sub￾asset classes
• • EUR 2,500,000 - - EUR 5,000,000 - - - EUR 7,500,000 - - - EUR 10,000,000
    CFDs
    Liquid sub￾asset classes
    60 EUR 50,000 - 70 EUR 60,000 - 80 60 EUR 90,000 - 90 70 EUR 100,000 - Illiquid sub￾asset classes
• • EUR 50,000 - - EUR 60,000 - - - EUR 90,000 - - - EUR 100,000

Dynamic calculation
49. Respondents supported the dynamic methodology ESMA suggested for calculating the
SSTI and the LIS thresholds stressing that this would allow to capture future changes in the market structure. ESMA therefore proposes in the draft RTS to determine thresholds periodically as of the application of MiFID II. More detailed feedback on the methodology for determining the thresholds see paragraphs 40 to 48, details on the implementation of the new regime is provided in section 2.2.3. Deferral period
50. The large majority of stakeholders across all asset classes were against the introduction
of a deferral period of 48h and recommended instead to reference the deferral period to business days, e.g.T+2 business days, as this would simplify the operational burden of the requirement and ensure that transactions that occur close to the end of trading before a weekend or bank holiday are treated in the same manner as transactions under ordinary conditions.
51. Views on the appropriate length of the deferral period were split. Responses from the
sell-side and the buy-side were in favour of extending the deferral period, in particular for trades in illiquid instruments that are large in scale, to up to 12 weeks, in order to avoid in effect unmasking the identity of the firm taking on risk in thin markets. Exchanges, on the other hand, were generally in favour of shortening deferral periods to end of day or to a maximum of 24h and stressed that currently most on-venue trades are published immediately and that block sizes on exchanges are significantly higher than the LIS thresholds proposed by ESMA.
52. In light of the feedback, ESMA has revisited its proposal and amended the deferral
period to two trading days after the transaction has taken place (‘T+2’) as recommended in the feedback to the CP. However, given the split of views at opposite ends of the spectrum, and bearing in mind the possibility of supplementary deferrals granted at the discretion of CAs, as well as the need to avoid excessive complexity, ESMA has decided not to further adjust deferrals for different types of transactions but to set a T+2 deferral period across the board.
53. Some respondents raised concerns that the current drafting ‘of no longer than 48 hours’
would be ambiguous and could be understood as allowing CAs to grant shorter deferral periods (e.g. 24h), thereby leading to a patchwork of applicable deferral periods across the EU. ESMA would like to clarify that CAs may only grant a deferral period of 2 business days following the transaction with no discretion to shorten the deferral period.
54. The asset class specific elements are presented on a per asset class basis in the
following sections.

II. Asset class specific analysis
A. Bonds
Liquidity
Summary of key proposals in the CP
55. For the purpose of determining liquid classes of bonds and SFPs, ESMA collected
information from transaction reporting from 25 CAs for the period 1 June 2013 - 31 May
2014. ESMA included in the analysis 54,395 bonds, out of which 49% did not trade over
the period.
56. Taking into account the responses from the DP, ESMA calibrated the COFIA aiming at
optimising the number of bonds and SFPs correctly classified when using the following liquidity thresholds (hereinafter liquidity criteria):
i. 400 trades a year;
ii. 200 trading days a year; and
iii. an average notional amount traded of €100,000 per day.
57. These liquidity criteria were tested at ISIN level to build the basis for grouping
instruments into liquidity classes.
58. Different explanatory variables were examined to analyse the predicting power on
liquidity: issuance size, time to maturity, currency, instrument type and issuer type (financial vs. non-financial). Some of them had a relatively low predicting power on liquidity so the level of granularity was decided on the basis of the simplest classes with better predicting power.
59. The empirical exercise demonstrated that there was a clear relationship between liquidity
and issuance size (the bigger the issuance size, the more liquid is the bond). Based on that, ESMA designed the classes optimising the issuance size for a given combination of instrument type and issuer type, under the objective of classifying correctly, according to the liquidity criteria, the majority of instruments belonging to a liquid or illiquid class.
60. In the CP ESMA proposed the segmentation below:
Table 12: Bonds and SFPs

Analysis following feedback from stakeholders on CP proposals
61. Respondents to the CP expressed different views about the liquidity criteria. Some of
them supported ESMA’s proposal while others considered that the thresholds were too low and should be increased, hence being more demanding to be considered liquid.
62. Concerning the general approach to use COFIA, some respondents, mainly from the
sell-side, asked ESMA to reconsider IBIA.
63. However other respondents supported the use of the COFIA and made some comments
to increase the accuracy of the model.
64. Most of the respondents agreed that issue size is a good indicator to determine liquidity,
while stressing that it is not the only driver. They proposed to consider other variables in order to find the appropriate granularity for COFIA, such as spreads, number of market participants, rating, placement of the issue, market structure, etc.
65. Respondents agreed that the proposed classes needed recalibration, specially
increasing issue size thresholds. While some respondents preferred more granularity including adding further variables as mentioned above, others preferred fewer classes but adjusted issuance sizes. Those who supported the simplification of the classes did not see the need to divide corporate bonds by issuer type (financial vs. non-financial) and by seniority (senior vs. subordinated).
66. Most stakeholders claimed that most fixed income products were mainly liquid after
issuance and rather illiquid afterwards.
67. In the CP ESMA also consulted on the definitions of the classes of bonds to be included
in the draft RTS. ESMA received some feedback that the category of corporate bonds did not include the “Societas europaea” and that it was not clear to which bond type the category ‘other non-European public bond belonged’. ESMA’s proposal for draft final RTS BOND TYPE DEBT SENIORITY ISSUER SUB-TYPE Liquidity Test: 200 days traded, 400 trades and €100,000 nominal amount a year European Sovereign Bond greater or equal to 2,000,000,000 Liquid Non-European Sovereign Bond greater or equal to 2,000,000,000 Liquid Other European Public Bond greater or equal to 1,000,000,000 Liquid Convertible Bond Financial greater or equal to 750,000,000 Liquid Covered Bond greater or equal to 750,000,000 Liquid Corporate Bond Senior Financial greater or equal to 500,000,000 Liquid Corporate Bond Senior Non-financial greater or equal to 750,000,000 Liquid Corporate Bond Subordinated Financial greater or equal to 500,000,000 Liquid Corporate Bond Subordinated Non-financial greater or equal to 500,000,000 Liquid Convertible Bond Non-financial Illiquid SFPs Illiquid Others Illiquid ISSUANCE SIZE*

68. Having carefully reconsidered the pros and cons of IBIA versus COFIA, including the
    arguments put forth by different groups of stakeholders, ESMA proposes to use IBIA for the liquidity assessment of bonds for a number of reasons:
    i. in consideration of the high number of false positives, i.e. bonds classified as liquid
    on the basis of the issuance size but not according to the trading activity presented by COFIA, ESMA attempted to refine the system in order to improve its accuracy. In particular, in comparison with COFIA proposed in the December CP, the number of classes was reduced by not taking into consideration debt seniority (senior vs subordinated) and issuer sub-type (financial vs non-financial). Furthermore, time from issuance was included as parameter (2 weeks for corporate bonds and 3 months for all the other bond types). Last but not least, the issuance sizes were reduced for the period close to issuance). However, the accuracy of the model showed only marginal improvements. In particular, the percentage of false positives decreased from 56.51% to 50.76% amongst all instruments at the expense of a slight increase of false negatives from 1.77% to 2.58% (the low percentage of false negatives is not surprising as the large majority of instruments is illiquid and will always be correctly classified). For more details on the accuracy of IBIA please refer to the cost-benefit analysis section;
    ii. IBIA has no false positives/false negatives at the time of calculation, but can be
    inaccurate between calculation dates. When looking back, at the end of each quarter, some bonds that were classified as illiquid in the previous quarter may have actually traded above the liquidity thresholds and vice-versa. This relates to the fact that the past is not always a good indicator of the future, which is also true in the case of COFIA where any bond correctly classified as liquid also not necessarily remains liquid in the future. However, in the case of IBIA these misclassifications due to a change in the liquidity status of the bond (from liquid to illiquid or vice￾versa) are corrected from one quarter to the other by means of the periodic liquidity reassessment. For more details on the accuracy of IBIA please refer to the cost￾benefit analysis section;
    iii. considering that the performance of the calculations for LIS and SSTI requires the
    collection of trading activity data and that such data will be collected on a daily basis, the incremental costs of implementing IBIA are marginal in comparison to a more correct classification of bonds.
69. In conclusion, IBIA is considered to strike the right balance among flexibility, stability and
    operational manageability.
70. Consequently, it is proposed that the liquidity of each bond is re-assessed at the end of
    every quarter on the basis of the following parameters and taking as observation period the last quarter;
    i. average daily nominal amount, which should be at least EUR 100,000;

ii. average daily number of trades, which should be at least 2;
iii. minimum number of days traded which should correspond to at least 80% of the
trading sessions available.
71. Furthremore, newly issued instruments are deemed to be liquid according to their
issuance size. A bond is considered to be liquid until application of the first assessment based on the trading activity recorded over a quarter. In particular, for bonds issued during the first two months of a quarter the classification of liquidity based on the issuance size will last until the publication of the results of the calculations at the end of that calendar quarter. On the other hand, for bonds issued during the last month of a quarter the classification of liquidity based on the issuance size will last until the publication of the results of the calculations at the end of the next calendar quarter. The applicable issuance size for each bond type is the one provided below:
Pre-trade and post-trade LIS and SSTI
Analysis following feedback from stakeholders on CP proposals and proposal for draft final RTS
72. Regarding bonds, market participants argued against the use of the percentage of
volume as a measure to determine LIS thresholds. They were concerned that the threshold would dramatically increase when the 70% methodology kicks in. According to some respondents’ calculations if the LIS were set at 70% of nominal value traded, 99% of the trades will be below the threshold.
73. ESMA understands that the proposed methodology could be biased by a few extremely
huge transactions that could represent a significant percentage of the total volume although representing just a small proportion of transactions, and hence recognizes the risk of adding the percentage of volume as a measure for setting the thresholds.
74. There was also criticism to the removal of trades below €100.000 from the calculation of
the thresholds. However, in contrast to the volume measure, the calculation of LIS or Bond Type Time from issuance < 3 months smaller than € 1,000,000,000 >= 3 months smaller than € 2,000,000,000 < 3 months smaller than € 500,000,000 >= 3 months smaller than € 1,000,000,000 < 3 months smaller than € 500,000,000 >= 3 months smaller than € 1,250,000,000 < 3 months smaller than € 500,000,000 >= 3 months smaller than € 1,250,000,000 < 2 weeks smaller than € 500,000,000 >= 2 weeks smaller than € 1,000,000,000 Convertible Bond Covered Bond Corporate Bond Issuance size Sovereign Bond Other Public Bond

SSTI based on number of trades can be biased by a huge amount of retail transactions in small sizes, but representing a small proportion of the market volume. According to Directive 2010/73/EU the distinction between retail and professional investors in terms of investor capacity is set at a denomination per unit of at least €100.000.
75. ESMA considers that a minimum level of transparency needs to be guaranteed, in
particular for retail investors, and that it is therefore necessary to exclude those transactions from the calculation of LIS and SSTI thresholds.
76. The majority of respondents were against the use of the proposed floors saying that the
value of recalculation of the thresholds is questionable since it does not permit a lowering of the thresholds if the evolution of the market justifies it.
77. ESMA recognises the difficulty in setting appropriate thresholds that will not damage the
dynamic determination of thresholds and acknowledges that excluding trades below €100.000 from the calculation is already establishing an implicit floor protecting the minimum level of transparency required for retail investors. For that reason ESMA has revised its proposal so that no additional floors are considered for liquid bonds.
78. Some respondents pointed out that covered bonds in the form of mortgage bonds are
very important for the functioning of the housing markets. In these markets, market makers put their own capital at risk acting as intermediaries between institutional investors who only want to trade in big blocks and the homeowners who need to finance their houses and trade in retail sizes. It would imply an undue risk for these market makers, if they were forced to quote at sizes above the average price for houses and apartments. This could motivate them to leave this market altogether – with serious detrimental consequences for the ordinary mortgage borrowers.
79. Noticing that mortgage bonds are the most liquid type of covered bonds and that they
serve a real economic purpose (financing a home for ordinary individuals), ESMA agrees that the function of this market should be protected by allowing a pre-trade transparency waiver for the mentioned liquidity providers above a transaction size which is reflective of the average price of a home and set to a lower trade percentile (40%) with respect to the other bond types.
80. Last but not least, the classes of European and non-European bonds for sovereign and
public bonds were merged to ensure consistent treatment across sovereign and public bonds respectively. Exchange traded commodities (ETCs) and Exchanges traded notes (ETNs)
81. In the December CP ESMA categorised ETCs and ETNs as securitised derivatives
which were as a whole considered to be a liquid class.
82. However, a number of respondents raised concerns about the treatment of ETCs and
ETNs and suggested to apply to those instruments the same transparency regime as for

ETFs arguing that those instruments change largely the same characteristics and that a different transparency regime might lead to market distortions. ESMA agrees that ideally ETCs, ETNs and ETFs should be covered under the same transparency regime given their similarities.
83. After further analysis ESMA concluded that the definition for ETFs in MiFID II applies
only to fund structures and is therefore not applicable for ETCs and ETNs. However, in order to ensure a harmonised treatment of instruments sharing the same characteristics and taking into account the features of fixed income products of ETCs and ETNs, ESMA proposes to categorise those instruments as types of bonds and to apply a similar transparency regime for ETCs and ETNs as for ETFs.
84. Liquidity will be assessed on an instrument level as for ETFs and on the basis of the
thresholds for 2 liquidity criteria, namely the ADT and average number of trades.
85. Again, similarly to ETFs, fixed values are set as pre-trade and post-trade LIS and SSTI
thresholds. Furthermore, the SSTI threshold is set equal to the LIS as to have a unique threshold, again in line with ETFs. Last but not least, in line with the general approach, the pre-trade thresholds are set at lower values than post-trade thresholds.

B. Structured Finance Products
Analysis following feedback from stakeholders
86. For the CP the liquidity of SFPs was analysed on the basis of the same liquidity criteria
as for bonds, i.e. at least 400 trades a year, traded on at least 200 days a year and a minimum nominal amount traded per day of € 100,000. Since the analysis revealed that on this basis 99.69% of SFPs would have been illiquid, ESMA proposed to classify the whole asset class as illiquid.
87. While many respondents agreed to this proposal, some responses pointed to the need
of better distinguishing between different types of SFPs, since some instruments (e.g. certain Residential Mortgage Bonds) may be liquid. A number of respondents also pointed to the possibility that, in light with current policies to revive securitisation markets, SFPs might become sufficiently liquid in future.
88. ESMA agrees that the market for SFPs may become more liquid if attempts to revive
securitisation markets are successful. Furthermore, ESMA considers that going forward the capital markets union (CMU) might also improve the liquidity of SFPs and that it might be contradictory for the success of both initiatives to introduce a static liquidity approach for SFPs, which would classify those instruments as illiquid irrespective of possible developments in the near future. Proposal
89. In order to strike the right balance between the current situation where SFPs are illiquid
and providing for sufficient flexibility to accommodate future market developments, ESMA revised its proposal and suggests a two-step liquidity assessment.
90. In a first test, the liquidity of the asset class as a whole would be assessed using the
following quantitative liquidity criteria on a cumulative basis:
i. Average daily notional amount of at least € 300,000,000; and
ii. Average daily number of trades of at least 500.
91. If these criteria are not met, all SFPs will be considered as not having a liquid market.
However, should the SFP class as a whole meet these criteria, a second liquidity test on an instrument basis would be undertaken. Every single SFP would be assessed against the following quantitative liquidity criteria on a cumulative basis:
i. Average daily notional amount of at least € 100,000;
ii. Average daily number of trades of at least 2; and
iii. Traded on at least 80% of trading days over the period considered.

92. Depending on the results of the tests, ESMA proposes the following methodology for
    determining the SSTI and LIS thresholds (pre-trade and post-trade):
    i. Scenario#1: the first test is not passed all SFPs are considered not having a liquid
    market, then fixed threshold values for all SFPs apply;
    ii. Scenario#2: the first test is passed but the second is not, those SFPs are
    considered not having a liquid market, then the same fixed threshold values provided in scenario#1 apply to those SFPs;
    iii. Scenario#3: the first and the second tests are both passed, those SFPs are
    considered having a liquid market, then the thresholds are determined as the greater of the trade size related to the trade percentiles and the threshold floors
    Table 13: SSTI and LIS thresholds for SFPs having a liquid market – Scenario #3
    Table 14: SSTI and LIS thresholds for SFPs not having a liquid market– Scenario
    #1 and Scenario #2
    Trade percentile
    Floor threshold
    Trade percentile
    Floor threshold
    Trade percentile
    Floor threshold
    Trade percentile
    Floor threshold
    60 EUR
    100,000 70 EUR
    250,000 80 EUR
    500,000 90 EUR 1 million
    SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade EUR 100,000 EUR 250,000 EUR 500,000 EUR 1 million

C. Securitised Derivatives
Summary of key proposals in the CP
93. In the CP ESMA analysed a dataset collected from 9 trading venues for the period of 1
June 2013 – 31 May 2014 covering 3,427,815 securitised derivatives of a wide range of product types. ESMA proposed that all securitised derivatives should be qualified as liquid. The majority of instruments were investment certificates, plain vanilla covered warrants and leverage certificates. The remaining 0.03% instruments included in the data set included exotic covered warrants, exchange-traded-commodities, exchange￾traded notes, negotiable rights, structured medium-term-notes and other warrants.
94. Roughly 94% of the whole sample traded very little or not at all during the one year
period covered. Furthermore, for approximately 98% of the whole sample at least one market maker was available. However, those instruments admitted to trading without the presence of a market maker constituted 71% of trades and 61% of volume traded of the whole sample and on average they traded more than twice a day (2.17 times) with an average volume of €6,843 traded per day.
95. Since either a market marker was available for the instruments covered or they met the
liquidity thresholds. ESMA suggested in the CP that all securities derivatives should be liquid.
96. For the LIS and SSTI thresholds ESMA proposed to use the same threshold values for
pre-trade and post-trade transparency purposes and suggested to set the SSTI at 50% of the LIS. Analysis following feedback from stakeholders and proposal
97. The responses were split with regards to the liquidity assessment. On one side
respondents agreed with the proposal to qualify all securitised derivatives as liquid, highlighting the retail focused nature of the market for securitised derivatives. On the other side respondents were of the opinion that the presence of a market maker is not a sufficient proxy for liquidity and proposed a liquidity assessment that is based on a more granular approach.
98. The majority of respondents supported the proposed definition of securitised derivatives.
Some respondents proposed a clearer delineation between securitised derivatives on one hand and bonds, structured finance products and derivatives on the other hand. Some respondents argued that there is a risk that different trading venues and investment firms would treat structured debt securities with an embedded derivative differently for transparency purposes
99. ESMA therefore maintains its approach that all securitised derivatives should be
qualified as liquid.

100. ESMA revised the thresholds for pre-trade and post-trade SSTI. In line with the
     overall changed approach, the new SSTI and LIS thresholds for pre-trade purposes are lower than the ones for post-trade purposes. Given the large amounts of retail market participants in this market, ESMA proposes to keep low and fixed thresholds, ranging from € 50,000 (pre-trade SSTI) to € 100,000 (post-trade LIS).
     Table 15: SSTI and LIS thresholds for securitised derivatives
101. Finally, ETCs and ETNs are now categorised as bonds, for further details on ESMA
     proposal, see section A.
     SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade EUR 50,000 EUR 60,000 EUR 90,000 EUR 100,000

D. Interest Rate Derivatives
Summary of key proposals in December CP
102. In determining the thresholds for interest rate derivatives, ESMA undertook two data
collection exercises, one from trading venues and one from TRs. The determination of liquidity distinguished between exchange traded derivatives (ETDs) and OTC derivatives.
103. For sub-asset classes of ETDs ESMA set the liquidity thresholds at an average trade
per day of 1 or more and an average notional amount per day of EUR 5 million or more.
104. To determine whether an OTC interest rate derivative sub-class was liquid or illiquid,
ESMA applied a two-step methodology. Firstly, ESMA applied quantitative liquidity thresholds at the sub-asset class level and secondly, for those sub-asset classes considered liquid based on these liquidity thresholds, ESMA further segmented each sub-asset class into sub-classes using a set of qualitative criteria, namely tenor, underlying and currency/ currency pair. Each sub-class was then re-assessed on the basis of quantitative thresholds, i.e. the average number of trades per day and notional amount per day, specified on a sub-asset class level.
105. For those sub-classes of financial instruments which were deemed to have a liquid
market, ESMA asked stakeholders whether it should include sub-classes where the tenor is over the period specified for the related sub-class or include only sub-classes whose tenor is not a broken date (whether the tenor is a broken date was calculated as the difference between the maturity date and execution date with a tolerance of +/- 5 days). Analysis following feedback from stakeholders
106. Overall, respondents did not agree with the thresholds ESMA set for determining
whether a sub-class was liquid or not. Respondents considered the liquidity thresholds as too low and required for some sub-asset classes, particularly for swaptions and inflation rate single currency swaps, more granularity. Responses also queried the accuracy of the data, e.g. noting that Bunds less than 3 months to maturity were not identified as liquid and were considered to have a much lower volume than Gilts although Bunds are the EU’s most liquid bond futures.
107. Concerns were raised that ESMA’s taxonomy did not clearly distinguish between
ETDs and OTC traded interest rate derivatives and that sub-classes were not consistently broken down to an equivalent level of granularity. There was also widespread criticism of ESMA’s proposal not to reassess the sub-classes periodically.
108. A number of respondents provided detail regarding the liquidity status they would
expect to see for specific sub-asset classes. For example, stakeholders expected liquidity to be concentrated in tenors less than three months for bond futures. A couple of

respondents noted that interest rate futures are similar to FRAs but that both sub-asset classes have been calibrated at a different level of granularity. Some stakeholders argued that for swaptions, the categories should be set at a more granular level using the tenor of the option and of the underlying as otherwise the swaption could be liquid although the underlying could be illiquid. Other comments related to the fact that some classes deemed liquid by ESMA, such as inflation single currency swaps and float to float multi-currency swaps should be illiquid
109. With respect to the two options for tenors, there was a slight preference for excluding
broken dates and in particular, respondents noted option 2 was important for the trading obligation and would align the EU trading obligation to the approach in the US as the made available to trade (MAT) swaps are limited to benchmark tenors. Proposal in final draft RTS
110. The liquid and illiquid sub classes for interest rate derivatives are constructed in line
with the general approach described in the introductory section of this chapter. In response to the feedback received, IR futures and FRAs now form one sub-asset class. The sub-asset classes (e.g. bond futures, swaptions etc.) are further segmented into more granular sub-classes by reference to the criteria specified in Annex III of the final draft RTS, for example time to maturity. The criteria vary slightly from sub-asset class to sub-asset class. For example, sub-classes for bond futures are determined based on specified time to maturity buckets, the issuer of the underlying and the term of the underlying deliverable bond, whereas a fixed to float multi-currency swap sub-class is determined based on time to maturity bucket and the notional currency pair. An annual liquidity assessment will be undertaken for each sub-class.
111. With regard to the liquidity thresholds, the minimum average daily notional amount
ranges between EUR 5 million and EUR 500 million and the minimum average number of trades per day is 10 for all sub-classes. The below table shows the quantitative liquidity thresholds for liquidity.
Table 16: Quantitative liquidity thresholds interest rate derivatives sub-asset
classes
Sub-asset class Average daily notional Average number of trades Bond Futures/Forwards EUR 5 million 10 Bond Options EUR 5 million 10 IR Futures and FRAs IR Options EUR 500 million 10 Swaptions

Fixed to float swaps and
Futures /Forwards on fixed to float swaps (multi and single currency) EUR 50 million 10 Float to float swaps and Futures /Forwards on float to float swaps (multi and single currency) Fixed to fixed swaps and Futures /Forwards on fixed to fixed swaps (multi and single currency) OIS swaps and Futures /Forwards on OIS swaps (multi and single currency) Inflation swaps and Futures /Forwards on inflation swaps (multi and single currency)
112. Other interest rate derivatives not belonging to one of the defined sub-asset classes
are considered to be illiquid. An annual liquidity assessment will be undertaken for each sub-class.
113. The SSTI and LIS thresholds for interest rate derivatives are calibrated in line with the
general approach described in the introductory section of this chapter. The pre-trade transparency thresholds are set at a lower level than the post-trade transparency thresholds. For liquid sub-classes, the pre-trade transparency thresholds are set as the greater of a pre-determined floor and a trade percentile, and the post-trade transparency thresholds are set as the greater of a pre-determined floor, a trade percentile and a volume percentile if the volume percentile for the LIS threshold is not higher than the 97.5th percentile, in that case the trade percentile should prevail for both the LIS and SSTI.
114. For illiquid sub-classes, the thresholds are the same as the pre-determined threshold
floors used for the liquid calculations. The thresholds floors are calibrated across the different sub-asset classes as to take into account the current block trade sizes applied on venues. The thresholds floors are summarised in the two tables below.
Table 17: SSTI and LIS thresholds for sub-classes having a liquid market

Table 18: SSTI and LIS thresholds for sub-classes not having a liquid market
Sub-asset class SSTI pre trade LIS pre trade SSTI post trade LIS post trade Bond Futures/Forwards EUR 4 million EUR 5 million EUR 20 million EUR 25 million Bond Options IR Futures and FRAs EUR 5 million EUR 10 million EUR 20 million EUR 25 million IR Options Swaptions Fixed to float swaps EUR 4 million EUR 5 million EUR 9 million EUR 10 million and Futures /Forwards on fixed to float swaps (multi and single Sub-asset class Trade percentile Floor threshold Trade percentile Floor threshold Trade percentile Volume percentile Floor threshold Trade percentile Volume percentile Floor threshold Bond Futures/Forwards Bond Options IR Futures and FRAs IR Options Swaptions Fixed to float swaps and Futures /Forwards on fixed to float swaps (multi and single currency) Float to float swaps and Futures /Forwards on float to float swaps (multi and single currency) Fixed to fixed swaps and Futures /Forwards on fixed to fixed swaps (multi and single currency) OIS swaps and Futures /Forwards on OIS swaps (multi and single currency) Inflation swaps and Futures /Forwards on inflation swaps (multi and single currency) EUR 9 million EUR 10 million SSTI pre trade LIS pre trade SSTI post trade LIS post trade EUR 20 million 90 70 EUR 25 million EUR 5 million EUR 10 million EUR 20 million EUR 25 million EUR 4 million EUR 5 million EUR 4 million EUR 5 million 80 60

currency)
Float to float swaps and
Futures /Forwards on float to float swaps
(multi and single currency)
Fixed to fixed swaps and Futures /Forwards on fixed to fixed swaps (multi and single currency) OIS swaps and Futures /Forwards on OIS swaps (multi and single currency) Inflation swaps and Futures /Forwards on inflation swaps (multi and single currency)

E. Foreign Exchange (FX) Derivatives
Summary of key proposals in December CP
115. In determining the liquidity thresholds for FX derivatives, ESMA collected data from
TRs. ESMA divided FX derivatives into six sub-asset classes and applied a two-step methodology. Firstly, ESMA applied quantitative liquidity thresholds at the sub-asset class level and secondly, for sub-asset classes considered liquid based on these liquidity thresholds, ESMA further segmented each sub-asset class into sub-classes using a set of qualitative criteria, namely tenor and underlying currency pair. After segmentation the liquidity of each sub-class was re-assessed on the basis of quantitative thresholds, i.e. the average number of trades per day and notional amount per day, specified on a sub￾asset class level. Analysis following feedback from stakeholders
116. Respondents raised significant concerns over the accuracy of the data used for the
analysis in the paper and consequently disagreed with ESMA’s proposals on what is a liquid market. The majority did, however, agree with the qualitative criteria ESMA proposed to further segment the sub-asset classes but suggested distinguishing swaps and options between deliverable and non-deliverable as in the case of forwards. Proposal in final draft RTS
117. Considering that the data available did not allow for a comprehensive and undistorted
analysis of the entire market of foreign exchange derivatives Annex III of the final draft RTS includes a proposal with regard to only the qualitative liquidity criteria to be considered for the segmentation of the sub-asset classes but not the thresholds of the quantitative liquidity criteria necessary to perform the liquidity assessment and determine the sub-classes having a liquid market. As a result, ESMA proposes to deem the whole class of foreign exchange derivatives as illiquid until better data is available which would then trigger a revision of the RTS.
118. The qualitative criteria proposed are the same for each FX sub-asset class and are
(1) underlying currency pair and (2) time to maturity bucket, which are further subdivided into 3 maturity buckets up to one year and yearly buckets from one year onwards.
119. Since the whole class of foreign exchange derivatives is deemed illiquid, in line with
the general approach described in section “Feedback to the CP and revised proposal applicable across all asset classes” above, the pre-trade and post-trade SSTI and LIS thresholds are set as fixed values, with the pre-trade thresholds set at a lower level than the post-trade ones, as provided in the table below.
Table 19: SSTI and LIS thresholds for all sub-classes

110 SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade EUR 4 million EUR 5 million EUR 20 million EUR 25 million

F. Credit Derivatives
Summary of key proposals in December CP
120. ESMA undertook an analysis of credit derivatives based on trade repositories (TRs)
data over the period 1 March 2014 – 31 May 2014.
121. Five different sub-asset classes were identified, two of which resulted to be illiquid as
a whole, namely bespoke basket CDS and options on single name CDS. The remaining three sub-asset classes, namely CDS indices, single name CDS and options on a CDS index were further segmented into sub-classes and a certain number of those resulted to be liquid because they met the liquidity thresholds for the average daily notional amount and the average daily number of trades. In the table 20 below a summary of the liquidity criteria used to further segment the sub-asset classes and the liquidity thresholds applied.
Table 20: Summary of liquidity criteria and thresholds
122. Furthermore, as far as single name CDS are concerned ESMA presented 2 options:
i. In Option A ESMA described that the classes of single name CDS included in Annex
III, Section 7 of draft RTS 9 (as published in CP in February2015) would have been deemed to be liquid. ESMA emphasised itself that this approach suffered from a lack of granularity as it considered single name CDS sub-classes liquid regardless of the specific underlying due to a lack of granularity of TR data.
ii. As Option B, ESMA proposed that a single name CDS would have been considered
to belong to a ‘single name CDS liquid class’ only if besides being characterised by the combination of underlying issuer type, tenor, currency in which the notional amount of the contract is denominated as specified in each row of Table 62 in
Annex III, Section 7 of draft RTS 9 (as published in CP in February 2015), the
reference entity/obligation was included in a liquid CDS index as provided in Table 60 in Annex III, Section 7 of draft RTS 9 (as published in CP in February 2015). As a result, only those corporates and sovereign entities which are included in a liquid CDS index were deemed to be liquid. CDS Criterion to define sub￾classes #1 Criterion to define sub￾classes #2 Criterion to define sub￾classes #3 Criterion to define sub￾classes #4 Total num of sub￾classes Num of liquid sub￾classes Trades per day threshold Notional per day (m EUR) threshold % of trades captured % of notional amount captured Index Tenor Notional Currency Undelying Index Name On/Off-the-run status 53 25 1.0 10 98% 98% Single Name Tenor Notional Currency Underlying Issuer type 42 18 2.0 100 97% 98% CDS Options Criterion to define sub￾classes #1 Criterion to define sub￾classes #2 Criterion to define sub￾classes #3 Criterion to define sub￾classes #4 Total num of sub￾classes Num of liquid sub￾classes Trades per day threshold Notional per day (m EUR) threshold % of trades captured % of notional amount captured Index Tenor Notional Currency Undelying Index Name On/Off-the-run status 28 10 2.0 100 94% 98%

Analysis following feedback from stakeholders
123. In respect of the general methodology applied, respondents criticised that the
observation period of the data sample utilised by ESMA is too short and stems from a period just after the time when EMIR trade reporting was applied in practice.
124. Respondents also considered that the number and type of market participants and
the size of spreads should have also been taken into account as criteria for applying the liquidity test but at the same time appreciated the practical difficulties in doing this. As a consequence, they consider that ESMA should compensate by applying higher thresholds for number and size of trades.
125. Other overarching comments from respondents were that ESMA should define the
tenor in line with the market convention and that the standard market day count convention should be used. Many respondents asked ESMA to implement regular reviews of the liquidity thresholds set in order to take advantage of having better data available in the future.
126. ESMA appreciates the concerns expressed by respondents that ideally calculations
should be performed on the basis of a larger and more mature dataset. ESMA did adjust its parameters for assessing liquidity to address some of the identified shortcomings. In particular, applying the methodology-based approach also to credit derivatives will ensure that liquidity assessments are carried out on a periodic basis and in line with market developments.
127. ESMA also points out again that for legal reasons it cannot build a review clause
directly into the Level 2 technical standard. However, ESMA will monitor the application of this standard and is ready to review the parameters set for credit derivatives and to propose an amended version in the future should this prove necessary. Single name CDS
128. Respondents by a large majority agreed with ESMA’s assessment of option A and
considered this option as not granular enough and in consequence lacking precision.
129. A majority of respondents also discarded Option B as not granular enough as it would
still create too many false positives because liquid indices would also have many constituents which are illiquid if traded in their own right. A number of market participants agreed to this Option based on specific adjustments to achieve a greater degree of granularity. Suggestions to that end included, integrating single name corporate CDSs only if they are part of a liquid investment grade index and using only the most recent series of index CDSs as a reference point.
130. The main proposal to improve Option B was to assess the liquidity of single name
CDS by also taking into consideration the underlying reference entity, in addition to the characteristics already applied by ESMA.

131. ESMA considers that this is indeed the solution for single name CDSs that would
     correctly classify single name CDSs as liquid and would address the difficulties of finding an adequate proxy (such as being a constituent of a liquid index). However, at this point in time ESMA does not possess a granular enough dataset to apply this approach.

132. Therefore, ESMA does undertake to add a new requirement to trade repository data
     identifying single name CDSs by the underlying reference entity (by country code for sovereigns and by LEI for corporates) as part of its work of amending the relevant EMIR Level 2 Regulation. ESMA expects this requirement to be in place by 2016.

133. Respondents to the consultation considered that ESMA did not take the irregular
     trading patterns of this market into account to a sufficient extent.

134. While some respondents considered that only the on-the-run five year single name
     CDS series should be qualified as liquid, others had specific proposals of how the liquidity thresholds should be set. For trades per day, respondents came back with concrete proposals ranging from five to fifteen trades a day. Notional amount traded should be set at €10 million per day if applied at the reference entity level in the view of a number of stakeholders.

135. ESMA took these proposals into account when adjusting its methodology as
     described below.
     CDS index

136. In general, respondents agreed with the criteria considered to define the sub-classes
     and also with the list of indices which qualified as liquid. However, they raised two concerns: (i) only indices with a 5-year tenor should be deemed liquid, and (ii) the definition of an on-the-run index should be aligned to that generally accepted by market practice.

137. Finally, respondents also stated that the thresholds used to assess liquidity were too
     low and suggested to raise them to a range of 9-15 trades per day and 500m notional per day.

138. ESMA took these proposals into account when adjusting its methodology as
     described below.
     CDS Index Options

139. Respondents to the consultation considered that the thresholds used to assess
     liquidity were too low and suggested to raise them to 15 trades per day and 500m notional per day. Others claimed that there is no liquidity for contracts other than 5 year on-the-run index as underlying.

140. Furthermore respondents also alleged that the level of granularity used was not
     sufficient and recommended to consider the following parameters: (i) the expiry of the option (ii) the distance of the option strike from the index price.

141. ESMA took these proposals into account when adjusting its methodology as
     described below.
     CDS bespoke basket and Single name CDS Options

142. Respondents to the consultation agreed with ESMA’s proposal which qualified this
     class as illiquid. However, in order to take into account market developments and to ensure consistency with the other credit derivatives sub-asset classes ESMA moves, for single name CDS options, to a methodology-based approach while keeping the CDS bespoke basket sub-asset class as illiquid. Proposal

143. ESMA proposes to use the COFIA approach as the basis for the determination of the
     liquidity of all the various non-equity financial instruments.

144. The liquid and illiquid sub-classes for the sub-asset classes of index CDS and single
     name CDS are constructed in line with the general approach described in section ” Feedback to the CP and revised proposal applicable across all asset classes” above. The sub-asset classes are further segmented into sub-classes by reference to criteria specified in Annex III of the final draft RTS which are as follows:
     i. for index CDS: the underlying index; the notional currency and the time to maturity
     bucket of the CDS. However, meeting the liquidity criteria is not sufficient to be considered liquid, an additional criteria has to be taken into account, i.e. ‘the on-the￾run status’ of the index. In order to take into account the drop in liquidity after the roll, i.e. the change in the composition of the index, the CDS index meeting the liquidity criteria will be considered liquid only when on-the-run and for the first 30 days of its off-the-run status;
     ii. for single name CDS: the underlying type, the underlying reference entity, the
     notional currency and the time to maturity bucket of the CDS;

145. The criteria and thresholds used to assess liquidity are summarised in the table below
     Table 21: SSTI and LIS thresholds for liquid sub-classes
     Sub asset class Average daily notional Average number of trades Index credit default swap (CDS) EUR 200 million 10

Single name credit default swap (CDS) EUR 10 million 10
146. In line with the feedback received, the average daily number of trades has been
increased. Furthermore, given the higher granularity of the single name CDS currently proposed the average daily notional has been decreased from EUR 100m to EUR 10m.
147. As far as the sub-asset class of bespoke basket CDS is concerned, considering the
custom-made nature of the underlying and the feedback received to the consultation, it would still be qualified as illiquid and belong to the sub-asset class of “other credit derivatives”.
148. In order not to apply different transparency regimes to the derivative contract and to
the related underlying, a methodology has been defined in order to assess liquidity for options on CDS indices and single name CDS. More specifically, since liquidity is concentrated in short term maturities, only options with a time to maturity up to 6 months whose underlying is a liquid CDS index or a liquid single name CDS will be considered liquid.
149. All other credit derivatives are considered to be illiquid.
150. The SSTI and LIS thresholds for credit derivatives are constructed in line with the
general approach described in section “Feedback to the CP and revised proposal applicable across all asset classes” above. The pre-trade transparency thresholds are set at a lower level than the post trade transparency thresholds. For liquid sub-classes, the pre-trade transparency thresholds are set as the greater of a pre-determined floor and a trade percentile, and the post-trade transparency thresholds are set as the greater of a pre-determined floor, a trade percentile and a volume percentile if the volume percentile for the LIS threshold is not higher than the 97.5th percentile, in that case the trade percentile should prevail for both the LIS and SSTI.
151. For illiquid sub-classes, the thresholds are the same as the threshold floors used for
the liquid sub-classes. The thresholds are the same for all credit derivative sub-classes, summarised in the two tables below:
Table 22: SSTI and LIS thresholds for sub-classes having a liquid market
Table 23: SSTI and LIS thresholds for sub-classes not having a liquid market
Trade percentile
Floor threshold
Trade percentile
Floor threshold
Trade percentile
Volume percentile
Floor threshold
Trade percentile
Volume percentile
Floor threshold
60 EUR 2.5 million 70 EUR 5 million 80 60 EUR 7.5 million 90 70 EUR 10 million SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade

116 SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade EUR 2.5 million EUR 5 million EUR 7.5 million EUR 10 million

G. Equity Derivatives
Analysis following feedback from stakeholders
152. ESMA proposed two options with regard to liquid classes for equity derivatives.
153. Option 1 relied on the results from the analysis presented in the CP from which it was
evident that contracts with a time to maturity up to 3 months represent the majority of the overall trading for a sub-class. Option 1 qualified the following contract types with a time to maturity up to 6 months (in order to take into account the rolling between the front maturity into the next) as liquid:
i. Index options (options on a specific index composed of shares);
ii. Stock options (options on a specific share);
iii. Options on a basket or portfolio of shares;
iv. Dividend index options (options on an index composed of the dividends of shares);
v. Options on other underlying values (i.e. volatility index or ETFs);
vi. Stock dividend options (options on the dividend from a specific share);
vii. Index futures (futures on a specific index composed of shares);
viii. Stock futures (futures on a specific share);
ix. Futures on a basket or portfolio of shares;
x. Dividend index futures (futures on an index composed of the dividends of shares);
xi. Futures on other underlying values (i.e. volatility index or ETFs);
xii. Stock dividend futures (futures on the dividend from a specific share).
154. ESMA also proposed Option 2 that extended MiFIR pre-trade and post-trade
transparency obligations to all equity derivatives instruments available for trading on a trading venue irrespectively of the time to maturity.
155. Respondents were evenly split between Option 1 and Option 2. However, the majority
of respondents, regardless whether they were in favour of Option 1 or Option 2, would like to see more granularity, either in the proposed list of contract types or as regards time to maturity.

156. Some respondents stated that Option 1 as well Option 2 should be modified in such a
     way that most classes are deemed illiquid and a few are considered liquid (namely futures on stock indices, options on stock indices and stock options).
157. A few respondents would like to define liquidity not only on the basis of maturity but
     also with a reference to the underlying instrument while a few other respondents would like to have (a minimum amount of) open interest as an additional criterion for a contract being liquid. Other respondents stated that only index futures and options can be regarded as liquid, provided that there are at least two market makers.
158. A few respondents argued that Option 1 is only supported by ESMA’s data set
     because OTC trading is not taken into account and Option 2 is contradictory to the argument that most trading is within a maturity up to three months.
159. Several respondents argued that the imposition of mandatory transparency on less￾liquid equity derivative contracts would prevent the emergence of alternative trading
     models.
160. Several respondents stated that ESMA needs to distinguish between exchange￾traded equity derivatives and OTC equity derivatives in its definitions, whereby also a
     distinction between ‘standard series’ and ‘flexible’ or ‘tailor-made series’ is advocated. Respondents considered that from the definitions it is not clear whether or not OTC derivatives are included or excluded.
161. A few respondents suggest that there should be a definition for “option” so that only
     the standard options (European, American, call, put) are covered and not exotic options.
162. As an alternative to ESMA’s proposal to define a liquid market for equity derivatives
     respondents to the CP provided an array of parameters, like reference to the liquidity of the underlying instrument(s), the use of open interest, the (average daily) turnover (whether expressed in notional value, in number of transactions or expressed in number of traded contracts), the number of market makers or whether an option contract is in or out of the money.
163. In addition to the contract types listed in the CP several respondents propose to
     include a definition for a volatility index and that the volatility indices and ETFs should be split into separate categories. Also several respondents propose to include an ‘all other equity derivatives’ category. This category would capture all derivatives that either (i) do not fall within one of the other classes, or (ii) that have multiple underlyings, such that they can fall in multiple classes.
164. As regards the setting of the LIS and SSTI thresholds several respondents expressed
     concerns that the proposed thresholds were too static.
165. One respondent provided an alternative to the LIS and SSTI thresholds proposed by
     ESMA. The system was designed to have several liquidity bands per sub-asset class

based on the average daily notional amount and the LIS and SSTI thresholds correlated to such liquidity measure. As a consequence, financial instruments within the same category that experience a low average daily notional amount relative to other financial instruments within that sub-asset class benefit from a lower LIS and SSTI threshold.
166. Furthermore, a handful of respondents proposed to set the LIS and SSTI thresholds
in local currency rather than Euros as they stated that the need to apply a currency conversion results in an additional layer of complexity, and would result in inflexibility as exchange rates move. Proposal
167. ESMA proposes to maintain current market practice namely to maintain pre-trade and
post-trade transparency currently available for a wide range of instruments, expiration dates and strike prices for the following sub-asset classes of equity derivatives: stock index options, stock index futures/forwards, stock options, stock futures/forwards, stock dividend options, stock dividend futures/forwards, dividend index options, dividend index futures/forwards, volatility index options, volatility index futures/forwards, ETFs options and ETFs futures/forwards. Curtailing the transparency obligations to a limited category of exchange traded equity derivatives contracts denies that these financial instruments already are characterised by high pre-trade and post-trade transparency, by providing price, size and depth towards the market, and close to real time trade reporting. As a consequence, ESMA maintains Option 2 and its approach that the majority of equity derivatives should be qualified as liquid as expressed in Annex III of the final draft RTS.
168. ESMA brings to mind that the obligations related to pre-trade transparency are
addressed to venue operators and SIs only. Investment firms concluding OTC transactions (not in the capacity of being a SI) do not have a pre-trade transparency obligation.
169. As regards determining whether an equity derivative contract is liquid on the basis of
the maturity of the contract, the outstanding amount of open interest, or whether an option contract is in or out of the money, ESMA is of the view that these parameters for liquidity represent a significant technical and operational issue for trading venues in setting up their trading systems, since each contract will be required to change their qualification of being liquid or illiquid depending on the daily changes in open interest, the remaining time towards expiry of the contract or changes in the price of the underlying instrument. Apart from operational challenges applying these parameters would introduce uncertainty for market participants in their price discovery process.
170. ESMA agrees with the recommendation to include separate categories for options
and futures on volatility indices and ETFs. In addition, an ‘other equity derivatives’ category is defined with the aim to better distinguish liquid from non-liquid sub-asset classes of equity derivatives.

171. ESMA agrees that a single LIS threshold per sub-asset class of equity derivatives as
     proposed in the CP denies the various degrees of liquidity within the respective category of contract types and therefore decided to build upon the alternative proposal provided by one of the respondents to the CP.
172. Therefore, ESMA proposes a methodology for equity derivatives that uses the
     average daily notional amount (ADNA) in terms of notional size as main criterion for classifying sub-classes into liquidity bands, and also as the key component for calculating applicable SSTI and LIS thresholds.
173. According to this methodology trading venue operators and SIs and investment firms
     concluding transactions OTC can determine per financial instrument in which liquidity band the contract fits, based on the ADNA for that specific instrument. Whereby the trading venue operator and SI has the discretion to impose higher block sizes than the proposed thresholds.
174. For non-Euro denominated contracts ESMA is of the view that the LIS and SSTI
     thresholds (that are expressed in Euro) should be converted by applying the relevant European Central Bank Euro foreign exchange reference rate as at 31 December of the preceding calendar year. However, trading venues may convert the threshold sizes into lots as defined in advance.
175. For instruments with a relatively low ADNA, a pre-trade SSTI threshold of € 20.000 is
     set, with the aim of catering for the development of new instruments falling in the respective sub-class regardless whether these are traded on-exchange, via RFQ or voice trading, or OTC.
176. The applicable pre-trade SSTI thresholds are set at roughly 95% 6 of the
     corresponding LIS threshold with the aim of providing for similar transparency across traditional trading systems and RFQ and voice trading systems.
177. Depending on the type of equity derivative instrument post-trade LIS and SSTI
     thresholds are set 10 or 5 times higher compared to pre-trade LIS and SSTI thresholds. This reflects current practice on European trading venues.
178. The liquid and illiquid sub-classes for equity swaps and portfolio swaps, typical OTC
     traded contracts, are constructed in line with the general approach described in section ”Feedback to the CP and revised proposal applicable across all asset classes” above. The sub-asset classes are further segmented into sub-classes by reference to criteria specified in Annex III of the final draft RTS. The criteria are the same for both swaps and portfolio swaps, i.e. (1) underlying type (2) specific underlying (3) parameter and (4) time to maturity bucket.
179. An annual liquidity assessment will be undertaken for each sub-class.

The percentage depends on the rounding of the figures

180. The below table shows the quantitative liquidity thresholds for swaps and portfolio
     swaps which, given the increased granularity of the class, have been reduced.
     Table 24: Quantitative liquidity thresholds equity derivatives sub-classes
181. Other equity derivatives not belonging to one of the defined sub-asset classes are
     considered not to have a liquid market.
182. The SSTI and LIS thresholds for equity swaps and portfolio swaps, are structured on
     liquidity bands based on the ADNA as for the other equity derivatives sub-asset classes.
183. For illiquid sub-classes, fixed thresholds are pre-determined as provided in the table
     below.
     Table 25: SSTI and LIS thresholds for sub-classes not having a liquid market
     SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade EUR 20,000 EUR 25,000 EUR 100,000 EUR 150,000 Sub-asset class Average daily notional Average number of trades Swaps EUR 50 million 15 Portfolio Swaps

H. Commodity derivatives
CP proposal
184. For the CP ESMA analysed data from 5-7 trading venues for the period ranging from
1 June 2013 to 31 May 2014 and distinguishing between three asset classes: metals, energy and agricultural. For each of these sub-asset classes ESMA identified the sub￾classes for which there was a liquid market. For the liquidity assessment the same liquidity criteria were applied for all three asset classes, namely:
i. Average daily notional amount = EUR 100,000; and
ii. Average daily number of trades = 1
185. However, the qualitative criteria applied to segment them were different.
Analysis following feedback from stakeholders
186. Most respondents did not agree with the definition of liquidity, although they
supported COFIA. Most comments are already reflected in the introductory section “Feedback to the CP and revised proposal applicable across all asset classes” above and therefore not repeated in this section. Concerning commodity derivative specific comments some respondents noted that the data set used in the analysis was too narrow and that it did not accurately represent liquidity in the commodity markets. Respondents stated that the data set should include at least three years of data from both EU and non-EU trading venues, and that open interest should be used instead of transaction data. Another concern raised with COFIA was the treatment of new financial products that may develop in the future.
187. Many respondents proposed to make a distinction between precious and base metals
and to use commodity units instead of notional amount for the liquidity assessment. Some respondents noted that if ESMA is to continue using notional amounts, it should express the threshold only in the currency in which commodity contracts are traded. Some respondents included a harmonised table illustrating the proposal listed above.
188. The feedback on the pre-trade and post-trade LIS and SSTI thresholds is
summarised in the introductory section “Feedback to the CP and revised proposal applicable across all asset classes” above. Proposal
189. Taking into account the suggestions included in the responses, ESMA proposes to
use COFIA as the basis for the determination of the liquidity of all the various non-equity financial instruments. Furthermore, ESMA proposes to divide the sub-asset classes by underlying commodity, notional currency (being defined as the currency in which the notional amount of the derivative contract is denominated), and time to maturity. ESMA

proposes to make a distinction for base and precious metals as suggested by the respondents in regards to time to maturity. Furthermore, ESMA proposes to take into account the load type and the deliver/cash settlement location for energy derivatives and to include settlement type in the determination of the sub-asset classes for commodity swaps.
Table 26: Quantitative liquidity thresholds commodity derivatives sub classes
Sub-asset class Average daily notional Average number of trades Metal commodity futures/ forwards EUR 10 million 10 Metal commodity options Metal commodity swaps Energy commodity futures/forwards Energy commodity options Energy commodity swaps Agricultural commodity futures/ forwards Agricultural commodity options Agricultural commodity swaps
190. In light of the feedback received and reflecting the general changed framework,
ESMA proposes to calculate annually the pre-trade and post-trade thresholds for LIS and SSTI on basis of the methodology set out in Article 13 and Annex III of draft RTS 2 and as illustrated in table 11. The pre-trade transparency thresholds are set at a lower level than the post trade transparency thresholds. For liquid sub-classes, the pre-trade transparency thresholds are set as the greater of a pre-determined floor and a trade percentile, and the post-trade transparency thresholds are set as the greater of a pre￾determined floor, a trade percentile and a volume percentile if the volume percentile for the LIS threshold is not higher than the 97.5th percentile, in that case the trade percentile should prevail for both the LIS and SSTI.
191. For illiquid sub-classes, the thresholds are the same as the threshold floors used for
the liquid sub-classes. The thresholds are the same for all commodity derivative sub￾classes, as summarised in the tables below:
Table 27: SSTI and LIS thresholds for sub-classes having a liquid market

Table 28: SSTI and LIS thresholds for sub-classes not having a liquid market
Trade percentile
Floor threshold
Trade percentile
Floor threshold
Trade percentile
Volume percentile
Floor threshold
Trade percentile
Volume percentile
Floor threshold
60 EUR
250,000 70 EUR
500,000 80 60 EUR
750,000 90 70 EUR 1 million
SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade EUR 250,000 EUR 500,000 EUR 750,000 EUR 1 million

I. Exotic Derivatives (including C10 derivatives and
emission allowance derivatives)
CP proposal
192. In the Addendum CP published in February 2015, ESMA presented an analysis of the
residual class of derivatives, called other or exotic derivatives, and which corresponds to derivatives on emission allowances and the derivatives defined under Section C(10) of
Annex I of MiFID II, i.e. freight derivatives, weather derivatives and other C10
derivatives.
193. All exotic derivatives were considered to be illiquid on the basis of a liquidity test
applied at the sub-asset class level (e.g. weather derivatives) based on the following liquidity thresholds applied on a cumulative basis:
i. average notional amount per day greater or equal to €500 m;
ii. number of days traded greater or equal to 80% of the available trading days in the
period;
iii. average number of trades per day greater or equal to 100.
194. With respect to the LIS and SSTI thresholds, ESMA proposed in the Addendum CP
for the purpose of setting the LIS and SSTI thresholds two alternatives:
i. Alternative A: to divide the exotic derivatives class into 4 sub-classes on the basis of
the type of underlying (i.e. freight, emission, weather and other derivatives); or
ii. Alternative B: to use more granular sub-classes dividing the exotic derivative
category on the basis of not only the type of underlying but also the contract type (i.e. futures (FU), options (OP), forwards (FW) and swaps (SW) and others (OT)). Analysis following feedback from stakeholders
195. In the responses received to the Addendum CP, most respondents agreed with
ESMA’s proposal to consider illiquid freight derivatives, weather derivatives and other exotic derivatives. However, for emission derivatives, whereas the majority deemed that those derivatives should be treated as illiquid as proposed by ESMA, some respondents noted that emission derivatives are currently traded on venues in pre-trade and post￾trade transparent manner and that classifying those products as illiquid would reduce the existing transparency in these markets.
196. Respondents stressed that liquidity parameters and thresholds should not be on the
notional traded but that the quantity traded should rather be monitored looking at the relevant number of units or lots traded (e.g. metric tonnes of cargo, tonnes of CO2, etc).

197. With respect to the liquidity thresholds, respondents also pointed out that the ones
     used for other derivatives differed significantly from the ones used from assessing the liquidity of other asset classes (e.g. commodity derivatives, emission allowances). In their view, those classes should have been treated more consistently.

198. Lastly, in the respondents’ view, the liquidity assessment should be more granular
     taking into account criteria such as the tenor and the open interest. For emission allowance derivatives, most respondents suggested to replicate the emission allowance segmentation - i.e. European Union Allowances (EUA), Certified Emission Reductions (CER), European Union Aviation Allowance (EUAA), and Emission Reducing Units (ERU).

199. ESMA appreciates the comments made with respect to exotic derivatives and has
     tried to take them into consideration when establishing the new dynamic liquidity regime by introducing more granularity and more consistency between the different classes. Furthermore, ESMA decided to align the liquidity assessment for derivatives on emission allowances to that of emission allowances on the basis of the average daily number of tons of carbon dioxide traded and average daily number of trades.

200. However, ESMA decided to maintain the liquidity assessment based on trading
     volume in terms of average daily notional amount traded for the other sub-asset classes in order to allow consistency between them and proper calibration of the thresholds using the data currently available.

201. As far as the LIS and SSTI thresholds are concerned, the vast majority of
     respondents supported more granularity when setting the thresholds. In this respect, alternative B had the support of the respondents. However, some stressed that the type of contract might not always be the most relevant criteria and recommend rather other criteria such as emission allowance types (i.e. EUA, CER, EUAA, and ERU) or tenor.

202. With respect to the methodology to determine the LIS and SSTI thresholds, ESMA
     received a few responses highlighting that the notional traded is inappropriate as it is subject to price fluctuations and recommend rather capturing volumes through more relevant metrics such as tonnes of CO2, etc.

203. ESMA believes that the new approach proposed to determine the LIS and SSTI
     thresholds for pre-trade and post-trade transparency purposes should address most of comments received since it will be based on more granular classes and calculated on a yearly basis. The differentiation of pre-trade and post-trade thresholds should also mitigate to a certain extent the concerns raised by a couple of respondents with respect to the level of thresholds as presented in the Addendum CP. Proposal

204. To improve the readability of the draft RTS, ESMA decided to disentangle the asset
     class of exotic derivatives into two classes: derivatives on emission allowances and C10 derivatives. Derivatives on emission allowances

205. The liquid and illiquid sub-asset classes for emission allowance derivatives are
     constructed in line with the general approach described in section “Feedback to the CP and revised proposal applicable across all asset classes” above. The asset class is further segmented into sub-asset classes by reference to the criterion specified in Annex III of the final draft RTS which is, as it is the case for emission allowances, the type of underlying emission allowances.

206. Contracts not belonging to one of the defined sub-asset classes are considered to be
     illiquid.

207. An annual liquidity assessment will be undertaken for each sub-asset class.

208. The below table shows the quantitative liquidity thresholds for each sub-asset class of
     emission allowance derivatives.

Table 29: Quantitative liquidity thresholds emission allowance derivatives sub￾asset classes
Sub-asset class Average daily notional amount
Average number of trades
EUA
150,000 tons of Carbon Dioxide 5
EUAA
CER
ERU
209. The LIS and SSTI thresholds for emission allowance derivatives are constructed in
line with the general approach described in section “Feedback to the CP and revised proposal applicable across all asset classes” above. The pre-trade transparency thresholds are set at a lower level than the post-trade transparency thresholds. However, as in the case of emission allowances, for liquid sub-asset classes, the pre-trade and post-trade transparency thresholds are set as the greater of a pre-determined floor and a trade percentile.
210. For illiquid sub-asset classes, the thresholds are the same as the pre-determined
threshold floors used for the liquid calculations. The thresholds are summarised in the
table below.
211. Last but not least, trading venues may convert the threshold sizes into lots as defined
in advance.
Table 30: SSTI and LIS thresholds for sub-asset classes having a liquid market
Table 31: SSTI and LIS thresholds for sub-asset classes not having a liquid market
Emission allowance type SSTI pre trade LIS pre trade SSTI post trade LIS post trade Trade percentile Floor threshold Trade percentile Floor threshold Trade percentile Floor threshold Trade percentile Floor threshold EUA 60 40,000 tons of Carbon Dioxide 50,000 tons of Carbon Dioxide 90,000 tons of Carbon Dioxide 100,000 tons of Carbon Dioxide other than EUA 60 20,000 tons of Carbon Dioxide 25,000 tons of Carbon Dioxide 40,000 tons of Carbon Dioxide 50,000 tons of Carbon Dioxide Emission allowance type SSTI pre trade LIS pre trade SSTI post trade LIS post trade

EUA 40,000 tons of
Carbon Dioxide
50,000 tons of
Carbon Dioxide
90,000 tons of
Carbon Dioxide
100,000 tons of
Carbon Dioxide
Other than EUA 20,000 tons of
Carbon Dioxide
25,000 tons of
Carbon Dioxide
40,000 tons of
Carbon Dioxide
50,000 tons of
Carbon Dioxide
C10 Derivatives
212. The asset class of C10 derivatives is divided into freight derivatives and other C10
derivatives including weather derivatives, inflation derivatives and derivatives linked to official economic statistics.
213. The liquid and illiquid sub-classes for freight derivatives are constructed in line with
the general approach described in section ” Feedback to the CP and revised proposal applicable across all asset classes” above and the sub-classes are defined by means of the criteria specified in Annex III of the final draft RTS, which include the contract type and the characteristics defining the underlying freight contract.
214. An annual liquidity assessment will be undertaken for freight derivatives and the
below table shows the quantitative liquidity thresholds, in line with all the other commodity derivative sub-asset classes, to be used.
Table 32: Quantitative liquidity thresholds freight derivative sub-asset classes
Sub-asset class Average daily notional amount
Average number of trades
Freight derivatives EUR 10 million 10
215. All other contracts belong to the other C10 sub-asset class and are considered to be
illiquid.
216. The LIS and SSTI thresholds for C10 derivatives are constructed in line with the
general approach described in section ”Feedback to the CP and revised proposal applicable across all asset classes” above. The pre-trade transparency thresholds are set at a lower level than the post-trade transparency thresholds. For liquid sub-classes, the pre-trade transparency thresholds are set as the greater of a pre-determined floor and a trade percentile, and the post-trade transparency thresholds are set as the greater of a pre-determined floor, a trade percentile and a volume percentile if the volume percentile for the LIS threshold is not higher than the 97.5th percentile, in that case the trade percentile should prevail for both the LIS and SSTI.
217. For illiquid sub-asset classes, the thresholds are the same as the pre-determined
threshold floors used for the liquid calculations. The thresholds are summarised in the
table below.

218. Last but not least, trading venues may convert the threshold sizes into lots as defined
     in advance.
     Table 33: SSTI and LIS thresholds for sub-classes having a liquid market
     Table 34: SSTI and LIS thresholds for sub-classes not having a liquid market
     Trade percentile
     Floor threshold
     Trade percentile
     Floor threshold
     Trade percentile
     Volume percentile
     Floor threshold
     Trade percentile
     Volume percentile
     Floor threshold
     60 EUR
     25,000 70 EUR
     50,000 80 60 EUR
     75,000 90 70 EUR
     100,000
     SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade EUR 25,000 EUR 50,000 EUR 75,000 EUR 100,000

J. Contracts for Difference
Summary of key proposals in February addendum CP
219. In respect of CFDs on equities ESMA proposed to define as liquid any CFD where the
underlying is a share for which there is a liquid market as determined in accordance with
article 2(1)(17)(b) of Regulation 600/2014.
220. ESMA was not in a position to establish the liquidity of CFDs with other sub-classes
of equity as underlyings such as CFDs on ETFs or depositary receipts. On that basis ESMA was seeking stakeholders’ views in the addendum CP on a proposal for extending the same approach taken on CFDs on shares to CFDs on ETFs and depositary receipts, i.e. determine as liquid all CFDs based on an equity or equity-like instrument for which there is a liquid market in accordance with article 2(1)(17)(b) of Regulation 600/2014.
221. As far as CFDs on currencies are concerned, ESMA proposed in the CP that a
number of classes set out in Annex III, Section 9 of the draft RTS 9 in the addendum CP were liquid. Analysis following feedback from stakeholders
222. Most respondents agreed with ESMA’s approach to deem any CFD based on an
underlying liquid share as liquid.
223. The feedback for CFDs on currency was very limited; the few respondents who
commented agreed with ESMA’s proposal.
224. In general, the majority of respondents agreed with the criteria proposed to define
classes and sub-classes, the parameters proposed in the addendum CP, and with extending the approach to CFDs with other equity and equity-like instruments as underlyings. Overall, respondents considered that the definition of CFDs was too broad, and could unintendedly capture some type of equity swaps.
225. Most respondents agreed with the proposed LIS threshold; however, one respondent
stated that beyond 2018, it should be lowered to the 50th percentile of transactions. In regard to the system and frequency of the recalculation of the thresholds, there were mixed views, with a small majority supporting recalibration on a dynamic basis. Proposal
226. ESMA proposes to divide the classes of CFDs into equity, bond, futures/forwards on
equity, option on equity, commodity, currency and a further class for other CFDs.
227. Sub-classes of CFDs on equity, bonds, futures/forwards on equity and options on
equity will be deemed liquid if the underlying equity, bond, future/forward on equity or

option on equity is considered to have a liquid market, in accordance with article 2(1)(17)(b) of Regulation 600/2014.
228. For CFDs on currency and commodities the sub-classes will be defined by the
underlying currency pair and commodity. Both CFDs on currency and on commodity will be deemed liquid if the average daily notional is at least EUR 50 million and the average daily number of trades is at least 100.
229. All other exotic derivatives which do not belong to any of the determined sub-asset
classes are considered to be illiquid.
230. An annual liquidity assessment will be undertaken for each sub-class.
231. The SSTI and LIS thresholds for CFDs are constructed in line with the general
approach described in section ”Feedback to the CP and revised proposal applicable across all asset classes” above. The pre-trade transparency thresholds are set at a lower level than the post-trade transparency thresholds. For liquid sub-classes, the pre￾trade transparency thresholds are set as the greater of a pre-determined floor and a trade percentile, and the post-trade transparency thresholds are set as the greater of a pre-determined floor, a trade percentile and a volume percentile if the volume percentile for the LIS threshold is not higher than the 97.5th percentile, in that case the trade percentile should prevail for both the LIS and SSTI.
232. For illiquid sub-classes, the thresholds are the same as the pre-determined threshold
floors used for the liquid calculations. The thresholds are summarised in the table below.
Table 35: SSTI and LIS thresholds for sub-classes having a liquid market
Table 36: SSTI and LIS thresholds for sub classes not having a liquid market
Trade percentile
Floor threshold
Trade percentile
Floor threshold
Trade percentile
Volume percentile
Floor threshold
Trade percentile
Volume percentile
Floor threshold
60 EUR
50,000 70 EUR
60,000 80 60 EUR
90,000 90 70 EUR
100,000
SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade SSTI pre-trade LIS pre-trade SSTI post-trade LIS post-trade EUR 50,000 EUR 60,000 EUR 90,000 EUR 100,000

K. Emission Allowances
CP proposal
233. To assess the liquidity of emission allowances, ESMA analysed a dataset collected
from 3 trading venues for the period of 1 June 2013 – 31 May 2014. In total, the dataset included 1,142 instruments covering 4 types of emission allowances, with the majority accounting for either EUA or CER. An average of 5 trades per day and 150,000 tons of carbon dioxide per day, representing roughly €750,000, was considered as sufficient trading activity to qualify this class as liquid.
234. On that basis, ESMA proposed to consider only the class of EUA contracts as liquid
and all other classes as illiquid.
Analysis following feedback from stakeholders and proposal
235. ESMA received only very limited feedback to this question and the majority of
responses received were rather focussing on derivatives on emission allowances than on emission allowances.
236. Some responses considered the proposed liquidity thresholds identifying liquid sub￾classes as too low and recommended increasing the thresholds. However, since ESMA
received no guidance or evidence as to the appropriate level of the thresholds, ESMA did not change the thresholds used. Concerning the question whether identified sub￾classes were correctly classified, there was limited feedback considering the categorisation of entire asset classes as illiquid as overly simplistic, which could lead to a reduction of existing transparency. While ESMA agrees that a reduction of transparency would not be desirable, ESMA was, given the lack of indication on how to improve the classification of emission allowances, not in a position to refine the categorisation of liquid vs. illiquid classes. Furthermore, ESMA would like to point out that CAs may decide not to grant waivers and/or deferrals, in particular in cases where this would diminish current levels of transparency.
237. In light of the feedback received and reflecting the general changed framework,
ESMA proposes that the liquidity assessment per emission allowances class (EUA, CER, EUAA, ERU and others) should be carried out on an annual basis against the following liquidity thresholds: an average of 5 trades per day and 150,000 tonnes of carbon dioxide per day.
238. ESMA received only very limited feedback on the level of pre-trade and post-trade
thresholds for emission allowances and, in addition, as mentioned above most of the feedback was rather related to derivatives on emission allowances. Points raised included concerns that the proposed thresholds would lead to a lower transparency for emission allowances compared to the situation today, the recommendation to set the thresholds based on order level data and to use an alternative volume measure for setting the thresholds (without however providing an alternative volume measure).

239. In light of the feedback received and reflecting the general changed framework,
     ESMA proposes to calculate annually the pre-trade and post-trade thresholds for LIS and SSTI on basis of the methodology set out in Article 13 and Annex III of draft RTS 2.
240. The SSTI and LIS thresholds for emission allowances are constructed in line with the
     general approach described in section ”Feedback to the CP and revised proposal applicable across all asset classes” above. The pre-trade transparency thresholds are set at a lower level than the post-trade transparency thresholds. For liquid sub-asset classes, the pre-trade transparency and post-trade transparency thresholds are set as the greater of a pre-determined floor and a trade percentile.
241. For illiquid sub-asset classes, the thresholds are the same as the pre-determined
     threshold floors used for the liquid calculations. The thresholds are summarised in the tables below.
     Table 37: SSTI and LIS thresholds for sub-asset classes having a liquid market
     Table 38: SSTI and LIS thresholds for sub-asset classes not having a liquid market
     Emission allowance type SSTI pre trade LIS pre trade SSTI post trade LIS post trade EUA 40,000 tons of Carbon Dioxide 50,000 tons of Carbon Dioxide 90,000 tons of Carbon Dioxide 100,000 tons of Carbon Dioxide Other than EUA 20,000 tons of Carbon Dioxide 25,000 tons of Carbon Dioxide 40,000 tons of Carbon Dioxide 50,000 tons of Carbon Dioxide Trade percentile Floor threshold Trade percentile Floor threshold Trade percentile Floor threshold Trade percentile Floor threshold EUA 60 40,000 tons of Carbon Dioxide 50,000 tons of Carbon Dioxide 90,000 tons of Carbon Dioxide 100,000 tons of Carbon Dioxide other than EUA 60 20,000 tons of Carbon Dioxide 25,000 tons of Carbon Dioxide 40,000 tons of Carbon Dioxide 50,000 tons of Carbon Dioxide Emission allowance type SSTI pre trade LIS pre trade SSTI post trade LIS post trade

2.2.2 Elements common to all asset classes: analysis and
approach
I. Trading Models
Background/Mandate
Article 9(5) of MiFIR
5. ESMA shall develop draft regulatory technical standards to specify the following:
[…]
(b) the range of bid and offer prices or quotes and the depth of trading interests at those prices, or indicative pre-trade bid and offer prices which are close to the price of the trading interest, to be made public for each class of financial instrument concerned in accordance with Article 8(1) and (4), taking into account the necessary calibration for different types of trading systems as referred to in Article 8(2);
242. MiFID II provides for three types of trading venues for bonds, structured finance
products, emission allowances and derivatives: regulated markets, MTFs and OTFs. Within each of these trading venues different types of trading systems may be operated in order to bring together buying and selling trading interests. Article 8(2) of MiFIR requires the calibration of the transparency requirements for different types of trading systems, including order-book, quote-driven, periodic auction trading, request-for-quote (RFQ), voice and hybrid trading systems. In order to ensure uniform applicable conditions for trading venues, the same pre-trade transparency requirements, defined at trading system level, would then apply equally to regulated markets, MTFs and OTFs to the extent that the trading systems can be operated in line with the definition of the trading venues under MiFIR7.
243. Article 9(5)(b) of MiFIR empowers ESMA to specify the pre-trade transparency
obligations by defining the range of bid and offer prices or quotes and the depth of trading interests at those prices, or indicative pre-trade bid and offer prices which are close to the price of the trading interest, to be made public for each class of financial instrument concerned taking into account the different types of trading systems.
244. In calibrating the requirements for different trading systems, the definitions of RFQ
systems and voice trading systems are key in determining the minimum amount of pre￾trade information they must offer. These definitions are also relevant for determining when pre-trade transparency obligations can be waived for orders above a size specific

Recital 16 of MiFIR

to the instrument. Article 9(1)(b) of MiFIR states that CAs can authorise waivers to pre￾trade transparency requirements for actionable indications of interest in request-for￾quote and voice trading systems that are above a size specific to the instrument.
245. In the CP ESMA proposed to use the approach for calibrating the content of the pre￾trade transparency requirements for shares according to Table 1 in Annex II of MiFID
Regulation 1287/2006 for all types of non-equity financial instruments traded as a basis, and to add the commonly used trading systems for non-equities: RFQ and voice systems.
246. On the basis that feedback to the DP broadly supported the proposed definition for
voice trading, ESMA retained the definition proposed in the DP. In light of feedback to the CP ESMA proposed to amend the RFQ definition on which it consulted. Regarding the definition of RFQ system ESMA proposes to amend the definition to incorporate the exclusivity feature of RFQ systems, i.e. to elucidate that the requesting party to which the quote is disclosed is the only counterparty entitled to trade against it. Analysis following feedback from stakeholders
247. The majority of responses opposed the proposal regarding the definition of RFQ
systems on the basis that it would have a negative impact on market liquidity and the quality of price settings. Market participants were concerned that the proposal to publish the individual responses to a RFQ would create disincentives for dealers to quote since competitive dealers might adapt their quotes in light of already published quotes (‘first mover disadvantage’) and could result in a ‘winner’s curse’ where the market moves against the dealer which wins the business.
248. Various proposals were made to introduce a regime for RFQ systems that mitigates
these concerns, ranging from clarifying that RFQ systems would be allowed to publish submitted quotes in response to a RFQ at the same time, i.e. once all quotes have been provided and the moment they become executable to publishing average or composite prices.
249. ESMA carefully reviewed these proposals, in particular the extent to which those
would address the two concerns raised above, and their compatibility with the MiFIR requirements. ESMA considers that the proposed definition of an RFQ system allowed for publishing all quotes submitted at the same time, but has further clarified this in a recital to provide market participants with legal certainty. Concerning the proposal to provide pre-trade transparency on basis of average prices, ESMA decided not to include it in its revised proposal for two reasons. Firstly, publishing average prices falls short of providing pre-trade transparency as defined in MiFIR, which requires trading venues to make public the current bid and offer prices and the depth of trading interest at those prices which are advertised through their systems (Article 8(1) of MiFIR). Secondly, it would grant RFQ systems a preferential treatment which discriminates against other trading systems. ESMA therefore maintained the proposal to disclose all quotes provided in request for a quote.

250. Some respondents suggested adding ‘all-to-all’ trading systems, i.e. trading systems
     that allow to source liquidity from all other system participants (investors and dealers), to the types of trading systems. ESMA acknowledges that this type of trading system could gain in importance in the future, but considers that it is already covered by the ‘hybrid system’. Proposal
251. ESMA largely maintained its proposal in the CP and clarified in a recital that RFQ
     systems may publish submitted quotes in response to a RFQ at the same time.

II. SSTI – Indicative prices
252. When the actionable indication of interest is above the SSTI threshold, market
operators and investments firms operating a trading venue under an RFQ or voice trading system are required in accordance with Article 8(4) of MiFIR to make public at least indicative pre-trade bid and offer prices which are close to the price of the trading interest advertised through their system. In the CP ESMA proposed that the indicative prices which are close to the price of the trading interests should be calculated and displayed by the operator of the trading venue in a transparent fashion. The composition and calculation of these indicative prices should be based on a clear and comprehensive methodology that is made transparent to the public beforehand and laid down in the rules of the trading venue. Analysis following feedback from stakeholders
253. Views from market participants were split. About half of the respondents supported
ESMA’s proposal stressing that a flexible approach provided the needed flexibility for a provision applicable to a broad area of non-equity instruments and considering that it would allow for strengthened competition between trading venues. On the other hand, the other half of the respondents disagreed with the approach, in particular for derivatives, and recommended to define a clear methodology to be used. Different proposals for the methodology to be applied were made, ranging from using the best available indicative bid and offer to simple average or volume weighted average price. A number of respondents also requested clarification whether indicative prices should be published continuously. Proposal
254. The final draft RTS specify the valid methodologies to be used when publishing
indicative prices while allowing trading venues to choose the methodology that they consider most appropriate. ESMA believes that this approach has the advantage of providing market participants with more clarity on the kind of methodology to be used for publishing indicative prices, while still providing for the flexibility needed to cater for the heterogeneous nature of non-equity instruments covered by the provision. Furthermore, ESMA clarifies that indicative prices should be updated.

III. Order management facility waiver
255. Under MiFIR the order management facility waiver is introduced for non-equities.
ESMA is of the opinion that the proposed approach for applying the order management facility waiver for equities would be appropriate to use for non-equities.
256. The order management facility waiver refers to functionalities operated by trading
venues where certain orders may waive pre-trade transparency pending their disclosure to the market (i.e. subject to being released to an order book prior to execution). With regard to the practice developed under MiFID I contingent orders such as reserve or iceberg orders and stop orders are considered orders held on an order management facility deemed compliant with MiFID I.
257. MiFIR empowers ESMA to draft RTS specifying the type and minimum size of orders
held in an order management facility.
258. In the CP, and in line with the proposal for order management facilities for shares and
equity-like instruments, ESMA proposed to define the key characteristics of orders held in an order management facility without narrowly prescribing specific characteristics of those orders. In relation to the minimum size ESMA proposed that for all orders held in an order management facility, with the exception of reserve orders, the minimum size should be, at the point of entry of the order, the minimum tradable quantity established by the trading venue. For reserve orders the minimum size shall be not smaller than €10,000. Analysis following feedback from stakeholders
259. Most respondents agreed with ESMA’s proposal. Some limited feedback highlighted
that the suggested minimum sizes were too low, in particular for exchange trade equity derivatives, and might lead to reduced transparency if applied. Proposal
260. In view of the strong support, ESMA maintained its approach.

IV. Content and timing of post-trade transparency
requirements
Background/Mandate
Article 11(4) of MiFIR
4. ESMA shall develop draft regulatory technical standards to specify the following in such
a way as to enable the publication of information required under Article 64 of Directive 2014/65/EU:
(a) the details of transactions that investment firms, including systematic internalisers, and market operators and investment firms operating a trading venue shall make available to the public for each class of financial instrument concerned in accordance with Article 10(1), including identifiers for the different types of transactions published under Article 10(1) and Article 21(1), distinguishing between those determined by factors linked primarily to the valuation of the financial instruments and those determined by other factors; (b) the time limit that would be deemed in compliance with the obligation to publish as close to real time as possible including when trades are executed outside ordinary trading hours; […]
Article 21(5) of MiFIR
5. ESMA shall develop draft regulatory technical standards in such a way as to enable
the publication of information required under Article 64 of Directive 2014/65/EU to specify the following:
(a) the identifiers for the different types of transactions published in accordance with this
Article, distinguishing between those determined by factors linked primarily to the
valuation of the financial instruments and those determined by other factors; (b) the application of the obligation under paragraph 1 to transactions involving the use of those financial instruments for collateral, lending or other purposes where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument; […]
261. Article 10(1) of MiFIR asks market operators and investment firms operating a trading
venue to make public the price, volume and time of transactions executed in non-equity

instruments which are traded on a trading venue. The post-trade transparency requirements have been extended, by Article 21(1) of MiFIR, to investment firms, including SIs, which, either on own account or on behalf of clients, conclude transactions outside trading venues (RMs, MTFs and OTFs) in non-equity financial instruments falling under the scope of the transparency regime.
262. Articles 11(4) and 21(5) of MiFIR require ESMA to develop draft RTS specifying
information and details to be made public under the new post-trade transparency regime for bonds, structured finance products, emission allowances and derivatives, as well as the timing of publication.
263. The list of flags in the CP (Annex II, Table 2 of the draft RTS) proposed the
substitution of the pre-trade LIS flag with a post-trade LIS flag and the addition of some additional flags: a non-price forming flag and flags for transactions for which the deferred publication of information follow the supplementary deferrals granted by CAs (in accordance with Article 10 of the draft RTS)8 . Furthermore, the CP consulted on the detail of transactions to be made available to the public (Table 1 of Annex II of the draft RTS) and asked whether an additional field for the date and time of publication of a transaction should be added.
264. ESMA proposed to set the maximum time limit for publishing post-trade information in
compliance with the requirement to publish as close to real time as possible to a maximum delay of 5 minutes. . To allow market participants to adapt to the new regime, ESMA provided for a less strict requirement of 15 minutes for the first 3 years of application. ESMA notes that the maximum permissible delay should only be used for market participants who for technical reasons cannot achieve real-time publication as promptly as in a fully automated process. Analysis following feedback from stakeholders and proposal
265. Views from respondents on whether to add the date and time of publication were split.
However, those opposing this provision did not provide reasons why this field should not be added, and ESMA, together with a significant part of respondents, considers that this information would be valuable both for market participants as well as for CAs. Therefore, the data and time of publication has been added to the details of a transaction to be made public. However, it has to be noted that for OTC transactions the field will have to be filled in by APAs and not by investment firms. The majority of respondents were not in favour of adding other fields to Annex II, Table 1.
266. ESMA did not introduce further new fields. However, the fields previously included
and related to the price and quantity of the transaction have been disentangled to take into account the different characteristics of non-equity financial instruments, e.g.

For more details on the rationale for the list of flags proposed please see section 3.7 in the CP.

commodity derivatives, and as to ensure a consistent application of the information related to the quantity and notional/nominal value of the transaction.
267. As concerns the flags for post-trade transparency the changes that were introduced
following feedback from respondents to the consultation are the deletion of the “technical trades” flag - as those transactions were already covered under the category of the non￾price forming trades - and the deletion of the “algorithmic trades” flag. Since there is no legal obligation to include an “algorithmic trading flag” for non-equity instruments – contrary to the requirement for CTPs for equity instrument to flag algorithmic transactions, the latter information was deleted, since most respondents considered it not as providing useful information.
268. In line with the special treatment to which certain package transactions, including
exchange for physicals (EFP) are entitled to (see below section VIII of chapter 2.2.2) ESMA considered relevant to include a “package transaction” flag and an “exchange for physicals” flag, so as to provide post-trade information on component transactions the reported prices of which would otherwise give misleading information.
269. Last but not least, the flags to be used in the case of transactions executed under the
discretionary deferral regime are maintained. However, for each scenario specific flags have to be used so as to identify the transaction at both points in time, i.e. when limited and full transparency to the reporting is applied.
270. The majority of respondents confirmed the proposal for the time limit for publishing
post-trade information, and the approach to set more demanding time limits after 3 years of application. Some respondents would have preferred a more flexible regime, allowing for a review of the provision rather than an automatic reduction to 5 minutes after the 3- year period to ensure that the industry is ready for such a reduction. However, ESMA considers that this approach provides market participants with sufficient time to prepare for more demanding time limits while respecting the objective of MiFID to provide for post-trade transparency in real-time.
271. In order to ensure that the information to be made available to the public for the
purpose of post-trade transparency is operational and meaningful, a common format for provision of such information needs to be defined. Additionally, since trading venues are not only subject to post-trade transparency requirements, but also (at the same time) obliged to report financial instrument reference data as per the draft RTS 23, alignment of the formats for relevant data has been considered reasonable and beneficial in light of the overlap between the data to be provided under both requirements.
272. The formats to be applied for the post-trade reports are therefore consistent with the
ISO 20022, which has been chosen as the most suitable for the purpose of reference data reporting under MiFIR Art. 27. ISO 20022 is a standardisation methodology which sets out guidelines, principles and formats that should be followed in the development of a common formal notation to describe financial processes.

273. The alignment with the formats used for reference data (and thus, with ISO 20022
     methodology) concerns only the way the information is represented, for example the same codes are used to represent the same values. It does not affect the data requirements themselves or the means of their collection or publishing (for example, no specific technical format, like XML, is required for the publication of data). In practical terms it means that the additional burden resulting from the alignment is limited to the transformation of the data so that they are represented in a standard way, thus it can be considered marginal.

V. Application of post trade transparency regime to certain
OTC transactions
274. Article 21(5) of MiFIR empowers ESMA to develop draft RTS to identify transactions
involving the use of non-equity financial instruments for collateral, lending or other purposes where the exchange of such instruments is determined by factors other than their current market valuation.
275. ESMA notes that a similar, although broader, empowerment exists under Article 28 of
MiFID I. On the basis of that empowerment, Article 5 of the Implementing Regulation 1287/2006 does not consider, for the purpose of the transparency regime, securities financing transactions, the exercise of options or of covered warrants and primary market transactions.
276. ESMA consulted on an exhaustive list of transactions for which the application to
investment firms, including SIs, of the obligation to make public the volume and price of transactions and the time at which they were concluded is deemed not appropriate as those transactions are initiated on the basis of factors other than the current market valuation of the involved financial instruments. Within that list were included, inter alia, securities financing transactions and the exercise of options, covered warrants or convertible bonds. With particular regard to securities financing transactions the vast majority of respondents supported the inclusion as they noted that the reporting requirements are now being dealt with under a separate piece of draft Regulation on the Transparency of Securities Financing Transactions and that MiFIR should avoid duplicative or conflicting reporting requirements.
277. Some respondents stressed the need to exempt transactions that do not contribute to
the current valuation of an instrument from post-trade transparency provisions also when executed on trading venues. ESMA notes that the empowerment in Article 21(5) only encompasses investment firms trading OTC, also in their activity as SIs, whereas it is not applicable to on venue trading. However, in order to be able to identify transactions taking place on trading venues and not contributing to the current valuation of the financial instrument, ESMA suggests introducing a flag for those transactions.
278. Primary markets transactions have not explicitly been mentioned as those are out of
the scope of the transparency regime of MiFIR.
279. Furthermore, a few respondents outlined the need to exempt post-trade risk reduction
service component transactions from the post-trade obligation. Portfolio compression trades are already exempt under the draft RTS, by way of reference to the list of transactions excluded from the scope of Article 26 of MiFIR under the relevant draft RTS. ESMA also notes that Recital 27 of MiFIR, provides that the obligation to conclude transactions in eligible derivatives on a trading venue should not apply to the components of non-price forming post-trade risk reduction services which reduce non￾market risks in derivatives portfolios. Commission Delegated Regulation (EU) 149/2013

supplementing Regulation (EU) 648/2012 with regard to, inter alia, risk mitigation techniques for OTC derivatives contracts not cleared by a CCP, does only explicitly cater for portfolio compression. Therefore, for the sake of consistency, no other (non-defined) transactions have been considered for the purpose of setting an exemption from relevant transparency requirements.

VI. Identification of the investment firm making the
transaction public
Background/Mandate/Empowerment
280. Investment firms and SIs (SI) trading OTC need to make public the price and volume
of transactions with respect to instruments traded on a venue9 – Articles 20(1) and 21(1) of MiFIR. Publication occurs through an APA.
281. When a transaction involves two investment firms, it is necessary to determine which
of the investment firms should report such a transaction, and ESMA is to specify which of the investment firms is responsible for ensuring publication. Articles 20(3)(c) and 21(5)(c) of MiFIR:
ESMA shall develop draft regulatory technical standards to specify the following:
“(c) the party to a transaction that has to make the transaction public in accordance with Paragraph 1 if both parties to the transaction are investment firms;”
282. Currently Article 27(4) of the MiFID I Implementing Regulation states that:
“Where the transaction is executed outside the rules of a regulated market or an MTF, one of the following investment firms shall, by agreement between the parties, arrange to make the information public:
a. the investment firm that sells the share concerned; b. the investment firm that acts on behalf of or arranges the transaction for the seller;
c. the investment firm that acts on behalf of or arranges the transaction for the
buyer; d. the investment firm that buys the share concerned.
In the absence of such an agreement, the information shall be made public by the investment firm determined by proceeding sequentially from point (a) to point (d) until the first point that applies to the case in question.

The duty to make sure a trade is published falls only on investment firms, including where applicable systematic internalisers.

The parties shall take all reasonable steps to ensure that the transaction is made public as a single transaction. For those purposes two matching trades entered at the same time and price with a single party interposed shall be considered to be a single transaction.”
283. In order to ensure a clear and enforceable regime ESMA proposed in the CP that the
responsibility for publishing transactions should always fall on the seller. This proposal has furthermore the advantage of limiting the scope for regulatory arbitrage when granting investment firms the discretion of choosing which party is responsible for making a transaction public and thereby implicitly the discretion of choosing the applicable deferral regime (in particular for non-equities).
284. For transactions where only one of the investment firms party to the transaction is an
SI in the given instrument and the SI is the buyer, ESMA proposed a different approach requiring the SI to always publish the transaction. ESMA opted for this approach since:
firstly, there might be an expectation on the part of the SI’s client that the SI will be responsible for reporting; and secondly, the trade report will need to have “SINT” entered in the venue of execution field. In the unlikely case where both parties to the transaction are SIs in the given instrument, the selling firm should report the transaction, following the usual principle of ‘seller reports’. Analysis and proposal following feedback from stakeholders
285. The large majority of respondents agreed with the proposal stressing that it provides
legal clarity, avoids double reporting and contributes to improving the quality of the publication of OTC trades. However, a number of concerns and requests for clarifications were raised.
286. Some respondents asked for clarification that on-venue trades will be published by
trading venues and that only trades concluded outside of trading venues should be published by APAs. ESMA agrees with this interpretation of the interaction between the post-trade transparency requirements for investment firms and trading venues in MiFIR, which is furthermore confirmed by recital 116 of MiFID II10 .
287. A number of responses considered that the draft RTS needs to address the scenario
that the seller is a third-country firm. However, ESMA considers Article 20(1) and 21(1) of MiFIR already sufficient clear in stating that the obligation to report the trade falls always on investment firms, thereby excluding third-country firms from a publication duty. Hence, if an investment firms concludes a transaction with a third-country firm, duty to make the transaction public would always fall on the investment firm, even if it is the buyer.

10 “The introduction of APAs should improve the quality of trade transparency information published in the OTC space and contribute significantly to ensuring that such data is published in a way facilitating its consolidation with data published by trading venues”.

288. Some responses asked for guidance on the identification of the seller for transactions
     in derivatives, and in particular FX instruments. ESMA notes that the parties to an OTC derivative transaction have to establish who is the seller and who is the buyer for the purposes of reporting the transaction to a Trade Repository under EMIR11 and therefore concludes that the participants in such a transaction will identify the seller. ESMA is currently reviewing Implementing Regulation (EU) No 148/2013 including to reflect the guidance currently provided in the Q&A guidance for EMIR. It is expected that the amended ITS will be adopted and applicable by the time of application of MiFID II.
289. A few respondents believed that the proposal is too complex, reverses current market
     practice and is difficult and costly to implement, in particular for smaller firms. ESMA considered the alternative proposals made in the responses but came to the conclusion that these were either more complex than ESMA’s proposal or did not provide the clarification requested in the empowerment.
290. In light of the responses received ESMA maintains its proposal.

11 The requirement is in item 13 of Table 1 of the Annex to Regulation (EU) No 148/2013 of 19 December 2012. ESMA has supplemented this with Q&A guidance, i.e., Questions and Answers: Implementation of Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR), ESMA, 10 July 2014, http://www.esma.europa.eu/system/files/2014-815.pdf. See “TR Question 24”.

VII. Discretionary deferral regime
Background/Mandate
Article 11(3) of MiFIR
3. Competent authorities may, in conjunction with an authorisation of deferred publication:
(a) request the publication of limited details of a transaction or details of several transactions in an aggregated form, or a combination thereof, during the time period of deferral; (b) allow the omission of the publication of the volume of an individual transaction during an extended time period of deferral; (c) regarding non-equity instruments that are not sovereign debt, allow the publication of several transactions in an aggregated form during an extended time period of deferral; (d) regarding sovereign debt instruments, allow the publication of several transactions in an aggregated form for an indefinite period of time. In relation to sovereign debt instruments, points (b) and (d) may be used either separately or consecutively whereby once the volume omission extended period lapses, the volumes could then be published in aggregated form. In relation to all other financial instruments, when the deferral time period lapses, the outstanding details of the transaction and all the details of the transactions on an individual basis shall be published.
Article 11(4) of MiFIR
4. ESMA shall develop draft regulatory technical standards to specify the following in
such a way as to enable the publication of information required under Article 64 of Directive 2014/65/EU:
[…]
(d) the criteria to be applied when determining the size or type of a transaction for which deferred publication and publication of limited details of a transaction, or publication of details of several transactions in an aggregated form, or omission of the publication of the volume of a transaction with particular reference to allowing an extended length of time of deferral for certain financial instruments de-pending on their liquidity, is allowed under paragraph 3.
291. According to Article 11(3) of MiFIR, CAs may, in conjunction with an authorisation of
deferred publication, supplement the deferred publication regime with additional

features. Combined with the deferred publication regime, some of these features effectively provide additional transparency (e.g. publication of limited details during the time period of deferral) while most of them provide for longer deferrals or publication in an aggregated fashion.
292. Article 11(4)(d) of MiFIR requires ESMA to draft RTS specifying the criteria to be
applied when determining the features described in Article 11(3) of MiFIR.
293. The option for CAs to grant an authorisation of deferred publication and the options to
allow or request additional features listed in Article 11(3) of MiFIR means that there are effectively 3 different transparency regimes that may apply for transactions eligible for a deferral:
i. Real-time transparency, if the CA does not permit deferred publication;
ii. Deferred publication, if the CA permits deferred publication; and
iii. Deferred publication with supplementary features (e.g. volume omission for an
extended period of deferral), if the CA permits deferred publication in conjunction with any of the additional features listed in Article 11(3) of MiFIR. Analysis following feedback from stakeholders
294. In the CP, ESMA proposed to set the length of the extended time period of deferral
described in Articles 11(3)(b) and 11(3)(c) to 4 weeks.
295. With regard to the publication of transactions in an aggregated form, ESMA proposed:
i. a daily aggregation of transactions during the 48h time period of deferral for Article
11(3)(a) MiFIR;
ii. that transactions benefitting from an extended deferral should be aggregated by the
respective trading venues and APAs over the course of one calendar week and would be published on the following Tuesday before 9.00 CET. Once the four week period lapses transactions should be published on an individual basis for Article 11(3)(c) of MiFIR;
iii. that transactions benefitting from an extended deferral should be aggregated by the
respective trading venues and APAs over the course of one calendar week and should be published on the following Tuesday before 9.00 CET for Article 11(3)(d) of MiFIR.
296. For sovereign debt instruments for which the options in Article 11(3)(b) and (d) MiFIR
can be applied consecutively ESMA proposed that transactions are aggregated over the course of one calendar week and published on the Tuesday following the expiry of the

extended period of deferral of four weeks counting from the last day of the calendar week before 9.00 CET.
297. ESMA pointed out that the proposed rules for operationalising the supplementary
deferral regime imply that transactions for which CAs are exercising the option under
Article 11(3)(c) and (d) would benefit from slightly longer and varying periods of deferrals
before aggregated data would be published and in the cases covered by Article 11(3)(c) to slightly varying extended periods of deferrals. However, ESMA considered its proposal as a pragmatic solution which avoids overburdening trading venues and APAs with potentially numerous aggregation periods that might lead to confusion in markets. Furthermore, ESMA considered that the proposal addressed concerns that too short periods for aggregating transactions might lead to situations where only very few transactions are aggregated thereby exposing risk positions to the public and impairing liquidity.
298. For the content of the aggregated data to be published, ESMA proposed including the
weighted average price, the total volume traded and the total number of transactions. ESMA proposed that the data should only be aggregated at an instrument level and considered that Articles 11(3)(a), (b), (c) and (d) of MiFIR should not be used in combination, except in the case of sovereign debt where a combination of Articles 11(3)(b) and (d) of MiFIR is expressly permitted as per the Level 1 text.
299. The large majority of respondents did not comment on the ESMA proposals on how to
draft the implementing measures, but rather expressed their concerns about the effects of the Level 1 text.
300. Respondents considered that Article 11(3) of MiFIR can create a highly fragmented
environment in the EU which would cause an unlevelled playing field, distorted market conditions and cross-border issues where two counterparties in different jurisdictions may be subject to different regimes.
301. Respondents therefore urged ESMA to actively coordinate the national
implementation of the supplementary deferral regime in order to ensure a harmonised deferral regime to the extent possible.
302. ESMA agrees with the concerns expressed, however they cannot be addressed at
Level 2. While ESMA will encourage a harmonised implementation of the supplementary deferral regime, it has also has to acknowledge that the various options for CAs are enshrined in the Level 1 text and therefore can be exercised in different ways.
303. Regarding the actual Level 2 proposals, respondents overall agreed with how ESMA
is envisaging operationalising the different options, notwithstanding a number of dissenting views.
304. For the extended period of deferral foreseen in Article 11(3)(b) and (d) of MiFIR,
many investment firms advocated extending the deferral period from four to twelve

weeks for large trades, especially in illiquid instruments and for occasional very large or bespoke transactions, as 4 weeks were deemed insufficient to fully exit positions.
305. Many trading venues however asked for a reduction of the supplementary deferral
period to 24 hours for exchange-trade derivatives, one or two weeks for fixed income instruments and 72 hours for all other instruments to avoid promoting regulatory arbitrage and in order not to undermine existing levels of transparency. Proposal
306. ESMA has only made small technical adjustments to its proposal for the
supplementary deferral regime in Article 11 of the draft RTS and kept the overall system proposed in the CP.
307. While ESMA appreciates that there may be merit in differentiating per asset class or
per type or size of transaction, it also has to take into account that Article 11(3) of MiFIR already lays the foundation for a potentially highly fragmented transparency regime across the Union, as has also been recognised by many respondents.
308. Therefore, ESMA believes that the implementing measures should operationalise the
supplementary deferral regime on Level 2 in a simple and unified way to the extent possible rather than making the system even more complex due to the many options that have to be taken into consideration.
309. ESMA also considers that the four week supplementary deferral period, that is the
basis for implementing the volume-masking option in Article 11(3)(b) of MiFIR and the aggregate publication option in Article 11(3)(c) of MiFIR, does represent an adequate and workable compromise between the opposing views expressed by investment firms and trading venues.

Chart 1: General description of the supplementary deferral regime at the discretion of the CA (Part I) CAs discretion regarding deferral to post- trade transparency for non-equities CAs can require some transparency during standard deferral period CAs can permit enhanced deferral above the standard deferral period On T+1 before 9am local time aggregate at least 5 transactions executed on same calendar day and publish all details on an aggregate basis Publish all details of individual transaction except volume to be published during standard deferral period Standard Deferral CAs can impose further conditions on the deferral Publish all details of individual transaction except volume for an extended period of deferral of 4 weeks . No details published for T+2 if instrument/ class qualifies for a deferral. Details to be published by 7pm local time on T+2. If a sovereign debt instrument, NCAs can permit after this period … Publish details of several transactions executed over one calendar week on an aggregated basis for an indefinite period Publish details of several transactions executed over one calendar week on an aggregated basis …. Full details to be published after 4 weeks No publication of full details for an indefinite period

Table 39: General description of the supplementary deferral regime at the discretion of the CA (part II)
Article 10(1)(a)(i) of the draft RTS Article 10(1)(a)(ii) of the draft RTS Article 10(1)(b) of the draft RTS Article 10(1)(c) of the draft RTS
(non-sovereign debt only)
Article 10(1)(d) of the draft RTS
(sovereign debt only)
Article 10(1)(b) and (d) of the
draft RTS applied consecutively
(sovereign debt only)
Content
All details except the quantity using the flag "LMTF" Aggregated publication of at least 5 transactions using the flag "DATF" All details except the quantity using the flag "VOLO" Aggregated publication of transactions executed over the course of one calendar week using the flag "FWAF" Aggregated publication of transactions executed over the course of one calendar week using the flag "IDAF" All details except the quantity using the flag "VOLW" Timing As close to real time as possible The next day before 09.00 am local time As close to real time as possible The following Tuesday before
09.00 am local time
The following Tuesday before
09.00 am local time
As close to real time as possible and
Content
All details of the transaction and using the flag "FULF" All individual transactions with all details using the flag "FULA" All details of the transaction and using the flag "FULV" All individual transactions with all details and using the flag "FULJ" - Aggregated publication of transactions executed over the course of one calendar week using the flag "COAF" Timing Before 7pm local time on the second day after initial publication Before 7pm local time on the second day after initial publication Before 9am local time four weeks after initial publication Before 9am local time four weeks after initial publication - The following Tuesday before
09.00 am CET four weeks after
the initial publication
Initial publication
Second publication

VIII. Package transactions
310. A number of stakeholders stressed in their response to the CP the need to provide for
a tailored transparency regime for package transactions, i.e. transactions comprising several linked and contingent components, aiming at allowing clients or investment firms to reduce transactions costs and manage execution risks. Those responses stressed the need to allow market participants to continue using package transactions once the new regime is in place.
311. ESMA agrees that it is important to provide more guidance on how the transparency
requirements apply for package transactions and under which conditions those transactions may benefit from deferrals. However, it is important to stress the limited mandate given to ESMA in Level 1 for developing such a tailored regime. Some proposals brought forward by stakeholders, such as provisions covering pre-trade waivers for packages and/or the introduction of a negotiated transaction waiver for package transactions similar to the one used for equity instruments, cannot be introduced at Level 2 but would require changes to the text of MiFIR.
312. The draft RTS therefore does not include provisions on pre-trade transparency for
packages. However, since ESMA shares the view that appropriate pre-trade transparency provisions for packages are needed, ESMA recommends an amendment of MiFIR, wich would allow for a tailored treatment of packages also in the context of pre-trade transparency. Furthermore, ESMA intends to take the specificities of package transactions into account when developing the draft RTS on the trading obligation (see
section 2.4 on trading obligation for derivatives).
313. ESMA considers it important to provide for a regime that appropriately treats the
different types of package transactions. In ESMA’s view, at least three different types of package transactions can be distinguished:
i. Bespoke transactions that are largely carried out OTC and to which only post-trade
transparency will be applied;
ii. Trading strategies such as swap butterflies (i.e. a package of three swaps of
different tenors) or swap spreads traded on the same trading venue and which many trading venues already quote as a package; and
iii. Exchange for physicals (EFP) where a derivative position on one trading venue is
entered into to offset a simultaneous transaction in a physical underlying on the physical market or another trading venue.
314. Given the limited empowerment and the diversity of packages to be covered, ESMA
proposes in the revised draft RTS the following solution:

i. Introduction of a definition for EFP and package transactions to provide legal
certainty on the meaning of the term package transaction for the purpose of non￾equity transparency.
ii. Concerning post-trade transparency, the draft RTS clarifies that, in line with market
practice, the individual components of a package shall be published. In case where one of the components is subject to a deferral, the information on all components shall only be published after the lapse of the deferral period to provide all components of the package with the necessary protection. Last but not least, ESMA proposes a flag to identify package transactions and a separate flag for EFP.
iii. Deferrals: for the application of post-trade deferrals ESMA proposes in the draft RTS
that deferrals may be granted where one component of a package transaction, including an EFP, is above the LIS or SSTI threshold or does not have a liquid market.

IX. Temporary suspension of transparency requirements
Background/Mandate
Article 9(4) of MiFIR
4. The competent authority responsible for supervising one or more trading venues on
which a class of bond, structured finance product, emission allowance or derivative is traded may, where the liquidity of that class of financial instrument falls below a specified threshold, temporarily suspend the obligations referred to in Article 8. The specified threshold shall be defined based on the basis of objective criteria specific to the market for the financial instrument concerned. Notification of such temporary suspension shall be published on the website of the relevant competent authority. The temporary suspension shall be valid for an initial period not exceeding three months from the date of its publication on the website of the relevant competent authority. Such a suspension may be renewed for further periods not exceeding three months at a time if the grounds for the temporary suspension continue to be applicable. Where the temporary suspension is not renewed after that three-month period, it shall automatically lapse. Before suspending or renewing the temporary suspension under this paragraph of the obligations referred to in Article 8, the relevant competent authority shall notify ESMA of its intention and provide an explanation. ESMA shall issue an opinion to the competent authority as soon as practicable on whether in its view the suspension or the renewal of the temporary suspension is justified in accordance with the first and second subparagraphs.
Article 11(2) of MiFIR
2. The competent authority responsible for supervising one or more trading venues on
which a class of bond, structured finance product, emission allowance or derivative is traded may, where the liquidity of that class of financial instrument falls below the threshold determined in accordance with the methodology as referred to in Article 9(5)(a), temporarily suspend the obligations referred to in Article 10. That threshold shall be defined based on objective criteria specific to the market for the financial instrument concerned. Such temporary suspension shall be published on the website of the relevant competent authority. The temporary suspension shall be valid for an initial period not exceeding three months from the date of its publication on the website of the relevant competent authority. Such a suspension may be renewed for further periods not exceeding three months at a time if the grounds for the temporary suspension continue to be applicable. Where the temporary

suspension is not renewed after that three-month period, it shall automatically lapse. Before suspending or renewing the temporary suspension of the obligations referred to in
Article 10, the relevant competent authority shall notify ESMA of its intention and provide an
explanation. ESMA shall issue an opinion to the competent authority as soon as practicable on whether in its view the suspension or the renewal of the temporary suspension is justified in accordance with the first and second subparagraphs.
Article 9(5)(a) of MiFIR
5. ESMA shall develop draft regulatory technical standards to specify the following:
(a) the parameters and methods for calculating the threshold of liquidity referred to in paragraph 4 in relation to the financial instrument. The parameters and methods for Member States to calculate the threshold shall be set in such a way that when the threshold is reached, it represents a significant decline in liquidity across all venues within the Union for the financial instrument concerned based on the criteria used under
Article 2(1)(17);
315. Articles 9(4) and 11(2) of MiFIR allow CAs to temporarily suspend pre-trade and post￾trade transparency requirements for trading venues and investment firms when the
liquidity of a class of financial instrument falls below a specified threshold. Article 9(5) requires ESMA to specify in draft RTS the parameters and methods for calculating the threshold on the basis of objective criteria specific to the market for the financial instrument concerned and in such a way that it represents a significant decline in the liquidity within a class of bond, structured finance product, emission allowance or derivative across all venues within the Union based on the criteria used under Article 2(1)(17)(a) of MiFIR.
316. While there is some overlap between the “liquid” market and the “liquidity threshold”
to be specified under Article 9(5)(a) of MiFIR, the two provisions have different rationales and produce different effects. The “liquid market” provision deals with more structural aspects of liquidity and follows the standard procedure for granting a waiver or deferral of transparency requirements, whereas the “liquidity threshold” is meant to address an unexpected drop in liquidity allowing a CA to immediately suspend all transparency obligations for a limited period of time. ESMA’s understanding of the rationale for this provision is that temporarily removing transparency requirements in markets suffering from a temporary lack of liquidity can contribute to restoring liquidity.
317. In the DP ESMA suggested that the power to suspend transparency obligations
should be used only in exceptional market circumstances and that the threshold should be set at a sufficiently low level in order to avoid unnecessary fluctuations in transparency requirements and maintain a level playing field across the Union and also including a qualitative assessment.

318. In light of the feedback to the DP and being mindful of the scope of MiFIR and that
     the temporary suspension should only be applied in extraordinary circumstances, ESMA further developed its proposal and suggested in the CP that the liquidity suspension could be triggered following a drop in liquidity during the last 30 days compared to the average monthly volume for the preceding 12 full calendar months:
     i. by 60% for instruments or classes of financial instruments which have a liquid
     market.
     ii. by 80% for instruments or classes of financial instruments which do not have a liquid
     market.
     Analysis following feedback from stakeholders

319. The majority of respondents disagreed with the ESMA proposal and considered it
     unworkable from a general perspective. In particular, two issues were raised: Firstly, market participants considered that the period for assessing a significant drop in liquidity of 30 days was too long and would not allow CAs to react in a timely manner to changing market conditions, in particular in stressed market conditions. Secondly, the assessment on the basis of COFIA classes was considered as too broad since they do not represent the liquidity of one financial instrument and classes were not considered to be homogeneous enough.

320. Responses suggested addressing these deficiencies by adding a non-exhaustive list
     of market events which could trigger a temporary suspension, take into consideration more granular classes and shorten the look-back period from 30 days to 20 or 7 days.

321. In addition, some respondents also noted that suspending transparency without
     suspending the trading obligation might put market participants in a difficult position by being obliged to trade on-venue on the basis of little or no market data.

322. ESMA recognises that the conditions for triggering the temporary suspension are very
     restrictive, but considers that those reflect co-legislators’ intention to provide competent authorities with an instrument to only address extraordinary circumstances, while providing overall for a stable environment and avoiding unnecessary fluctuations in transparency requirements. Furthermore, the more granular calibration of classes of instruments for the liquidity assessment will also be mirrored in the assessment for the temporary suspension, allowing to better take developments at instrument level into account. ESMA has clarified in the draft RTS that the assessment should be carried out at the same level of the class of instruments as for determining the liquidity of a class of instruments. Proposal

323. ESMA maintains its approach to set different thresholds for financial instruments for
     which there is a liquid market and financial instruments for which there is not a liquid market, including the consideration of qualitative criteria. In light of feedback received, the draft RTS clarifies that the significant drop in liquidity should be measured at the same level of the class of instruments as used for the determination of the liquid market.

X. Exemptions from transparency requirements in respect
of transactions executed by a member of the ESCB Background/Mandate
Article 1 of MiFIR
[…]
6. Articles 8, 10, 18 and 21 shall not apply to regulated markets, market operators and
investment firms in respect of a transaction where the counterparty is a member of the European System of Central Banks (ESCB) and where that transaction is entered into in performance of monetary, foreign exchange and financial stability policy which that member of the ESCB is legally empowered to pursue and where that member has given prior notification to its counterparty that the transaction is exempt.
7. Paragraph 6 shall not apply in respect of transactions entered into by any member of
the ESCB in performance of their investment operations.
8. ESMA shall, in close cooperation with the ESCB, develop draft regulatory technical
standards to specify the monetary foreign exchange and financial stability policy operations and the types of transactions to which paragraphs 6 and 7 apply. ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1095/2010.
324. Article 1(6) of MiFIR exempts regulated markets, market operators and investment
firms from transparency requirements in respect of transactions in non-equity instruments where the counterparty is a member of the European System of Central Banks (ESCB) and where a transaction is carried out for the purpose of monetary, foreign exchange and financial stability policy.
325. MiFIR empowers ESMA to develop, in close collaboration with the ESCB, draft RTS
specifying the monetary, foreign exchange and financial stability policy operations and other tasks in the public interest of each member of the ESCB and the type of transactions to which the exemption applies.
326. MiFIR also empowers the Commission to adopt delegated acts to extend the scope of
the exemption from transparency requirements in relation of transactions carried out by

central banks that are not members of the ESCB. ESMA stands ready to provide technical advice to the Commission on the extension of the exemption to other central banks.
327. ESMA’s proposal for draft RTS in the CP clarified the operations and types of
transactions for which the exemption from pre-trade and post-trade transparency in
Article 1(6) of MiFIR apply. The proposal defined monetary, foreign exchange and
financial stability policy operations in relation to the legal acts or statutes laying down the duties and powers of members of the ESCB. The proposal clarified the types of investment operations for which the exemption under Article 1(6) does not apply which includes those where the member of the ESCB acts in its capacity as administrator of a pension scheme. Analysis following feedback from stakeholders
328. The vast majority of respondents agreed with the proposal, requesting that it is made
clear in the draft RTS that the member of the ESCB is responsible for notifying when the transaction is being carried out for the purpose of monetary, foreign exchange and financial stability policy. Trading venues, in contrast, opposed the proposal, noting that the exemption would require them to adapt their systems to allow the members of the ESCB to make such a notification, translating into increased costs. Trading venues also stated that the exemption should not apply to anonymous order books. Proposal
329. ESMA maintains its proposal of the operations and types of transactions for which the
exemption from pre-trade and post-trade transparency in article 1(6) of MiFIR apply, and continues to be of the view that the requirement to provide prior notification rests only on the member of the ESCB in the form of legal documentation or contractual or regulatory arrangements. In the context of certain trading systems such as anonymous electronic order books, prior notification shall be provided by the member of the ESCB to the operator of the trading venue rather than to the counterparty. ESMA clarifies that the notification given by the member of the ESCB when trading in an anonymous order book exempts the system from producing a transaction report, which includes both legs of the trade.

2.2.3 Implementing the new non-equities liquidity and
transparency regime
I. Data collection, calculations and publication
Annual determination of liquid classes and of the LIS and SSTI thresholds
330. The CP included only some basic provisions on the methodology to be applied for the
purpose of determining the LIS and SSTI thresholds. However, in light of the revised approach requiring periodic calculation, ESMA has further developed the methodology in the draft RTS to provide certainty on the treatment of different asset classes, to ensure that all classes and sub(-asset) classes of instruments are included and that calculations are carried out consistently.
331. The revised approach requires the yearly determination of the financial instruments or
classes of instruments (not) having a liquid market and the thresholds to determine the LIS and SSTI on the basis of the distribution of trades of each sub(asset)-class as presented in section ”Feedback to the CP and revised proposal applicable across all asset classes” above and asset class by asset class in sections A to K above and set out in Annex III of the draft RTS.
332. However, the Regulation requires trading venues, APAs and CTPs to submit data
related to the trading activity on a daily basis. Considering the broad scope of financial instruments covered and the large amount of data to be processed, daily submission enables CAs to more accurately process files of manageable sizes and ensures an efficient and timely management of the data submission, data quality check and data processing. Furthermore, collecting data on a daily basis also simplifies the data provision obligation on trading venues, APAs and CTPs by alleviating them from the burden of calculating the number of trading days in the cases where that quantitative liquidity criterion is applicable, and of aggregating data for the same financial instrument across different time maturity buckets in the cases where the time to maturity has to be considered. Centralising that calculation also ensures a consistent use of the criteria across financial instruments and trading venues.
333. The following paragraphs present the different steps of the data collection, calculation
and publication.
334. Step 1: CA collect on a daily basis the data on the trading activity over the period
from 1 January to 31 December for the purpose of the liquidity assessment and the determination of the SSTI/LIS thresholds except for the liquidity assessment bonds which shall be performend at the end of each quarter.

335. Step 2: The collected data, where expressed in monetary value and not denominated
     in Euro is converted into EUR (applicable currency) using the ECB foreign exchange rate reference data.
336. Step 3: Determination of the liquid market for the various sub(-asset) classes. Five
     cases can be distinguished:
     i. For securitised derivatives, foreign exchange derivatives and some sub-asset
     classes of equity derivatives, Annex III of the draft RTS already pre-determines whether those classes (not) have a liquid market. For those cases no calculations are needed.
     ii. For bonds (including ETCs and ETNs), interest rate derivatives, commodity
     derivatives, C10 derivatives, emission allowances, emission allowance derivatives, some sub-asset classes of equity derivatives (swaps, portfolio swaps), credit derivatives as well as some sub-asset classes of CFDs (currency and commodity CFDs), Annex III defines quantitative liquidity criteria and thresholds against which the liquidity assessment should be performed.
     iii. For some credit derivatives (CDS index options and single name options) and CFDs
     not covered under (ii) the liquidity assessment shall be determined on basis of the so-called qualitative liquidity criteria. In particular, the liquidity assessment will be based on the underlying, i.e. where the underlying is liquid, the derivative contract will be, subject to further conditions set out in Annex III, categorised as liquid.
     iv. For SFPs a two-test procedure is provided: the first test is performed at the class
     level, in other words the trading executed in all SFPs is measured against quantitative liquidity criteria and thresholds. If the first test is not passed all SFPs are deemed illiquid, otherwise the second test has to be performed. The second test is performed on an instrument by instrument basis and aims at selecting as liquid only those SFPs that recorded a certain trading activity over the period by applying quantitative liquidity criteria and thresholds.
     v. All sub-asset classes that do not belong to any of the defined sub-asset class of the
     respective asset class will be considered as not having a liquid market and no calculations are needed.
337. Step 4: Determination of the SSTI/LIS-thresholds
     i. The data collected on a daily basis, as mentioned above, is used for the
     determination of the SSTI/LIS thresholds. In particular, for each instrument data related to the number of transactions and related volume executed (using the measure of volume set out in Table 4 of Annex II fo the final draft RTS) in pre-

defined transaction-size bins12 defined on the basis of the rounding rule provided in
Article 13 of the final draft RTS13 is collected.
ii. For a given sub(-asset) class, the data received for all days and all instruments it will
be summed as to have, for each transaction-size bin, the number of transactions of that size range executed during the year and the total volume represented by those transactions.
iii. The cumulative distribution function will be computed by cumulating the number of
transactions and the total volume of the transactions over the transaction-size bins.
iv. The upper bound of the bin so that the X% percentile lies within the bin will be
determined as the X% trade-percentile (or volume-percentile).
338. Step 5: Determination of the SSTI/LIS-thresholds according to one of the following
methodologies:
i. For bonds applying the trade percentiles set out in table 2.3 of Annex III.
ii. For ETCs and ETNs, securitised derivatives, foreign exchange derivatives, all SFPs
when the first test for the purpose of the liquidity assessment is not passed, for those SFPs considered not to have a liquid market where the first is passed and sub(-asset) classes of all derivatives (except equity derivatives), emission allowances and CFDs not having a liquid market the threshold values set out in the respective tables of Annex III of the final draft RTS
iii. For those SFPs considered to have a liquid market, i.e. when the both tests are
passed l and all sub(-asset) classes of derivatives (except equity derivatives and foreign exchange derivatives), emission allowances and CFDs having a liquid market if they recorded more than 1,000 transactions14, the greater of:
a. the trade size below which lies the percentage of transactions corresponding to a certain trade percentile; b. (only for the determination of the post-trade LIS/SSTI thresholds except for emission allowances and emission allowance derivatives) the trade size below which lies the percentage of volume corresponding to a certain volume percentile as long as the volume percentile for the LIS threshold is not higher

12 For bonds, transactions < EUR 100,000 will not be considered for the calculations 13 Transactions size bins are defined as follows:

• EUR 100,000 steps until EUR1 million 0-EUR 100,000; EUR 100,000- EUR 200,000, etc.
• EUR 500,000 steps until EUR10 million EUR1 million-EUR1.5 million, EUR1.5 million-EUR 2 million, etc.
• EUR 5million steps until EUR100 million EUR5 million-EUR10 million, EUR10 million-EUR 15 million, etc.
• EUR 25million steps above EUR100 million EUR100million-EUR125 million, EUR125 million-EUR 150 million,
  etc.
  14 For sub(-asset)classes with less than 1,000 trades the threshold floors shall apply.

than the 97.5th percentile, in that case the trade percentile should prevail for both the LIS and SSTI; and
c. the threshold floor.
iv. For equity derivatives the threshold values should be set in relation to the average
daily notional amount (ADNA) according to table 6.2 in Annex III of the final draft RTS.
339. Step 6: .Round the resulting value of classes covered under (ii) and (iii) of step 5
using the following methodology:
Trade value (TV) in EUR Rounding up to the next…(in EUR) TV < 1,000,000 100,000 1,000,000≤TV<10,000,000 500,000 10,000,000≤TV<100,000,000 5,000,0000 TV 100,000,000≥ 25,000,000
340. Step 7: Publication of results of the liquidity test and of the LIS/SSTI thresholds by
the first day of May each year.
341. Step 8: Application of the results of the publication one month following its
publication, i.e. on the first day of June for a 12-month period.

II. Reference data, treatment of newly issued instruments
and instruments traded for the first time
Reference data
342. In order to ensure that data on financial instruments traded is provided on a
sufficiently granular basis to assign the financial instruments to the respective sub(- asset)classes and to carry out the transparency calculations, Article 13 of the final draft RTS requires trading venues to submit to competent authorities the necessary details included in Annex IV (e.g. for interest rate derivatives information on the underlying type and the maturity date) whenever an instrument is admitted to trading or first traded and any time the information provided are subject to change. Such details are additional to the reference data that trading venues have to provide under Article 27 of MiFIR. Treatment of instruments admitted to trading or traded for the first time on a trading venue
343. Under the proposed COFIA approach newly issued instruments or derivatives traded
for the first time on a trading venue will, in general automatically, fall into one of the existing sub-classes and hence the liquidity classification and transparency thresholds applicable to this specific sub-class will be applied.
344. However, given the dynamic market environment, it cannot be excluded that financial
instruments not covered by any sub-class as defined in Annex III of the draft RTS may be admitted to trading or traded for the first time. To ensure that in such a situation, the transparency regime can be applied, the draft RTS clarifies that those instruments will be treated as instruments not having a liquid market and the liquidity threshold values applicable to instruments of the same sub-asset class that do not have a liquid market will apply.
345. In light of the impact of such a new non-defined sub-class, it may be necessary to
amend in the medium term the RTS to ensure a comprehensive approach.

III. Transition
346. To provide for a smooth transition into the new system and to ensure that all results of
the transparency calculation are published sufficiently ahead of the first application on 3 January 2017, the draft RTS includes transitional provisions. On basis of a reference period of 6 months (1 July 2015 - 31 December 2015), all calculations specified in Article 13 and described in sections I and II of chapter 2.2.3 will be carried out and published by 3 July 2016. Publication half a year ahead of the application of the new transparency regime will ensure that markets are informed timely of which financial instruments and/or classes of financial instruments are considered to have a liquid market and on the applicable transparency thresholds.
347. However, for bonds (except ETCs and ETNs) the observation period used for the
transitional period will be the quarter ranging from 1 August 2016 to 31 October 2016 and the results will be published by 1 December 2016.
348. Data will be collected from trading venues for exchange traded products and from
trade repositories for other financial instruments. However, for bonds (except ETCs and ETNs) transaction reporting will be used.

2.3. Double volume cap mechanism and the provision of
information for the purposes of transparency and other calculations
2.3.1 Double volume cap mechanism
Background/Mandate
Article 5 of MiFIR

1. In order to ensure that the use of the waivers provided for in Article 4(1)(a) and
   4(1)(b)(i) does not unduly harm price formation, trading under those waivers is restricted as follows:
   (a) the percentage of trading in a financial instrument carried out on a trading venue under those waivers shall be limited to 4% of the total volume of trading in that financial instrument on all trading venues across the Union over the previous 12 months. (b) overall EU trading in a financial instrument carried out under those waivers shall be limited to 8% of the total volume of trading in that financial instrument on all trading venues across the Union over the previous 12 months. That volume cap mechanism shall not apply to negotiated transactions which are in a share, depositary receipt, ETF, certificate or other similar financial instrument for which there is not a liquid market as determined in accordance with Article 2(1)(17)(b) and are dealt within a percentage of a suitable reference price as referred to in Article 4(1)(b)(ii), or to negotiated transactions that are subject to conditions other than the current market price of that financial instrument as referred to in Art 4(1)(b)(iii). […]
2. ESMA shall publish within five working days of the end of each calendar month, the
   total volume of Union trading per financial instrument in the previous 12 months, the percentage of trading in a financial instrument carried out across the Union under those waivers and on each trading venue in the previous 12 months, and the methodology that is used to derive those percentages.
3. In the event that the report as referred to paragraph 4 identifies any trading venue
   where trading in any financial instrument carried out under the waivers has exceeded 3.75% of the total trading in the Union in that financial instrument, based on the previous 12 months trading, ESMA shall publish an additional report within 5 working days of the 15th day of the calendar month in which the report referred to in paragraph 4 is published. That report shall contain the information specified in paragraph 4 in respect of those financial instruments

where 3.75% has been exceeded.
6. In the event that the report referred to paragraph 4 identifies that overall EU trading in
any financial instrument carried out under the waivers has exceeded 7.75% of the total EU trading in the financial instrument, based on the previous 12 months trading, ESMA shall publish an additional report within five working days of the 15th on the day of the calendar month in which the report referred to in paragraph 4 is published. That report shall contain the information specified in paragraph 4 in respect of those financial instruments where 7.75% has been exceeded. […]
9. ESMA shall develop draft regulatory technical standards to specify the method,
including the flagging of transactions, by which it collates, calculates and publishes the transaction data, as outlined in paragraph 4, in order to provide an accurate measurement of the total volume of trading per financial instrument and the percentages of trading that use those waivers across the Union and per trading venue.

1. In order to ensure that the use of waivers from pre-trade transparency does not unduly
   harm price formation, MiFIR introduces in Article 5 a mechanism that caps the amount of trading carried out under:
   i. systems matching orders based on a trading methodology by which the price is
   determined in accordance with a reference price; and
   ii. negotiated transactions in liquid instruments carried out under limb (i) of Article
   4(1)(b) of MiFIR.

2. This double volume cap mechanism is to be implemented and supervised on the basis
   of ESMA publications regarding the volume of trading under the waivers and an empowerment for technical standards enabling CAs to obtain the data for making such publications.

3. The volume cap applies on an instrument by instrument basis. Two situations can be
   distinguished. In the first case, the first volume cap is calculated on a trading venue by trading venue basis and is set at the level of 4% of the overall amount of trading across all trading venues in the EU. That means that the volume of trading on any trading venue using the reference price waiver and/or the first limb of the negotiated trade waiver should not exceed the 4% threshold. As an example, a trading venue would be in breach of the 4% threshold when the amount of trading carried out under the reference price waiver and the relevant negotiated trade waiver is 2% and 3% respectively. If the 4% cap is breached by a trading venue in a particular financial instrument, the CA that has authorised the use of these waivers shall suspend within 2 working days their use for that trading venue for that particular financial instrument for a period of 6 months.

4. In the second case, the volume cap is calculated across all trading venues operating
   under one or both of the relevant waivers and is set at the level of 8% of the overall amount of trading across all trading venues in the EU. That means that the total volume of trading on all trading venues using the reference price waiver and/or the first limb of the negotiated trade waiver should not exceed the 8% threshold. As an example the 8% threshold would be considered to be breached when the amount of trading in the EU carried out under the reference price waiver and the relevant negotiated trade waiver is 4% and 5% respectively. If the 8% cap is breached, all CAs shall within 2 working days suspend the use of those waivers across all trading venues in the EU for a period of 6 months.

5. Both volume caps are measured against a rolling 12 month period with monthly updates
   published by ESMA as well as updates published twice a month in certain circumstances.

6. In order to effect such publications of actual volume traded within waiver facilities, ESMA
   is empowered to draft RTS specifying the methods by which ESMA can collate the necessary information, calculate the actual volumes traded and publish the information. Analysis following feedback from stakeholders Volume traded via waiver facilities

7. ESMA is aware of the sensitivity of the double volume cap calculations and the potential
   commercial consequences for venues, issuers and other market participants alike of the publication of incorrect information which would then lead to the suspension of the use of one waiver or of all waivers across the EU for one particular financial instrument. In the CP, ESMA proposed to use two different channels for collecting data:
   i. First source of data - Collation of the volume of trading from trading venues: One
   way envisaged to collect the entire volume of on-venue trading consists in requesting all trading venues to submit volumes traded on their systems over the relevant 12 months period to their CA.
   ii. Second source of data - Collation of volumes from CTPs: ESMA also considered
   that trading volumes could be retrieved from the CTPs. ESMA considered this source particularly helpful for checking the validity and completeness of data submitted by trading venues.

8. In the responses received to the CP, some respondents questioned the fact that ESMA
   was expecting to receive data from these two different sources (i.e. trading venues and CTPs). In their view, this would represent an unnecessary burden and, hence, they recommended using only one source of data. They added that, given that uncertainty remains on whether or not there will be CTPs in the future, TVs should be used as the unique source of data. On the other hand, other respondents welcomed the ESMA

proposal in this respect highlighting the extreme sensitivity of the DVC publications and they deemed crucial to have the possibility to cross check data if necessary. Frequency of the calculations and publications
9. According to Article 5(4) of MiFIR, “ESMA shall publish within five working days of the
end of each calendar month, the total volume of Union trading per financial instrument in the previous 12 months, the percentage of trading in a financial instrument carried out across the Union under those waiver and on each trading venue in the previous 12 months, and the methodology that is used to derive those percentages”. Article 5(2) and 5(3) stipulate that, in case of breach of one of two thresholds, the competent authority will have two days after this publication by ESMA to suspend the use of the waiver concerned. Therefore, and given the limited timeframe granted to CAs to react and in order to ensure timely publication, ESMA suggested in the CP that the use of waivers should be monitored on a more frequent basis and proposed to request data and perform the calculations twice a month.
10. ESMA proposed in the CP to receive data twice a month for two reasons:
i. to minimise the impact of potential data errors; if data is requested twice a month,
data errors can be corrected as soon as they are detected. This is important as ESMA only has five days for error checking and publication from the reception of end of month information, as foreseen in Article 5(4) of MiFIR;
ii. to be prepared from the outset for the publication of information twice a month which
is required in cases where the thresholds of 3.75% per trading venue or 7.75% overall are reached (Article 5(5) and (6) of MiFIR).
11. No comments were received against collecting data twice a month, hence the proposal
to do so is maintained. However, respondents wondered whether the mid-month data were to be published on a systematic basis. As mentioned in the CP, updates will only be published once a month as prescribed by Level 1 text or twice a month in the cases described in Article 5(5) and (6) of MiFIR.
12. In the CP, ESMA also suggested, in order to simplify the periodic submission of data,
that trading volumes should be requested not for the previous 12 months but only for the last 15 days (or 13, 14, 15 or 16 days in the second half of the month, depending on the calendar month). The volumes would then be aggregated with the data collected previously from which the trading volume for the first 15 days (or again 13, 14, 15 or 16 as the case may be) of the rolling calendar year would be removed. As an example, on 1 March 2017, trading venues would be requested to submit data for the period from 16 February 2017 to 28 February 2017 (end of the month). Volumes collected would then be added to the calculation sample from which volumes for the period from 16 February 2016 to 29 February 2016 (end of the month) would have been removed. No specific comments have been received in this respect and, thus, the proposal is maintained.

13. Trading venues will be required to send all data required on the first and sixteenth day of
    each calendar month by 13.00 CET to their respective CA. All such dates are subject to adjustments if they fall on a public holiday or a non-trading day according to the trading venue’s home country calendar. In this case, it was proposed that data should be reported on the following working day before the opening of the markets. However, in some of the responses received, respondents asked ESMA to extend the submission in those cases to the following working day by 13.00 CET. Although ESMA noted that a non-working day for a trading venue might always correspond to a non-working day for ESMA (and hence the delay for the general publication of the volumes on the ESMA website would necessarily be delayed), ESMA also appreciates the benefit of having consistent timing for the delivery of the data. Hence, the draft RTS has been modified to accommodate the comments received in this respect.
14. It is worth stressing that ESMA has maintained the possibility to submit ad-hoc requests
    to trading venues and CTPs. Thus, trading venues and CTPs should have systems and IT infrastructures in place to submit, by close of business on the next working day following the request, data for the last 12 months aggregated over different time horizons (e.g. last 12 months aggregation, monthly aggregation over the last year, etc.). As mentioned above, this data could for instance be used in case errors are detected in the main data sample. Calculation of actual volumes by ESMA
15. Some responses received during the consultation questioned the use of “value”
    thresholds (i.e. number of units traded multiplied by price) and recommend using rather “volume” thresholds (i.e. considering only the number of units traded). Should the “value” threshold be maintained, respondents asked for having further clarity on the exchange rate to be used. With respect to the converted data, one respondent stressed that, in his view, converted data might introduce distortion in the calculation with the possibility that one of the thresholds is breached just because of currency swings.
16. With respect to the use of “volume” thresholds rather than “value” thresholds, ESMA
    disagrees with the responses received. In its view, the price remains an essential element that should be taken into consideration in order to adequately monitor the volume of trading undertaken under the waivers and the economic impact this has on financial markets. ESMA also notes that the proposed use of “volume” thresholds would not allow taking adequately into account potential increases or decreases of the number of outstanding shares for a specific financial instrument (e.g. in case of splits or reverse splits).
17. With respect to the conversion of data into euros, ESMA appreciates the concern that
    conversion might introduce distortion in the calculations and agrees that it would more appropriate to convert volumes only where necessary. Therefore, with respect to financial instruments which are traded in only one single currency across the Union, the volumes to be used for the calculations and to be published will not be converted.

However, for financial instruments traded in more than one currency across the Union, it is necessary to convert the volumes executed in different currencies into one common cuurency so as to enable the computation of those volumes and make the required calculations. In those cases, the volumes will be converted into euro using average exchange rates calculated on the basis the euro foreign exchange reference rates as published daily by the European Central Bank on its website over the collection period.
18. It is also worth stressing that trading venues will not be responsible for the conversion of
the volumes. Leaving to trading venues the repsonsability of the conversion might otherwise lead to divergent application between venues and would introduce additional operational risks and possible errors. Hence, ESMA has revised its proposal in this respect: data will be reported to CAs and ESMA using the transaction original currency and the conversion into euros will be managed, where necessary, centrally by ESMA.
19. Last but not least, some respondents also asked ESMA to clarify whether transactions
executed on the basis of orders benefitting from the pre-trade large in scale (LIS) waiver should be included in the calculations. In ESMA’s view, this should only be the case for a transaction executed on the basis of two orders benefitting from the large in scale waiver, where such waiver has been granted by the CA. Data with respect to financial instruments for which there is less than 12 months of data available
20. It is worth clarifying that ESMA also expects to receive data for instruments for which
there is less than 12 months of data available. This could concern notably instruments newly admitted to trading or instruments traded for the first time on a venue. More generally, trading volumes have to be reported for equity and equity-like financial instruments regardless of whether they have been traded continuously over the previous 12 months or only during a limited time over that period. Consolidation of volumes by ESMA
21. With regard to the consolidation and calculation of the relevant data for the operation of
the volume cap, ESMA remains minded to establish technical arrangements seeking to ensure that the data is consolidated on a timely basis and that proper procedures for the identification and correction of errors are in place.
22. To ensure a timely publication of data each month ESMA intends to develop templates
in a format allowing for a seamless aggregation of volumes across venues which must be completed by stakeholders. In order to ensure sufficient harmonisation in this respect, ESMA has deemed appropriate to already include some specifications on the data to be submitted in Annex of the RTS.
23. In particular, ESMA notes that the identifiers currently used by trading venues for diverse
purposes do not always provide the sufficient level of granularity required for performing

the DVC calculations. In particular, ESMA has observed that in some cases, where for instance a regulated market and a MTF are operated by the same entity, they might be using the same identifier (MIC code) which is not appropriate in the context of the DVC calculations.
24. As indicated in a recital, for the purpose of the double volume cap mechanism, trading
venues and CTPs should ensure that the entity on which the transaction was executed is identified with sufficient granularity so as to allow ESMA to perform all calculations set out under MIFIR. In particular, the trading venue identifier used should be unique and not shared with any other trading venue operated by the same market operator or otherwise. Trading venue identifiers should allow ESMA to distinguish in an unequivocal manner all trading venues for which the market operator has received a specific authorisation under MiFID II. Suspension and resumption of the waiver
25. Some respondents asked for further clarification on how the suspension and resumption
of the waiver will operate in practice and in particular on how to achieve sufficient coordination. ESMA appreciates the concerns expressed in this respect and agrees that some clarification could be provided. However, it also notes that those questions concern more specifically the level 1 text and are outside the mandate conferred to ESMA with respect to the Technical Standards on the double volume cap mechanism.
26. Some responses suggested that in case of suspension of the use of the waiver for six￾months, the aggregated volumes of the two waivers should be reset automatically to
zero rather than include the six months prior to the suspension in a rolling 12 month calculation claiming that, otherwise, the same trades could result in two consecutive suspensions. ESMA does not agree with this interpretation and considers that the last 12 months of data should always be taken into consideration, as prescribed by the level 1 text and regardless of whether a suspension has already occurred or not. In ESMA’s view, the same trades could indeed result in two separate suspensions should the volumes of trading under the waiver(s) for the last 12 months still be above the thresholds set out by Article 5 of MiFIR. However, it should be stressed that a suspension would prevent the use of waivers for 6 months and that the volume of trading under the waivers taken into account for the calculation should, hence, be lower in relative terms after the end of the suspension period (considering that lit trading should continue in the meanwhile). Implementation of the DVC provisions and 2016 data
27. Article 5(8) of MiFIR stipulates that “the period for the publication of trading data by
ESMA, and for which trading in a financial instrument under those waivers is to be monitored shall start on 3 January 2016. Without prejudice to Article 4(5), competent authorities shall be empowered to suspend the use of those waiver from the date of application of this Regulation [i.e. 3 January 2017] and thereafter on monthly basis”. On

this basis, trading venues will have to submit their first report to their respective CA by 3 January 2017. This report will include trading data for the previous 12 months (i.e. from 3 January 2016 to 31 December 2016) and will be published by ESMA within five working days. The data to be submitted in this respect should be granular enough so as to allow ESMA to collate data to be received in line with the methodology described in the paragraphs above. In other words, the aggregated data to be submitted will need to be split into 24 distinct periods as follows: from 3 January 2016 to 15 January 2016; from 16 January 2016 to 31 January 2016, etc.
28. MiFID II / MiFIR, including the waiver regime, will only be applied as of 3 January 2017.
It has to be noted that the waivers under MiFIR are not identical to the ones under MiFID. This applies in particular to the negotiated trades waiver which has been further refined in MiFIR compared to MiFID I. However, in ESMA’s view, this should not prevent trading venues from submitting the first reports based on the new waiver regime. ESMA takes this view for two reasons. First, the volumes of trading executed under the reference price and negotiated transaction waivers can be inferred from the equivalent waivers existing under MiFID I and specified in Article 18(1) of the Commission Regulation (EC) No 1287/2006 (MiFID I Implementing Regulation). In order to fit the MiFID II definition of the reference price and of the negotiated transaction waivers, those volumes will however need to be adjusted, in particular by excluding negotiated transactions in illiquid instruments from the volume of transactions under the negotiated transactions waiver.Transactions executed on the basis of orders that would have benefitted from the large in scale waiver if executed after 3 January 2017 will also have to be excluded from the reference price and negotiated transcation volumes. Second, MiFID II/MiFIR entered into force in July 2014, thereby providing trading venues with sufficient lead time to implement the new waiver regime and to be able to perform the necessary adjustments.
29. Several respondents raised concerns about the implementation of the DVC mechanism
and in particular the collection of data for the year 2016 described above. ESMA is fully aware that smooth implementation of the RTS requires adequate coordination with trading venues well before the entry into force of the DVC provisions. ESMA is already working on the operational implementation of those technical standards and should contact the relevant parties in due course. Proposal Volume traded via waiver facilities
30. ESMA proposes to use trading venues as the primary source of data for performing all
the necessary calculations for the purpose of the DVC mechanism. ESMA agrees that a second source of data is not needed in all circumstances and that it might not be necessary to request data from CTPs on a systematic basis. However, ESMA still believes that in some cases (e.g. partial or non-delivery of the data, doubts with regard to the quality and accurateness of the data, etc.) a second source of data should be

available. The possibility of requesting data to CTPs on ad hoc basis has therefore been maintained in the RTS. Frequency of the calculations and publications
31. Although some adjustments were made with respect to the exact time by which the data
should be submitted by trading venues, ESMA has maintained the general procedure described in the CP and will request data from trading venues and perform the calculations twice a month. Updates will however still be published monthly as prescribed by Level 1 text or twice a month in the cases described in Article 5(5) and (6) of MiFIR. Calculation of actual volumes by ESMA
32. ESMA has maintained its initial proposal to use “value” thresholds (i.e. number of units
traded multiplied by price) and rather than “volume” thresholds (i.e. considering only the number of units traded). However, ESMA has revised its proposal with respect to the conversion of data:
i. volumes will only be converted into euro for financial instruments traded in more
than one currency across the Union; and
ii. data will be submitted to CAs and ESMA in the original currency of the transaction
and the conversion into EUR will be managed centrally by ESMA.
33. ESMA has also clarified in a recital how to treat transactions executed on the basis of
orders benefitting from the large in scale (LIS) waiver for the purpose of the DVC calculations. Only transactions executed on the basis of two orders benefitting from the large in scale waiver should be excluded. Consolidation of volumes by ESMA
34. In order to ensure sufficient harmonisation of the data submitted and facilitate the
consolidation of volumes submitted by different trading venues, ESMA included some specifications on the data to be submitted in the Annex of the draft RTS. Suspension and resumption of the waiver
35. ESMA has not considered appropriate to modify or further specify its proposal with
respect to the suspension and resumption of the waiver and the proposal is maintained in this regard. Implementation of the DVC provisions and 2016 data
36. ESMA is mindful of the challenges arising from the implementation of the DVC
mechanism and will liaise with trading venues to ensure smooth implementation of the

provisions contained in the RTS and in particular with respect to the collection of data for 2016.

2.3.2 Article 22, MiFIR: Providing information for the purposes of
transparency and other calculations
Background/Mandate
Article 22(4) of MiFIR
4. ESMA shall develop draft regulatory technical standards to specify the content and
frequency of data requests and the formats and the timeframe in which trading venues, APAs and CTPs shall respond to such requests in accordance with paragraph 1 and the type of data that must be stored and the minimum period of time trading venues, APAs and CTPs shall store data in order to be able to respond to such requests in accordance with paragraph 2.
37. MiFIR requires competent authorities and ESMA to perform a significant number of
calculations in order to determine whether financial instruments are liquid and the level at which various thresholds (e.g. the ones for the large in scale waiver and the deferred publication regime) are set for such instruments. More specifically, these calculations are for the following purposes:
i. determining whether equity, equity-like and non-equity financial instruments have a
liquid market;
ii. setting the thresholds for pre-trade transparency waivers for equity, equity-like and
non-equity financial instruments;
iii. setting the thresholds for post-trade transparency deferrals for equity, equity-like and
non-equity financial instruments;
iv. determining whether an investment firm is a SI;
v. setting the SMS applicable to SIs dealing in equity and equity-like instruments, and
the size specific to the instrument applicable to SIs dealing in non-equity instruments; and
vi. determining whether derivatives are sufficiently liquid for the purposes of
implementing the trading obligation for derivatives.
38. Under Article 22(4), ESMA is empowered to further specify:
i. the content, frequency and formats of such requests;

ii. the timeframe within which trading venues, APAs and CTPs must respond to such
requests; and
iii. the rules applying to the storage of data by trading venues, APAs and CTPs.
Analysis following feedback from stakeholders
Content of data requests
39. In the CP, ESMA noted that the content of data requests under Article 22 of MiFIR will
depend, to a large extent, on the methodologies ESMA will set for determining the various thresholds. Therefore this section must be read in the context of ESMA’s proposals on how to determine the diverse thresholds for the pre-trade and post-trade transparency requirements for equity, equity-like and non-equity instruments.
40. In addition, ESMA stressed that the Level 1 text already imposes a number of specific
parameters. For instance, Article 2(1)(17)(a) already stipulates criteria to be used when assessing the liquidity of non-equity financial instruments for transparency purposes and, hence, data requests to trading venues, APAs and CTPs should entail parameters like the number of transactions in instruments over a specified period of time, the volume executed, the number and type of market participants active and the size of spreads. Similar criteria also apply to the determination of whether an instrument is sufficiently liquid for the purposes of the trading obligation for derivatives.
41. No specific comments were received with respect to the general approach suggested by
ESMA in the CP in which it proposed to cross refer to the calculation and methodologies set out in the relevant RTSs (i.e. RTSs on transparency requirements for equity, equity￾like and non-equity instruments, trading obligation, etc.) and, therefore, the RTS has been maintained in this respect. Frequency of data requests and timeframe to respond to data requests
42. In the CP, ESMA stressed that carrying out the calculations for determining the
requirements for pre-trade and post-trade transparency and the trading obligation regimes implies both periodic and ad hoc requests from CAs. In ESMA’s view, the calculations to be carried out for determining the various transparency requirements listed under Article 22(1) MiFIR cannot all be performed on a periodic basis and, thus, ESMA also foresees the need for ad-hoc requests. This concerns, for instance, future recalculations of the thresholds to adapt potential market changes, re-setting of the liquidity categories, production of reports as required under Article 4(4) of MiFIR, etc.
43. With regard to the timeframe to respond to the data requests, ESMA considered in the
CP that four weeks should be an appropriate timeframe to respond to ad hoc data requests and that, for periodic requests, information should be provided at the pre-set dates without any additional delay permitted.

44. Many respondents stressed that they should be able to cope with the response time set
    out under Article 3 of the draft RTS (CP version) on the double volume cap mechanism and the provision of information for the purposes of transparency and other calculations only in case of the use of standardised templates. ESMA agrees that the timeframe to respond to data requests very much depends on the level of automation and standardisation reached in the data request processes.
45. In this respect, it is worth stressing that, given the very large amount of data which will
    need to be collected and the borad scope of financial instruments to be covered, this is indeed ESMA’s intention to set up robust and automatized procedures for the collection of the data. In this context, ESMA has revised its initial proposal with respect to the frequency for the collection data. Except for the double volume cap calculations, it appears indeed appropriate to collect data daily from trading venues, APAs and CTPs to allow competent authorities to process smaller files and ensure an efficient and timely management of data submission, data quality check and data processing. Given the important amount of data to be collected, it also appear more appropriate to collect data in an aggregated form where possible. Daily collection will hence alleviate the burden such aggregation for submitting entities especially since certain calculations implies aggregating data for the same financial instrument across different time maturity buckets. Formats of data requests
46. As already stated in the DP and CP, it is ESMA’s intention to develop, in coordination
    with the stakeholders concerned, standardised templates setting out pre-determined content and format specifications in order to minimise the IT investment costs for trading venues, APAs and CTPs and to allow automating, to the extent possible, the submission of data.
47. As advised by the respondents, ESMA will try to the extent possible to leverage on
    templates already developed in the context of EMIR as well as existing industry standards so as to avoid unnecessary implementing costs for the industry.
48. As mentioned in the CP, such templates must be sufficiently adaptable so that they can
    incorporate any changes considered necessary at a later stage in a pragmatic fashion. Therefore ESMA has not integrated, but for the double volume cap, any templates into the technical standards given that any change to technical standards requires a significant period of time. Type of Data to be Stored and minimum period for storage
49. Trading venues, APAs and CTPs are requested to store data that is comprehensive and
    allow competent authorities and ESMA to perform accurately the calculations as required in the RTSs establishing the MiFID II / MiFIR requirements in terms of transparency such as the RTSs on:

i. Transparency for equity and equity-like instruments;
ii. Transparency for non-equity instruments;
iii. Liquid Market for equity and equity-like;
iv. Definition of SI; and
v. Trading obligation for derivatives.
50. It worth noting that while the required information should usually be included in the post￾trade transaction reports, it might be necessary for trading venues, APAs and CTPs, in
some cases, to store and provide additional information to CAs and ESMA. In particular, information on transactions executed on the basis of orders benefitting from the pre￾trade large in scale waiver might need to be submitted as for instance in the context on the calculations for the DVC mechanism.
51. In terms of minimum period for storage, ESMA has revised its original proposal. The two
years periods initially proposed in the CP does not appear to be sufficient to manage all the transparency calculations and, where necessary, perform ad hoc requests and calculations.
52. For instance, for equity and equity-like instruments, calculations have to be performed by
1 March each year on the basis of data from the previous calendar year and the results of those calculations will apply for a year starting 1 April following that publication. This means that, for example, the first round of calculations will be based on data for the period between 1 January 2017 and 31 December 2017 and will apply from 1 April 2018 until 1 April 2019. It is crucial for competent authorities that the submitting entities store the data that has served for the calculations at least until the end of the period of application. Hence, in this example, data from January 2017 should be stored at least until 1 April 2019 – i.e. more than 2 years.
53. Nevertheless, ESMA remains of the view that it is not necessary I to align the minimum
period of storage for the purposes of Article 22 with the record keeping rules under
Article 25 of MiFIR which provide for investment firms and require trading venues, APAs
and CTPs to store data for five years. A period of three years is deemed sufficient to manage all the transparency calculations and, where necessary, perform ad hoc requests and calculations. Proposal
54. Following the comments received by ESMA, the general approach developed in the draft
RTS on the double volume cap mechanism and the provision of information for the purposes of transparency and other calculations annexed to the CP has been maintained except for two changes which have been introduced for practical reasons:

i. The daily collection of data (except for double volume cap mechanism); and
ii. A minimum period for storage of three instead of two as consulted on.
55. It should be noted that the draft RTS on the double volume cap mechanism and the
provision of information for the purposes of transparency and other calculations establishes only the abstract principles for providing information necessary for the purpose of the transparency calculations. These principles are further developed in the draft RTS on equity and non-equity transparency which specify the content and frequency of data requests.
56. Lastly, ESMA takes note of the stakeholders call for developing standardised templates
as early as possible so as to ensure smooth implementation of the provisions contained in this RTS.

2.4. Criteria for determining whether derivatives should be
subject to the trading obligation (Article 32(6) of MiFIR) Background/Mandate
Article 32(6) of MiFIR – Criteria for determining whether derivatives should be subject
to the trading obligation
[…]
ESMA shall develop draft regulatory technical standards to specify the criteria referred to in paragraph 2(b):
Article 32(1) – (3)

1. ESMA shall develop draft regulatory technical standards to specify the following:
   (a) Which of the class of derivatives declared subject to the clearing obligation in accordance with Article 5(2) and (4) of Regulation (EU) No 648/2012 or a relevant subset thereof shall be traded on the venues referred to in Article 28(1) of this Regulation; (b) The date or dates from which the trading obligation takes effect, including any phase-in and the categories of counterparties to which the obligation applies where such phase-in and such categories of counterparties have been provided for in regulatory technical standards in accordance with Article 5(2)(b) of Regulation (EU) No 648/2012. ESMA shall submit those draft regulatory technical standards to the Commission within six months after the adoption of the regulatory technical standards in accordance with Article 5(2) Regulation (EU) No 648/2012 by the Commission. Before submitting the draft regulatory technical standards to the Commission for adoption, ESMA shall conduct a public consultation and, where appropriate, may consult third-country competent authorities.
2. In order for the trading obligation to take effect:
   (a) The class of derivatives pursuant to paragraph 1(a) or a relevant subset thereof must be admitted to trading or traded on at least one trading venue as referred to in Article 28(1); and (b) There must be sufficient third-party buying and selling interest in the class of derivatives or a relevant subset thereof so that such a class of derivatives is considered sufficiently

liquid to trade only on the venues referred to in Article 28(1).
3. In developing the draft regulatory technical standards referred to paragraph 1, ESMA
shall consider the class of derivatives or a relevant subset thereof as sufficiently liquid pursuant to the following criteria:
(a) The average frequency and size of trades over a range of market conditions, having regard to the nature and lifecycle of products within the class of derivatives; (b) The number and type of active market participants including the ratio of market participants to products/contracts traded in a given product market; (c) The average of the size of the spreads. In preparing those draft regulatory technical standards, ESMA shall take into consideration the anticipated impact that trading obligation might have on the liquidity of a class of derivatives or a relevant subset thereof and the commercial activities of end users which are not financial entities. ESMA shall determine whether the class of derivatives or relevant subset is only sufficiently liquid in transactions below a certain size.
4. ESMA shall, on its own initiative, in accordance with the criteria set out in paragraph 2
and after conducting a public consultation, identify and notify to the Commission the classes of derivatives or individual derivative contracts that should be subject to the obligation to trade on the venues referred to in Article 28(1), but for which no CCP has yet received authorisation under Article 14 or 15 of Regulation (EU) No 648/2012 or which is not admitted to trading or traded on a trading venue referred to in Article 28(1). Following the notification by ESMA referred to in the first subparagraph, the Commission may publish a call for development of proposals for the trading of those derivatives on the venues referred to in Article 28(1).
5. ESMA shall in accordance with paragraph 1, submit to the Commission draft
regulatory technical standards to amend, suspend or revoke existing regulatory technical standards whenever there is a material change in the criteria set out in paragraph 2. Before doing so, ESMA may, where appropriate, consult the competent authorities of third countries. The trading obligation procedure

1. The application of the trading obligation is defined by Article 32 MiFIR which outlines the
   process for deciding which derivatives should be declared subject to mandatory trading. Once a class of derivatives has been mandated as subject to the clearing obligation under EMIR, ESMA must determine whether those derivatives (or a subset of them) should be subject to the trading obligation, meaning they can only be traded on an RM,

MTF, OTF or a third country trading venue deemed to be equivalent by the Commission. In summary, whether or not a class of derivatives subject to the clearing obligation should also be made subject to the trading obligation will be determined by two main factors:
i. The venue test: the class of derivatives must be admitted to trading or traded on at
least one admissible trading venue; and
ii. The liquidity test: whether the derivatives are ‘sufficiently liquid’ and there is
sufficient third party and selling interest.
2. Article 32 of MiFIR provides three empowerments for ESMA for drafting RTS in relation
to derivatives subject to the trading obligation.
3. Under Article 32(1) of MiFIR, every time a class of derivatives (or subset) is declared
subject to the clearing obligation under EMIR, ESMA has 6 months to prepare, consult on, and present to the Commission a draft RTS stating whether those derivatives should also be made subject to the trading obligation and if so, when. In preparing these RTS, ESMA must consider, under Article 32(3), a list of criteria when making a determination regarding whether the class of derivatives (or subset) is “sufficiently liquid” to be subject to the trading obligation. In summary, these are: the average frequency and size of trades, the number and type of active market participants, the average size of spreads, the anticipated impact of the trading obligation on liquidity and the size of the transactions to which it should apply.
4. Under Article 32(5) of MiFIR ESMA must submit to the Commission a draft RTS to
“amend, suspend or revoke” an existing RTS (created under empowerment Article 32(1) described in the paragraph above) whenever there is a material change in the criteria set out in Article 32(2). The criteria under Article 32(2) are: (a) the derivatives are admitted to trading or traded on at least one trading venue; and, (b) there is sufficient third-party buying and selling interest in the derivatives so that it can be considered sufficiently liquid to trade only on trading venues.
5. Article 32(6) of MiFIR empowers ESMA to draft RTS to specify the criterion under Article
32(2)(b): that there is sufficient third-party buying and selling interest in the class of derivatives (or subset) so that such a class of derivatives (or subset) is considered “sufficiently liquid” to trade on trading venues only. This is also one of the criteria, as noted in the paragraph above, which ESMA must take into account when deciding whether to amend, suspend or revoke an existing RTS created under empowerment
Article 32(1).
6. ESMA is of the view that the empowerment under Article 32(2)(b) should be read
broadly and in conjunction with the criteria set out under Article 32(3)(a),(b) and (c), given the link with determining what is “sufficiently liquid”.

7. ESMA notes that Article 32(3) also requires it to take into consideration the anticipated
   impact of the trading obligation on liquidity and the commercial activities of end users which are not financial entities, and the size of the transactions to which it should apply in determining whether a specific class or subset of derivatives should be subject to the trading obligation. Given the more subjective nature of these criteria, in that they do not provide objective measurements regarding whether a class of derivatives or subset is sufficiently liquid, ESMA has not included specific Level 2 rules on these criteria since the draft RTS only specifies the general approach ESMA will adopt in determining whether a class of derivatives or subset is sufficiently liquid. However, ESMA will address these criteria in the draft RTS prepared regarding whether a specific class of derivatives or subset should be subject to the trading obligation.
8. As ESMA noted in its DP, the definition of the liquidity test for the trading obligation is
   very similar to the definition of ‘liquid market’ for non-equities under Article 2(1)(17)(a), which ESMA must also further specify. The definition of the liquidity test for the trading obligation differs in the following:
   i. Article 32(3)(a) refers to trades instead of transactions (however it is assumed the
   terms are used interchangeably);
   ii. Article 32(3)(b) refers to the number and type of active market participants,
   “including the ratio of market participants to products/contracts traded in a given product market” rather than “including the ratio of market participants to traded instruments in a particular product”; and
   iii. When referring to the use of spreads, Article 32(3)(c) does not qualify the criterion
   with ‘when available’.
9. The trading obligation assessment is triggered when a class of derivatives has been
   mandated as subject to the clearing obligation under EMIR. In determining whether the clearing obligation should apply, ESMA must perform a liquidity assessment as specified under Article 5(4)(b) of EMIR and further elaborated at level 2 under Article 7(2) of Commission Delegated Regulation 149/2013:
   Article 7(2), EMIR Commission Delegated Regulation 149/2013
10. In relation to the volume and liquidity of the relevant class of OTC derivative
    contracts, ESMA shall take into consideration:
    (a) Whether the margins or financial requirements of the CCP would be proportionate to the risk that the clearing obligation intends to mitigate; (b) The stability of the market size and depth in respect of the product over time;

(c) The likelihood that market dispersion would remain sufficient in the event of the default of the clearing member; (d) The number and value of the transactions.
10. As discussed in its CP, ESMA has concluded that complete alignment with the EMIR
liquidity test is neither desirable nor feasible because the clearing and the trading obligation serve different regulatory purposes. In addition, the factors of the liquidity test prescribed in Article 32(3) of MiFIR only partially match those in the EMIR framework so that the MiFIR liquidity test which incorporates factors such as the number and type of market participants and the size of spreads will always have to be operated in a different fashion from the EMIR one. Analysis following feedback from stakeholders
11. In its CP, ESMA asked for comments on its proposals regarding how to interpret the
different components of the definition of ‘liquid market’ in relation to the trading obligation.
12. ESMA proposed to align the criteria under the definition of ‘liquid market’ for non-equities
under Article 2(1)(17)(a) with the trading obligation criteria although the thresholds would not necessarily be the same. In addition, given the different purposes of the two assessments, ESMA proposed building sufficient flexibility into its draft RTS so that approaches to assessing the criteria, which may subsequently prove to be valid, are not excluded. In brief, it proposed that:
i. Average frequency of transactions: ESMA noted its preferred approach for
calculating this criterion would be to set thresholds for both a minimum number of trades per day and a minimum number of days on which trading took place, over a specified period of time (the ‘assessment reference period’). However, it would not exclude the use of alternative approaches for calculating this criterion.
ii. Average size of transactions: ESMA noted its preferred approach for calculating this
criterion would be the division of notional size by number of trading days during the specified period. However, it would not exclude the use of other options, e.g. calculation of notional size divided by number of trades.
iii. Assessment reference period: ESMA proposed that as the assessment reference
period may need to vary depending on the class of derivatives or subset, it would not introduce hard timeframes within its draft.
iv. Number and type of active market participants: ESMA proposed it would assess this
criterion by giving consideration to the number of members or participants of a trading venue involved in at least one transaction in a given market or where any

member or participant of a trading venue has a contractual arrangement to provide liquidity in a financial instrument at least on one trading venue.
v. Average size of spreads: ESMA proposed to use the average size of weighted
spreads over different periods of time, the size of spreads at different points in time, and use proxies where information on spreads cannot be obtained.
vi. Decision mechanism for assessing liquidity criteria: ESMA noted it may not always
give equal weight to each criterion when determining whether a class or sub-class should be subject to the trading obligation, but rather it can judge each case separately.
13. Overall, respondents broadly agreed with ESMA’s proposals on how it specified the
different elements of the liquidity assessment, largely because it provided flexibility. Some respondents highlighted that although products may be traded infrequently in certain markets, there may still be a liquid market in terms of readily available buyers and sellers and market makers. Others noted that the number of market makers and other market participants should not be limited to where liquidity is provided under a specific written agreement as this is not common in the swaps market.
14. Views on what the size of the spread indicates continued to diverge: some respondents
consider a lack of spreads indicate there is insufficient liquidity whereas others note spreads may tighten once trading is moved on to trading venues. However, most respondents acknowledged the difficulty in obtaining this data and views were split between either agreeing with ESMA in using a proxy, or suggesting ESMA ignore this criterion. Given the average size of spreads is a criterion listed in MiFID II, ESMA cannot ignore it and therefore retains its proposal to use proxies.
15. The majority of respondents argued that a class of derivatives or subset thereof should
be considered for the trading obligation only if it is deemed liquid for transparency purposes and considered that the trading obligation thresholds should be higher than those set for transparency, although some respondents did propose the thresholds be set at the same level. Some respondents also noted that the trading obligation assessment may need to be done at a more granular level than the sub-classes proposed in the CP. ESMA has decided to maintain flexibility in its draft RTS so that although it will take the assessment undertaken for transparency into consideration when making a trading obligation determination, to promote consistency of treatment of instruments, derivatives deemed to have a liquid market for transparency purposes will not be deemed automatically to be sufficiently liquid for the trading obligation and the thresholds may differ, taking into account the different purposes of the two assessments.
16. Article 32(3) states that in developing RTS to specify whether specific derivatives should
be subject to the trading obligation, “ESMA shall determine whether the class of derivatives or relevant subset thereof is only sufficiently liquid in transactions below a certain size”. Most respondents used the consultation as an opportunity to state that the

LIS thresholds under the transparency regime should be the same under the trading obligation i.e. if a trade is above the LIS size, it would not be subject to the trading obligation in addition to not being subject to transparency requirements. ESMA notes this point and will consult on the precise size when it prepares RTS specific to a class of derivatives under empowerment Article 32(1) of MiFIR. In this draft RTS under empowerment Article 32(6), ESMA states that it will analyse the data collected to identify whether liquidity is concentrated at certain sizes above which there may be insufficient liquidity to apply the trading obligation.
17. A large number of respondents voiced the importance of ESMA clarifying how
(preferably by exclusion) package transactions would be treated under the trading obligation and highlighted that this has been an issue in the US where the CFTC (Commodities Futures Trading Commission) had to issue relief of implementation on SEFs. ESMA has therefore included a recital identifying that where package transactions are used to manage risks and improve the resiliency of financial markets, it may be desirable to permit the execution of these transactions on a bilateral basis, outside a trading venue, although they may include one or more derivatives subject to the trading obligation. In preparing the RTS specific to a class of derivatives (under empowerment
Article 32(1)) ESMA will consult on the use of package transactions and their treatment,
taking into account the characteristics of the class under consideration.
18. Some trading venues raised concerns that there could be a loophole because the
clearing obligation is not applied automatically to OTC equity derivative contracts equivalent to standardised exchange-traded equity derivatives. Consequently, there is a concern that participants may create look-alike contracts to circumvent the trading obligation. However, Article 33(4) of MiFIR provides for ESMA to identify and notify to the Commission, on its own initiative, classes of derivatives or individual derivatives which should be subject to the trading obligation although no CCP may be authorised to clear them or they are not yet traded on a trading venue. ESMA would consider using this empowerment where economically equivalent OTC contracts are being created to circumvent the trading obligation, and notes that Article 28(2) MiFIR requires it to monitor activity in derivatives not subject to the trading obligation “to identify cases where a particular class of contracts may pose systemic risk and to prevent regulatory arbitrage between derivative transactions subject to the trading obligation and derivative transactions which are not subject to the trading obligation”. Equally, should trading move from trading venues to economically equivalent OTC contracts, such a class of OTC derivatives may later become subject to the clearing obligation under EMIR.
19. Some trading venue also noted that the absence of a trading obligation for ETDs traded
on Regulated Markets (due to EMIR not applying to instruments traded on Regulated Markets) coupled with the lack of a waiver for negotiated transactions could move trading away from trading venues which would be contrary to the objectives of the trading obligations. ESMA agrees that MiFID II does not provide a mechanism to apply the trading obligation to ETDs on Regulated Markets: the empowerment under Article

32(1) is contingent on the derivatives first being made subject to the clearing obligation under EMIR, which does not apply to Regulated Markets, and ESMA’s own initiative empowerment under Article 32(4) is to be used for derivatives:
i. Which should be subject to the trading obligation but where no such CCP has yet
been authorised to clear them under EMIR; or
ii. Which are not yet traded on any trading venue.
20. Neither scenario will apply to ETDs traded on Regulated Markets. However, being the
overall objective of MiFID II to bring greater transparency to the non-equity markets, ESMA considers that the risk of ETD trading moving off venue because there will no longer be a negotiated trade waiver is mitigated by the transparency requirements and quantitative thresholds which will apply to the new SI regime.
21. Some respondents noted the necessity of CAs being able to quickly de-list a derivative
from the trading obligation if it is no longer liquid and voiced concern that there is no corresponding ‘temporary suspension’ empowerment for CAs in relation to the trading obligation compared to under the transparency requirements. ESMA is aware of this issue, but as there is an absence of a mechanism in MiFID II and MiFIR to invoke a temporary suspension of the trading obligation except in exceptional circumstances, this means ESMA cannot introduce such a provision in its draft RTS.

2.5. Criteria for determining whether derivatives have a direct,
substantial and foreseeable effect within the EU (Article 28(5) of MiFIR) Background/Mandate
Article 28(5) of MiFIR – Criteria for determining whether derivatives have a direct,
substantial and foreseeable effect within the EU In order to ensure consistent application of this Article, ESMA shall develop draft regulatory technical standards to specify the types of contracts referred to in paragraph 2 which have a direct, substantial and foreseeable effect within the Union and the cases where the trading obligation is necessary or appropriate to prevent the evasion of any provision of this Regulation. ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015.

1. The last paragraph of Article 28(5) MiFIR prescribes that “where possible and
   appropriate, the regulatory technical standards referred to in this paragraph shall be identical to those adopted under Article 4(4) of Regulation (EU) No 648/2012”.
2. The Commission published on the 21 March 2014 the Delegated Regulation (EU) No
   285/2014, of the 13th February supplementing Regulation (EU) No 648/2012 on direct, substantial and foreseeable effect of contracts within the Union and to prevent the evasion of rules and obligations (Regulation 285/2014).
3. The CP proposed a framework closely linked to Regulation 285/2014 for the purposes of
   the trading obligation for derivatives, based on the following key elements:
   i. Considering as contracts with a direct, substantial and foreseeable effect within the
   Union:
   a. Contracts entered into by a third country entity which has a guarantee from an EU financial counterparty would be subject to the clearing obligation if they were established in the EU. b. Contracts entered into between two European branches of non-EU financial counterparties.
   ii. An indicative set of criteria to measure the substance or effect on the Union of
   trading which would normally be subject to the trading obligation but escapes it by

virtue of a unique business arrangement, considering mainly as such those designed for the purpose of avoiding the trading obligation. Analysis following feedback from stakeholders
4. Respondents broadly supported the proposed approach, after determining that
alignment with EMIR would be the simplest and least costly approach. Approximately half of respondents argued that it is not appropriate for the trading obligation to apply to third country firms’ trades where the clearing obligation under EMIR does not apply to the relevant transactions by virtue of an equivalence assessment under Article 13 of EMIR. These respondents expressed concern that the EU would, in such circumstances, impose an obligation on two counterparties to trade an instrument on an EU trading venue despite the fact that neither counterparty would be based in the EU and thus the relevant transaction would be exempted from the EU clearing obligation. As a solution, they suggested the draft RTS specify the criteria will not have been met if the clearing obligation does not apply to the transaction as a result of the application of Article 13 of EMIR.
5. ESMA notes that some respondents made these comments in response to the
discussion paper published in May 2014. ESMA has given the matter further thought but continues to conclude that a class of derivatives that has been exempt from the clearing obligation, in accordance Article 13 of EMIR, should still be subject to the trading obligation in cases where it had a direct, substantial and foreseeable effect within the Union unless an implementing act of equivalence under Article 33(3) of MiFIR has been adopted. In this regard, ESMA would point out that whilst Article 28(5) of MiFIR refers to capturing contracts under the EU trading obligation that would otherwise be out of scope, the trading obligation may in some cases be applicable even where there is no clearing obligation in place, pursuant to Article 32(4) of MiFIR. Furthermore, since the determinations of equivalence by the Commission under Article 33(2) of MiFIR and
Article 13(2) of EMIR are to be carried out on the basis of different criteria,
counterparties fulfilling the clearing obligation under EMIR cannot a priori be said to fulfil the trading obligation under MiFIR. ESMA does, however, recognise the potential for difficulties, as expressed by respondents, and that it is desirable for equivalent assessments of third country jurisdictions to look at both the clearing and trading obligation regimes at the same time where possible.
6. ESMA also sought comments regarding whether there was a need to expand the scope
of the EMIR RTS, which refers only to EU branches of third country financial counterparties and to EU branches of third country non-financial counterparties. Most respondents did not consider there was a need to extend the scope and thus ESMA has decided to keep the scope of these RTS aligned with those under EMIR.

3. MICROSTRUCTURAL ISSUES
   3.1. Organisational requirements for investment firms engaged in
   algorithmic trading, providing direct electronic access and acting as general clearing members Background/Mandate
   Article 17(7)(a) of MiFID II
   7.ESMA shall develop draft regulatory technical standards to specify the following:
   (a) The details of organisational requirements laid down in paragraphs 1 to 6 to be imposed on investment firms providing different investment services and/or activities and ancillary services or combinations thereof, whereby the specifications in relation to the organisational requirements laid down in paragraph 5 shall set out specific requirements for direct market access and for sponsored access in such a way as to ensure that the controls applied to sponsored access are at least equivalent to those applied to direct market access. Analysis following feedback from stakeholders General

4. ESMA proposed twelve definitions in the draft RTS. In general, stakeholders welcomed
   the definition of ‘investment firm’ in the draft RTS. However this definition has been removed to avoid confusion with the Level 1 definition of ‘investment firm’ as per Article 4(1)(1) of MiFID II. The definition in the draft RTS was intended to clarify that the Regulation only applies to those firms engaged in algorithmic trading. ESMA has now clarified this point on the scope of the Regulation in the title and recitals.

5. One respondent recommended clarifying that the RTS is applicable to Direct Electronic
   Access (DEA) clients only when they are engaged in algorithmic trading. ESMA does not necessarily disagree with that statement, however it is noted that the requirements set out in the Regulation affect DEA providers. The obligations imposed on DEA providers (directly or through sub-delegation) are applicable regardless of the type of trading (algorithmic or non-algorithmic) that their DEA clients undertake. ESMA has clarified in a Recital that investment firms must fulfil the requirements of the RTS if they provide DEA. In this regard, provisions concerning DEA should take into account the definition of DEA as adopted by the European Commission, based on the technical advice provided by ESMA.

6. One respondent suggested excluding RFQ systems from thescope since only quotes
   themselves are in the scope of algorithmic trading, which have limited or no human interaction. However, Article 17 of MiFID II sets out the scope of this Regulation where it refers to ‘investment firms engaged in algorithmic trading’ without further reference to the specific types of trading systems.

7. It was pointed out that there were different definitions of “disorderly trading conditions” in
   the draft regulations on the organisational requirements for investment firms and for trading venues. To avoid unnecessary confusion, ESMA has deleted the definitions of “stressed market conditions” and “disorderly trading conditions” from this Regulation. However, it should be noted that the draft RTS 8 on market making agreements and market making schemes still makes reference to those concepts.

8. In terms of organisation of the RTS, ESMA has eliminated the standalone article for
   definitions and specified each concept in the relevant articles.
   Governance

9. In the draft RTS, ESMA had proposed the segregation of trading functions, middle office
   and back office functions. According to one respondent, smaller firms would be required to hire additional personnel in order to fulfil the requirements of the draft RTS. ESMA has revised the text to require only that different functions should be involved in the governance of algorithmic trading systems.

10. ESMA has also revised the text of the draft RTS to clarify that the references in the
    governance process refer to those elements that are specific to the investment firm’s algorithmic trading system, rather than the general requirements that are covered under
    Article 16 of MiFID II.

11. Mindful of the need to cover a broad spectrum of firms, including smaller firms, ESMA
    has allowed for the compliance function to operate the kill functionality itself.

12. ESMA has deleted the references to the specific types of training needed to gain the
    relevant competencies and knowledge regarding algorithmic trading, a new the provision focuses rather on the competencies and knowledge themselves leaving more flexibility to investment firms to achieve that outcome.

13. ESMA proposed organisational requirements for IT outsourcing and IT procurement.
    Some stakeholders recommended narrowing down the scope to ‘material’ software and hardware. However, ESMA decided not to differentiate between material and non￾material outsourcing or procurement since minor components of an IT system may have an important impact on the entire system. These respondents requestsed for the rights to audit the outsourced activity only being applicable to new contracts. On this point, the Regulation no longer includes a reference to audit functions. However, ESMA reminds

that Article 16(5) of MiFID II and any delegated regulation thereof are also applicable to investment firms engaged in algorithmic trading.
11. Two respondents expressly opposed setting any requirements regarding the content of
the commercial agreements between investment firms and their vendors. These respondents considered that investment firms would incur a significant cost by requesting vendors to comply with the proposed requirements given the absence of any regulatory requirements on these vendors. In their opinion, it was the investment firms’ responsibility to ensure that sufficient documentation existed concerning any outsourced or procured hardware and software. Furthermore, they proposed that ESMA defined the terms “outsource” and “procure” to clarify the scope and application of these provisions.
12. In this regard, ESMA notes that the requirements regarding outsourcing are general
organisational requirements, per Article 16 of MiFID II. A recital has been added to the Regulation to clarify that the requirements stemming from Article 17 of MiFID II should be applied in conjunction with the whole regulatory framework. Testing of trading systems and algorithms
13. Respondents accepted most of ESMA’s proposals for the testing of trading algorithms
and trading systems. They suggested amending some of the obligations so as to ensure their appropriateness and practical applicability. ESMA has duly considered these comments, and has made several changes to the relevant articles.
14. In particular, several respondents pointed out their concern that pure investment
decision algorithms, which do not make any order execution decisions, may inadvertently be captured by the RTS as originally drafted. In this regard, ESMA has now clarified that pure investment decision algorithms that are executed by non-automated means are out of scope of the algorithm testing requirements contained in the Regulation. Further, several of the proposed articles in relation to testing have been moved to provide greater clarity.
15. Respondents generally agreed with the proposed obligations in relation to testing
governance and general considerations, which in the draft RTS were partially captured under the headings “general” and “initial testing”. ESMA has revised such obligations to align those requirements with the draft RTS on the organisational requirements for trading venues enabling algorithmic trading through their systems (RTS 7). Therefore, investment firms are expected to undertake testing to ensure that the algorithmic trading system or algorithm behaves as designed, complies with the investment firm’s regulatory obligations, is conformant to the trading venue’s rules and systems and does not contribute to disorderly trading conditions, including behaviour under stressed market conditions. Following the input from respondents, ESMA has clarified in the Regulation that the record keeping requirements regarding the sign-off process for making changes to proprietary software is limited to material changes only.

16. One stakeholder group proposed that testing to prevent contributing to disorderly trading
    conditions should include requirements to ensure that algorithms do not create stressed market conditions. As indicated above, the definitions of “stressed market conditions” and “disorderly trading conditions” have been deleted from this Regulation. However, ESMA wishes to clarify that one of the elements to be tested is the ability of the trading system, algorithm or strategy “to work effectively in stressed market conditions, and where necessary under those conditions, allow the trading system or algorithm to be switched off”. Therefore, where an algorithm is creating stress in the market it should be possible to manage that situation, including by switching off the algorithm.
17. Respondents pointed out to ESMA that a physical segregation of production and test
    environments should not be a disproportionately burdensome requirement. In this regard, ESMA has now clarified that it expects testing environments to be merely segregated from the production environment without requiring for duplicative physical systems or infrastructures.
18. ESMA’s draft proposal regarding non-live trading environments was viewed critically by
    most respondents, in particular because they considered that an exclusive reliance on non-live test environments provided by trading venues would inappropriately limit firms’ testing options, while also creating quality and cost concerns. ESMA has consequently reviewed its approach regarding non-live testing requirements for investment firms in conjunction with the test environment obligations for trading venues. The approach taken in this Regulation is as follows: as with the other testing requirements, the non-live testing obligations do not cover algorithms that only make investment decisions without execution decisions. Further, the Regulation allows firms the option of using a non-live testing environment that is appropriate to the type of testing being performed, i.e., a firm’s own testing environment, or a third-party test environment (provided by a trading venue, DEA providers, or vendor).
19. Regarding conformance testing, the respondents generally agreed with the draft
    obligations, but several considered that improvements could be made to more precisely define the scope of the conformance testing obligations. Based on the feedback received, ESMA has made several adaptations in the Regulation: as elsewhere in the area of testing, pure decision making algorithms are carved out from the obligations given that such algorithms should not interact with the trading systems. Also, the Regulation clarifies that, depending on the precise nature of their access arrangements, firms should undertake conformance testing with either the trading venue (for trading venue members and sponsored access (SA) clients) or with the direct market access (DMA) provider (for DMA clients). Further, it is clarified that subsequent conformance testing is only necessary in case of material or substantial changes to the trading systems or access facilities involved.
20. Regarding the controlled deployment of algorithms, a number of respondents asked
    ESMA to grant firms more flexibility as to whether, and the extent to which, the relevant

parameters should be restricted. Additionally, several respondents were materially concerned with the proposed obligation, arguing that it would unduly prevent them from carrying out their activities, notably portfolio optimisation, market making, and hedging. ESMA has duly considered the comments received, but remains of the opinion that in view of the risks for the orderly functioning of the market from firms insufficiently controlling the deployment of algorithms in the production environment, it would be inappropriate to allow firms to exercise such discretions. Therefore, ESMA has not materially changed its approach in the Regulation compared to the draft RTS. It should be noted, however, that the general carve out of pure decision making algorithms from the testing obligations in the Regulation also extends to this area, which should allay respondents’ concerns regarding portfolio optimisation.
21. Regarding the annual review and validation of systems, respondents generally agreed
with ESMA’s proposal. However, they made several suggestions, which ESMA has adopted after due consideration. In particular, it is now clarified that the annual review and validation should consider a firm’s relevant business continuity arrangements, and that validation report should be audited by an internal audit function where such function exists. The audit function may be carried out by staff in the investment firm who is independent of the risk control function that prepared the report, such as compliance staff or by an external firm. Further, the drafting of the article has been made more concise on the basis of several of the suggestions by respondents.
22. Regarding stress testing, many respondents were concerned by certain elements of the
proposed obligations in the draft RTS. ESMA has made several changes in this regard, in particular by clarifying that any stress tests should be undertaken in such a way that they do not affect the production environment, and by limiting the number of mandatory test scenarios to two (i.e., high message and trade volume tests) only.
23. A group of market participants noted that the annual stress testing should not be based
on the number of algorithms running simultaneously but on the volume of messages managed by the system. ESMA agrees with that approach and has revised the text accordingly.
24. Regarding change management, respondents agreed with ESMA’s proposal, but
considered that the requirements should apply only to material changes. Also it was suggested that part of the obligations that ESMA had proposed could be better placed elsewhere (in the general obligations regarding testing). After due consideration, ESMA has adopted these suggestions, and has changed the relevant articles.
25. One respondent commented that on Article 15 of the draft RTS (“Ad hoc” change
management), not all changes to an algorithm should require senior management sign￾offs, but rather sign-off at an appropriate level. Assuming that a proper governance arrangement is in place within the firm, investment firms should have the discretion as to whether there was a need for senior management sign-off on any ad hoc changes to a production system. ESMA has revised the text accordingly, requiring that material

changes to the production environment should be subject to a review by a responsible party as designated by the senior management of the investment firm. Business continuity arrangements
26. ESMA’s proposal in the CP reflected the arguments made in the consultation paper for
the 2012 ESMA Guidelines15 adding a minimum range of disruptive scenarios related to the operation of trading systems that should be considered by investment firms.
27. Respondents unanimously rejected the list of disruptive scenarios that ESMA had
proposed. A significant majority of the respondents explicitly stated that the list was too prescriptive for an efficient regulatory outcome to be achieved. Many added that the Regulation should be seeking to codify the 2012 ESMA Guidelines which took into account the nature, scale and complexity of the firm’s business. Respondents felt that this was not achieved in the draft RTS proposed in the CP.
28. Respondents considered that such a list should not be a list of minimum requirements,
but a non-exhaustive list where the firms can choose the requirements that fit their circumstances. Furthermore, one respondent noted that simulating the loss of staff or human error as stipulated in the list of disruptive scenarios are extremely difficult to undertake, and considered unlikely to add any value.
29. A sizable minority of the respondents noted that “disorderly markets” were perceived
differently by investment firms and trading venues. For investment firms, this was seen as a particular market event, whereas for trading venues, this was more about IT or operational issues rather than market conditions. Therefore respondents suggested that ESMA clarifies which perspective should be adopted, so as to enable all participants to prepare their business continuity arrangements appropriately.
30. On ESMA’s proposed requirement for investment firms to trade all existing orders
manually in the event of a disruptive event, a significant majority of respondents noted that this would be impractical and may compromise the firm’s ability to act in the best interest of its clients. In such circumstances, having the option to either trade, cancel or re-route would be preferable. To resolve this issue many respondents suggested substituting the term “trade” with “manage”.
31. Additionally, one stakeholder pointed out the need to distinguish between algorithms that
were used for making investment decisions and those used for trading decisions. Although the requirement for business continuity arrangements to set out trading (or managing) of the outstanding orders following a disruptive event would be relevant for execution algorithms, imposing the same requirement on investment decision algorithms was unwarranted as it may be better to simply disable that algorithm than to require

15 ESMA’s Guidelines on Systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities

resumption of trading using such an algorithm. These respondents called for investment firms to have the discretion to identify the relevant algorithms for which such a requirement should be applied.
32. Based on the input from stakeholders, ESMA has decided not to include a list of
disruptive scenarios that were viewed as being too prescriptive, but instead to require firms to have business continuity arrangements that are appropriate to the nature, scale and complexity of their business.
33. Furthermore, in view of the comments made regarding the appropriateness of requiring
all investment firms to arrange for the resumption of trading, a provision was added so that a business continuity arrangement may include a scenario for an orderly wind down of operations for firms that are not engaged in activities that would create risks market disruption following their sudden withdrawal from the market. In this regard, the requirement to maintain duplicate hardware components to permit continuous operations in case of a failover was dropped from the list of arrangements to be included in the business continuity arrangement.
34. With regard to assessing the relevance and adequacy of the existing business continuity
arrangements, an assessment is to be undertaken on an annual basis, as proposed in the CP. Pre-trade and post-trade controls
35. ESMA proposed a framework of six mandatory pre-trade controls. Stakeholders
highlighted that the controls were too detailed and preferred the approach of the 2012 ESMA Guidelines because too detailed requirements might become outdated in the future. Moreover, the detailed requirements on pre-trade controls raised several questions concerning their operationalisation. Some respondents commented that some requirements were not workable for all businesses.
36. ESMA streamlined the framework in this Regulation, with only four mandatory pre-trade
controls applicable for trading in all instruments. In addition, the text was clarified to indicate that investment firms should apply automation execution throttles to limit the number of times a strategy was applied only where appropriate to the specific trading venue, strategy and product.
37. ESMA has added a requirement to ensure that the calculations supporting each pre￾trade control take into account all orders sent to a trading venue.
38. ESMA proposed that monitoring of order flows should take place in real-time with a time
delay of no more than five seconds. Stakeholders stressed that real time monitoring was too excessive, and “timely controls” (or “as near to real time as is practical”) would be more adequate. ESMA still considers a five-second period for the generation of an alert

as adequate if an investment firm is engaged in algorithmic trading. However, it does not imply that the resolution of such an alert should take place within five seconds.
39. ESMA proposed that monitoring staff should have the authority to take remedial action.
Respondents questioned whether the monitoring staff should take remedial action or just ensure that action is taken. ESMA has clarified that monitoring staff, in analogy to compliance staff, should monitor the order flow and initiate remedial action. Hence monitoring staff is not required to solve the problem itself. Additionally, ESMA has clarified that real-time monitoring should be undertaken by the trader in charge of the algorithm and also by a risk function that is independent from that trader, to ensure an appropriate segregation between the trading desk and supporting functions.
40. ESMA proposed to have in place pre-trade controls at investment firms and trading
venues. Some respondents questioned the necessity for such redundancy, and recommended keeping the approach taken in the 2012 ESMA Guidelines. Other respondents stated that whilst trading venues should always be “the last line” of defence, the redundant nature of such controls were appropriate. ESMA believes that at least two lines of defence are appropriate in this complex business and thus continues to require pre-trade controls conducted by both investment firms and trading venues.
41. ESMA proposed to require investment firms to use drop copies for reconciliation as soon
as possible. Although many respondents agreed to that proposal, they also recommended requiring trading venues to provide for drop copies, and introduce requirements to improve availability of drop copies since their quality varies. One respondent acknowledged the importance of drop copies but did not believe that drop copies could ensure accurate and consistent information. Whilst ESMA does not require trading venues to offer drop copies, it expects investment firms to use them if they are available.
42. One group of stakeholders expressed concerns about the requirement to provide alerts
on a real-time basis when the volatility interruption mechanisms of a trading venue have been triggered by an algorithm or DEA order. ESMA remains of the view that investment firms should have the means to identify DEA clients or algorithms that might contribute to the creation of disorderly trading conditions, for a specific assessment of their performance and timely reaction when needed.
43. One response requested clarification on the authorisations that trading venues should
grant to monitoring staff of investment firms. ESMA has revised the text to clarify that relevant competent authorities, trading venues and where applicable DEA providers should have access to the investment firm’s monitoring staff.
44. One respondent noted that it was not clear whether the “kill functionality” which is
embedded in a trading venue’s system was expected to also be used by investment firms for their use, or it was just for the trading venue’s exclusive use. ESMA notes that this Regulation and the Regulation on the organisational requirements for trading tenues

enabling or allowing algorithmic trading through their systems (RTS 7) set out two different obligations: trading venues should operate their own “kill functionality” on pre￾determined cases. Separately, investment firms must have the ability to cancel unexecuted orders as stipulated in Article 12 of this Regulation. These Regulations neither oblige trading venues to provide access to their “kill functionality” for use by investment firms (unless where the member or SA client is technically unable to delete its own orders) nor ban it, in the context of the requirements for IT outsourcing and procuring. Market impact assessment
45. Virtually all respondents rejected the suggestion to consider mandating firms to apply a
market impact assessment as a pre-trade control. Respondents considered that a market impact assessment control would have very limited added value, while causing significant operational and cost concerns. Also, respondents considered that such a control would be redundant with well-calibrated “fat finger” controls. For this reason, ESMA has not pursued the market impact assessment control any further. However, ESMA would like to stress in this regard the importance for firms to appropriately calibrate their other pre-trade controls for varying price and liquidity levels and scenarios. Monitoring for the prevention and identification of potential market abuse
46. In the Discussion Paper, respondents expressed cost concerns regarding a requirement
for undertaking automated monitoring of algorithmic trading activities and argued that the decision to automate market surveillance alerts should be at the discretion of the firm. However, given the large amount of data that needs to be analysed, as well as the complexity of algorithmically generated trading patterns, ESMA considered that the nature of algorithmic trading activity is such that applying non-automated (i.e. manual) surveillance filters would be insufficient for identifying potential instances of market manipulation. ESMA therefore considered that a requirement for implementation of an automated alert system to identify potential market manipulation should be applicable for all investment firms undertaking algorithmic trading activities. In the CP, ESMA clarified that such a system should be able to at least analyse in an automated way the indicators of manipulative behaviour as specified by Annex 1.A of Regulation 2014/596/EU on market abuse (MAR).
47. However, ESMA recognised that a proportionality principle should be observed in
implementing automated alerts for the identification of other forms of market abuse, such as insider dealing, unlawful disclosure of insider information, and market manipulation by way of employing a fictitious device or any other form of deception or contrivance. ESMA considered that, based on a rigorous risk assessment, firms may decide not to automate the alerts for the latter mentioned types of market abuse, for instance because the firm does not have any clients, or because the firm is certain that the trading activity they allow to take place via their systems cannot be used for these forms of market abuse.

48. In the CP, ESMA sought to clarify that the requirements regarding market surveillance
    and the use of automated alerts would not presuppose a requirement to contract with a third party provider. ESMA considered that investment firms were free to develop their own automated surveillance alerts, as long as these were fit for purpose.
49. With respect to monitoring for the prevention and identification of potential market abuse,
    the majority of the responses disagreed with the proposal either partially or completely. Many of these respondents supported ESMA’s intention behind the proposal, but noted that the MAD/MAR regime was sufficient for this purpose. In their view, to include the proposed requirement in MiFID/R Level 2 would have been duplicative or would introduce regulatory ambiguity or interpretative slippage. Many of these stakeholders requested removing this reference from the Regulation, and proposed that algorithmic trading should be included in the Regulation developing Article 16 of MAR.
50. A significant number of responses considered that cross-asset class and cross-market
    surveillance presents a number of challenges from a technological perspective particularly in the case of monitoring the activity of the clients. One respondent considered that simpler controls that are easier to implement, would be more effective; and that most, if not all, instances of market abuse would be flagged by monitoring single markets and single products on a simultaneous basis.
51. ESMA has revised the text of this Article to avoid overlaps with the Regulation in
    development of Article 16 of the MAR. On that basis, the surveillance of non-algorithmic trading activity and the effective reporting of algorithmic and non-algorithmic suspicious transaction orders or reports falls under the Regulatory technical standards for the appropriate arrangements, systems and procedures as well as notification templates to be used for preventing, detecting and reporting abusive practices or suspicious orders or transactions.
52. On the contrary, the surveillance of algorithmic trading activity is regulated by Article 13
    of the final draft RTS. As a consequence, the content of this Article has been revised to clarify that where an investment firm is engaged in algorithmic trading, its surveillance systems must be automated in all cases. However, the final draft RTS still recognises that the alerts generation may need manual intervention, for which there should be an extended deadline. It has also been clarified that the reports generated by this surveillance activity must be adequately reviewed by the compliance staff to determine whether a suspicious transaction or order report is required to be generated. Security and limits to access
53. ESMA proposed to require penetration tests and vulnerability scans of an investment
    firm’s systems to be undertaken at least on a semi-annual basis. The respondents recommended using penetration tests only for connections which are open to attack from external parties and suggested that undertaking such tests semi-annually was too frequent. It is worth noting that ESMA does not impose specific details on how to

conduct these tests. Moreover, based on the feedback received, ESMA has aligned the frequency of these tests with other requirements in the Regulation by requiring these tests to be undertaken on an annual basis. Direct Electronic Access
54. In the DP, ESMA proposed to include know-your-client and anti-money-laundering
requirements within the due diligence assessment of DEA clients. One concern of stakeholders was the existence of an overlap with the Anti Money Laundering Directive (Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing). ESMA has considered this issue, and clarified in a Recital that such requirements should be met without prejudice to other regulatory requirements such as the Anti-Money Laundering Directive.
55. One market participant noted that the storage of alerts generated by SA clients would
not be possible, as SA providers do not hold such data. ESMA notes that the Directive does not allow for the controls applied to SA to be less stringent than those applied to direct market access. The same respondent also sought clarity as to how long such data needs be held in case of direct market access clients, suggesting three months. ESMA notes that this requirement should be read jointly with the general record keeping requirements in Article 16(6) and (7) of MiFID II where the records must be kept for a minimum period of five years. General Clearing Members
56. ESMA proposed to require firms acting as general clearing members to monitor their
client’s exposure in real time, and to perform non-discriminatory reviews of their clients’ performance. Respondents stated that intra-day risk management (ideally near to as real time as practical) would be more appropriate. Following such comments, ESMA has revised the text to clarify that clearing firms should monitor their clients’ positions as close to real time as possible.
57. A number of market participants requested ESMA to consider requiring CCPs to apply
limits to clearing members such that their clients’ exposures to clearing members were automatically managed. They also proposed setting limits at a clearing level to control trading activities. This group also suggested broadening the scope of the requirement proposed by ESMA to notify the competent authority upon a breach of electronic security, to cover any major incidents affecting critical systems of a trading system. ESMA notes that the scope of the mandate in Article 17 of MiFID II does not include CCPs. Content and Format of Order Records
58. While confirming the approach presented in the DP, the CP specifies in detail the order
data and information that each and every investment firm engaged in a high frequency

algorithmic trading technique has to maintain under Article 17 of MiFID II. The CP further provides for the precise standard and format under which the order data and information have to be kept. In doing so, the CP distinguishes between on the one hand, the data and information pertaining to orders received from the client or orders initiated internally, and on the other hand, those pertaining to orders being executed or leaving the investment firm. The CP finally confirms that the record-keeping period is five years.
59. The respondents to the CP (including trade associations, trading venues and investment
firms) all agreed that the order data and information provided in the CP for the purposes of the record-keeping obligations of investment firms engaged in a high frequency trading technique were complete and did not need to be supplemented with any additional elements. The different fields of order information and data provided in the Regulatory Technical Standard (RTS) have therefore been maintained.
60. A few respondents nonetheless asked for some clarification in relation to the client
identification and trader identification fields. To this end, the description of these fields has been further specified in consistency with the corresponding fields provided under the transaction reporting requirements pursuant to Article 26 of MiFIR. Moreover, the
table of fields has been slightly reorganized in order to improve its readability.
61. With regard to the timestamping of orders, a majority of respondents questioned the
nanosecond granularity (through the cross-reference to the draft RTS on clock synchronization) arguing that such a granularity was not technically feasible and was irrelevant business wise. On the other hand, these respondents indicated supporting the microsecond granularity. ESMA recognizes that a nanosecond granularity would raise technical feasibility issues as pointed out by the respondents. Moreover, there is no evidence that such a granularity would greatly improve the quality of order data and facilitate their assessment by CAs. ESMA further highlights that the nanosecond granularity was only provided via a cross-reference to the draft RTS on clock synchronization which has since been amended to reflect the comments received to the CP. In particular, an amendment to this draft RTS has consisted in providing for different timestamps granularity (i.e., second, millisecond, microsecond) according to the type of trading activity of investment firms and removing the nanosecond granularity. This amendment should address the concerns raised by the respondents.
62. The majority of stakeholders further supported the proposal providing for a five-year
record-keeping period. Several respondents highlighted that this was consistent with national law which already provides for record-keeping obligations and in some instances, even requires a longer period. Only two respondents indicated not agreeing with the record-keeping obligations provided in the CP arguing that these obligations were disproportionate notably as regards the amount of data to be kept by venue operators. In consideration of the comments received, the record-keeping period provided in the RTS has remained unchanged.

63. Clarification was also requested by a respondent as regards the precise moment at
    which the five-year record-keeping period commences. For the purpose of efficiency and simplicity, the RTS has been amended to expressly specify that the starting point of the record-keeping period is the date of the order submission to a trading venue or to another investment firm for execution.
64. It was further proposed by one respondent that ESMA reconsiders the applicability of the
    provision after one year of implementation with a view to potentially reducing the amount of order data and information to be maintained. This proposal may not be supported as such a review is not provided under MiFID II.

3.2. Organisational requirements of regulated markets,
multilateral trading facilities and organised trading facilities enabling or allowing algorithmic trading through their systems Background/Mandate
Article 48 (12), MiFID II
12. ESMA shall develop draft regulatory technical standards further specifying:
(a) the requirements to ensure trading systems of regulated markets are resilient and have adequate capacity; […] (c) the controls concerning direct electronic access in such a way as to ensure that the controls applied to sponsored access are at least equivalent to those applied to direct market access; […] (g) the requirements to ensure appropriate testing of algorithms so as to ensure that trading systems including high-frequency trading systems cannot create or contribute to disorderly trading conditions on the market.

1. Article 48 of MiFID II requires a regulated market:
   i. to have in place effective systems, procedures and arrangements to ensure its
   trading systems are resilient, to have sufficient capacity to deal with peak order and message volumes, to be able to ensure orderly trading under conditions of severe market stress and to be fully tested to ensure such conditions are met and to have arrangements to ensure continuity of its services if there is any failure of its trading systems;
   ii. to have in place effective systems, procedures and arrangements to reject orders
   that exceed pre-determined volume and price thresholds or are clearly erroneous;
   iii. to be able to temporarily halt or constrain trading if there is a significant price
   movement in a financial instrument on that market or a related market during a short period and, in exceptional cases, to be able to cancel, vary or correct any transaction. Regulated markets are required to ensure that the parameters for halting trading are appropriately calibrated in a way which takes into account the liquidity of different asset classes and sub-classes, the nature of the market model

and types of users and is sufficient to avoid significant disruptions to the orderliness of trading;
iv. to have in place effective systems, procedures and arrangements, including
requiring members or participants to carry out appropriate testing of algorithms and providing environments to facilitate such testing to ensure that trading systems cannot create or contribute to disorderly trading conditions on the market and to manage any disorderly trading conditions which do arise from such trading systems;
v. to set and apply appropriate criteria regarding the suitability of persons to whom
direct electronic access may be provided. Member States shall also require that the regulated market set appropriate standards regarding risk controls and thresholds on trading through such access and is able to distinguish and if necessary to stop orders or trading by a person using direct electronic access separately from other orders or trading by the member or participant. The regulated market shall have arrangements in place to suspend or terminate the provision of direct electronic access by a member or participant to a client in the case of non-compliance;
vi. to be able to identify, by means of flagging from members or participants, orders
generated by algorithmic trading, the different algorithms used for the creation of orders and the relevant persons initiating those orders. That information shall be available to competent authorities upon request
2. Article 18(5) of MiFID II requires investment firms and market operators operating an
MTF or OTF to comply with Articles 48 and have in place all the necessary effective systems, procedures and arrangements to do so. Analysis following feedback from stakeholders Scope and definitions
3. ESMA’s proposal in relation to the organisational requirements for trading venues
captured by the scope of Article 48 of MiFID II aims at setting the minimum requirements that all trading venues should meet in relation to their trading systems linked to algorithmic trading. In this regard, some respondents to the CP recommended that rules and requirements should apply only to trading venues’ specific systems and/or segments which enable algorithmic trading, taking into account the fact that trading venues can have different systems and market models in place. Some respondents also questioned the use of the wording “allowing algorithmic trading”, suggesting a cross reference to the definition of algorithmic trading under Article 4 of MiFID II and an explicit exemption for voice, hybrid, quote-driven or RFQ trading systems.
4. ESMA has revised its original proposal to clarify that any regulated market, MTF or OTF
where algorithmic trading may take place should be subject to the RTS. Therefore,

where a venue has different trading segments and some of them do not enable algorithmic trading, the Technical standards should not apply to those segments.
5. Additionally, ESMA wishes to clarify that the fact that trading systems are supported by
electronic means does not necessarily mean that the whole set of technical standards is applicable to them as long as it is not possible to carry out algorithmic activity through those trading systems. This is particularly the case with respect to RFQ or hybrid systems. In the case of voice trading systems where transactions between members are arranged through voice negotiation, the core activity is not algorithmic by nature and therefore, they should not be covered by the Technical standards.
6. Some respondents to the CP questioned the definitions of “stressed market conditions”
and “disorderly trading conditions”. In particular, a number of them referred to the sentence “including cases where orders are not resting for sufficient time to be executed” in the definition of disorderly trading conditions, as being ambiguous, detrimental to a competitive market and to some extent envisaging a minimum resting time for orders. Another respondent considered necessary to link the existence of disorderly trading conditions to extraordinary price movements unrelated to price sensitive information. Other respondents regarded the ‘disorderly trading conditions’ to exist when the pricing mechanism of the market becomes unreliable because of a delay or interruption in the order book. These respondents considered that the requirements linked to such conditions were not applicable for RFQ systems. One respondent also requested exemptions from these requirements where a trading venue only allows for limited algorithmic trading.
7. Following the responses from the CP, ESMA decided to delete the definitions of
“stressed market conditions” and “disorderly trading conditions” from the draft RTS However, it is noted that the draft RTS f on market making agreements and market making schemes (RTS 8) make reference to those concepts.
8. On the “kill functionality”, although the respondents agreed with the definition proposed
by ESMA, some stakeholders suggested that clearing houses should be able to request trading venues to invoke the “kill functionality” where appropriate. According to these respondents, such ability should be within the clearing houses’ responsibility in monitoring intraday position limits whereby the suspension of trading activity on trading venues is invoked where the limits are breached. ESMA wishes to clarify that the draft RTS describe the minimum set of requirements that must be met by trading venues that allow algorithmic trading. However, nothing in the draft RTS prevent trading venues from adopting additional mechanisms to protect their markets as appropriate.
9. Some respondents required further clarification on the definition of “real time” to reflect
the fact that trading venues are required to operate systems which trigger alerts on a real-time basis, but the investigation and resulting assessment by trading venues takes place ex-post. ESMA clarifies that the trading system infrastructure should be able to automatically generate alerts within five seconds of the relevant event but that the

reaction to such alerts is not expected within such timeframe, given the eventual need for human intervention. General organisational requirements for trading venues Proportionality principle
10. ESMA proposed that trading venues should assess their compliance with Article 48 of
MiFID II at least once a year, taking into account the nature, scale and complexity of their business. In undertaking this self-assessment, ESMA proposed that trading venues should take into account at least the elements contained in a non-exhaustive list annexed to the final draft RTS.
11. One respondent proposed deleting some of the references from the non-exhaustive list
of factors to be considered for the purpose of the application of the proportionality principle. Other respondents expressed concerns on the proportionality principle itself since, in their opinion, the draft RTS should ensure that all trading venues are covered by exactly the same requirements. ESMA highlights that the purpose of RTS according to Article 10 of Regulation (EU) No 1095/2010 (ESMA Regulation) is to ensure consistent harmonisation and a level playing field but it is also necessary to recognise the wide range of trading models and market participants operating in Europe.
12. Therefore ESMA has maintained the principle that trading venues are required to
assess, before the deployment of any new trading system and subsequently at least on an annual basis, the compliance of their systems with Article 48 of MiFID II. For this purpose, trading venues should use at least the non-exhaustive list of elements as mentioned above. The record of their self-assessment should be kept by trading venues for five years and submitted to their competent authorities only when requested. Governance and staffing
13. ESMA consulted twice on a set of governance, outsourcing and staffing requirements
based on its Guidelines on systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities published in 2012.
14. ESMA received comments seeking clarity on the expectation of ESMA concerning the
role of the compliance function within a trading venue, and whether the department responsible for the development of the internal policies and procedures should be distinct from the department responsible for the on-going compliance function. ESMA remains agnostic with respect to the organisational set up of a trading venue’s compliance function. ESMA expects all trading venues to ensure that these functions are in place and that there is an adequate segregation of functions to ensure effective supervision of the venue’s compliance with their legal and regulatory obligations regardless of their circumstances. ESMA has also acknowledged that in some trading venues the compliance function may also be in charge of operating the kill functionality.

Outsourcing
15. ESMA consulted on a proposal about outsourcing arrangements of the operational
function of trading venues based on Article 14 of Directive 2006/73/EC.
16. The comments received by ESMA noted that the reporting requirements included in the
proposal would imply a significant overhead both for trading venues and competent authorities. ESMA has therefore revised its original proposal to clarify that trading venues are obliged to notify only in specific circumstances.
17. Other respondents noted that some trading venues are operated and governed by legal
entities other than the legal owner of the systems, arrangements that have been endorsed by competent authorities. ESMA has further clarified the scope of the outsourcing requirements covered by the draft RTS, which corresponds to the operational functions in relation to the systems allowing or enabling algorithmic trading.
18. Some respondents sought clarification on the exact meaning of the term “critical
operational functions”. ESMA has revised the text to identify which operational functions are considered critical.
19. Some respondents considered that requests for information should be processed either
via the trading venue or via the competent authority of the service provider, still enabling the competent authority of the trading venue to receive the information it needs, on the basis that both the trading venue and the service provider are authorised within the EU. The same comments were made with respect to auditors’ access. The text has been redrafted to clarify these points.
20. Regarding the authorization for outsourcing of critical functions, some respondents
considered that trading venues should be required to provide notification with relevant information but that explicit authorisation should not be required: the competent authority should have the right to object to it when not in compliance with the technical standards. In addition, some respondents felt that the obligation to report the intention to outsource was not reasonable and might create significant costs. To clarify its expectations, ESMA amended the text to distinguish ‘ex ante’ notification of relevant outsourcing arrangements from ‘ex post’ notification for any other outsourcing agreement affecting the systems allowing or enabling algorithmic trading.
21. ESMA reiterates that the provisions in relation to outsourcing should be read in
conjunction with IOSCO Principles on Outsourcing by Markets published in July 2009. Capacity and resilience of trading venues Due diligence for members or participants of trading venues

22. ESMA proposed that a trading venue which permits algorithmic trading through its
    systems should perform an adequate due diligence to ensure that all members or participants meet certain pre-defined parameters. In addition, appropriateness of such parameters should be reviewed periodically by trading venues. To enable this, ESMA included a list of elements to be taken into account by the trading venue when performing due diligence.
23. Responses to the CP focused on two elements: firstly, as some of the elements listed for
    assessment in the due diligence (experience of staff in key positions within the members; responsible managers for the operation of the trading system; testing of algorithms; business continuity and disaster recovery procedures; outsourcing policy of the member) were covered by the draft RTS on organisational requirements for investment firms, trading venues’ due diligence would duplicate the supervision made by CAs. ESMA has therefore revised the list of requirements while maintaining the requirement relating to staff in key positions within the members as this obligation should be read in the context of Article 53(2)(c) of MiFID II whereby trading venues shall specify the professional standards imposed on the staff of the investment firms or credit institutions that are operating on the market. Secondly, the concern expressed by respondents concerning the obligation of trading venues to revise the due diligence already made for all their members annually. The final draft RTS have been revised to clarify that trading venues are not obliged to revise the due diligence for all of their members on an annual basis. Testing the capacity of members or participants to access trading systems
24. ESMA described in its CP three different sets of obligations on trading venues with
    respect to testing to reduce the possibility of threats to their capacity and resilience: the obligation of trading venues to test their own systems, the obligation to impose a conformance testing on their members, participants or clients and the minimum requirements for the testing environment provided by the trading venues to prevent disorderly trading conditions.
25. Only one respondent addressed the testing by the trading venue of its own systems,
    positing that the ultimate responsibility in relation to disorderly trading conditions rests with the members, participants or clients of a trading venue. ESMA wishes to clarify that this obligation prevents the deployment of systems without sufficient testing that, by themselves, might create disorderly trading conditions regardless of the operation of other market participants.
26. Regarding conformance testing, ESMA’s proposal required a functional test and a
    technical test to ensure that the basic interaction between the member, participant or client and the trading venue conformed to the venue’s specifications.
27. Some respondents suggested limiting the scope of conformance testing to those
    algorithms or systems that interact directly with the trading venue’s infrastructure (mostly

smart order routers and gateways) and that may have a direct interaction with the trading venue’s logic (in certain cases, scheduling algorithms). However, based on the evidence provided, it was not possible to differentiate in a way that would be applicable across various asset classes (for instance, according to these respondents there are cases where conformance testing and testing against disorderly trading conditions would be applicable to smart order routers and other cases in which it would not) and the final draft RTS does not differ significantly from the original text. Nevertheless, ESMA has specified in Recital (5) of the draft RTS that the specific organisational requirements for trading venues should be determined following a self-assessment that includes as well the testing requirements. For these purposes, Recitals (3) and (4) of the draft RTS 6 on the organisational requirements for investment firms engaged in algorithmic trading, which differentiate between investment decision algorithms and order execution algorithms, are also relevant.
28. Additionally, some respondents were concerned with the scope of instruments to be
tested, signalling that the focus should be on groups of instruments rather than having the whole list of instruments tested, due to the cost of maintaining a full correspondence between a live and non-live environment. ESMA has addressed this concern and the text now reflects that trading venues should have available a list of instruments which is representative of those available in a live environment.
29. A number of respondents proposed for the conformance testing requirement to apply
only when ‘material’ changes are made to an algorithm. Other respondents requested clarification of what should be considered as ‘material’ for these purposes. ESMA has revised the original text to acknowledge that not all types of updates in a trading venue’s functionality may trigger a requirement for conformance testing. However, on the basis of the evidence gathered it was not possible to provide definitive guidance on identifying ‘material’ changes. ESMA has also revised the text to clarify that there are two main types of events that would require a new conformance test: setting up or introducing material changes in the access to a trading venue or a substantial update of the member’s system, algorithm or strategy.
30. A number of respondents noted that the obligation to test on one trading venue should
only apply to those algorithms or strategies effectively deployed in that venue. ESMA agrees with that interpretation.
31. Throughout the consultative process, ESMA identified the minimum characteristics that a
conformance testing environment should have:
i. be accessible in equivalent conditions to the rest of trading venue´s testing service;
ii. have a list of financial instruments available for testing representative of the ones
available in the live environment;

iii. be available during general market hours or on a pre-scheduled periodic basis if
outside market hours. However, the text has been revised to highlight that trading venues should ensure separation between a testing and a production environment;
iv. be supported by knowledgeable staff; and
v. provide a report with the outcome of the testing exclusively to the actual or
prospective member.
32. These elements of a conformance testing environment have not been revised
respondents provided no comments on them.
Testing the member´s algorithms to avoid disorderly trading conditions
33. The purpose testing for disorderly trading conditions is to recreate real market conditions
to ensure the well-functioning of algorithms under changing circumstances.
34. ESMA’s preliminary view was that, without prejudice of the ability of investment firms to
test their algorithms through alternative means, investment firms should use the testing facilities provided by trading venues in which they planned to operate as part of the regular procedure before accessing a trading venue.
35. ESMA was of the opinion that the scenarios selected by trading venues should be
appropriate to the nature and scale of the trading activity that takes place on them. They should be comprehensive in terms of functionalities, protocols and structure and should be as close as to real market conditions as possible, including disorderly market conditions. The facilities offered by trading venues for these purposes should also permit testing a range of scenarios the users consider suitable to their activity.
36. The main criticism received by ESMA was the difficulty to reproduce real market
conditions in a non-live environment, where the simultaneous interaction with other relevant market players is a prerequisite. These respondents viewed such technical limitations significant enough to render such an exercise ineffectual as designing scenarios as close to market situations as possible would be fundamentally unachievable, and therefore not useful in attempting to avoid a black swan scenario as envisaged. Additionally, some respondents suggested the use of fictional test ‘symbols’ to undertake testing where different algorithms may interact with each other in a live trading environment to be sufficient in meeting such an objective.
37. In light of the responses received, ESMA considers that trading venues may fulfil the
obligation to offer environments for use by their members, participants or users to test their algorithms against disorderly trading conditions either by providing access to a facility simulating their markets or by providing a dedicated fictional symbol for testing purposes. ESMA has also noted the concern raised by one respondent in relation to the potential risks to trading venues’ system capacity and resiliency arising from an

excessive use of fictional testing symbols by clarifying that testing process should be subject to a fair usage policy and also that strict separation from the production environment should be maintained.
38. The second main element pointed out in the responses was the excessive burden
created with the imposition of testing algorithms in all trading venues where they are active. ESMA remains of the view that testing against disorderly trading conditions should be undertaken prior to the deployment or substantial update of an algorithm in a venue. However, nothing prevents several trading venues from developing joint testing environments that can be used for all of them when their market microstructures are sufficiently homogeneous.
39. Some respondents proposed limiting the scope of this type of testing to those algorithms
or infrastructures that may create disorderly trading conditions due to their interaction with other market participants (mainly scheduling algorithms and smart order routers) since only those elements which interact directly with market infrastructure or other participants should be subject to the tests. ESMA wishes to reiterate the points made in paragraph 27 above.
40. A significant number of respondents raised concerns on the proposal to place testing
obligations on trading venues as this would obfuscate the responsibility of investment firms and create an impossible task for trading venues, as they would be unable to guarantee that a firm would not create or contribute to disorderly trading conditions. ESMA agrees with these views and has revised its approach on the obligations to test investment firm’s algorithms: trading venues should only require their members or participants to certify that the algorithm has been subjected to testing obligations. However, trading venues are not obliged to validate the outcome of those tests. The responsibility for the adequate testing against disorderly trading conditions remains with the investment firm. ESMA reminds that these provisions should be read jointly with Articles 5 to 8 of the draft RTS 6 on the organisational requirements of investment firms engaged in algorithmic trading. Trading venue’s capacity
41. ESMA proposed requiring trading venues´ trading systems to have sufficient capacity to
accommodate at least twice the highest number of messages per second and per value ever recorded on any given day. In the original proposal, if the historical peak of messages had been overridden the capacity was considered as no longer sufficient, forcing the trading venue to take measures to expand its capacity. ESMA did not consider it appropriate to set a fixed period for trading venues to remedy the situation but indicated that the design of the trading system should permit installing new capacity “within a reasonable timeframe if necessary”. ESMA’s proposal permitted trading venues not to increase their capacity in justified cases upon providing their CAs with reasons for not doing that. The proposal also required trading venues to allow for scalability of the

performance of their systems in response to increased message flow which may otherwise threaten their operation.
42. The responses to the CP addressed several points in this respect which are described
below.
43. Some respondents requested ESMA to clarify the definition of a ‘message’ in this
context. ESMA has modified the text to clarify that ‘messages’ should be construed broadly, by including any input or output messaging consuming the trading venue’s capacity. This implies that quotes, indications of interest or trade confirmations should be considered within the scope of this obligation.
44. One respondent recommended specifying that capacity should refer to the market
segment in which the instrument is traded. ESMA has maintained the original proposal on this point since capacity should be viewed in terms of system usage of the trading systems where algorithmic trading may take place, not in terms of market segments. Where a trading venue has several market segments, capacity should be measured on a per segment basis only where each market segment is served by different systems.
45. Some respondents highlighted the inconsistency between the record-keeping obligations
imposed on trading venues (five years) and the historical peak to be considered for these purposes (the all-time high). The text has been amended to require such obligations taking into account the previous five-year period.
46. One respondent sought further clarity on ESMA’s expectation with regards to the
sequence of events for the trading venue following the breach of a historical peak. The sequence of events should be: 1) breaching of the historical peak; 2) assessment to be undertaken within a reasonable timeframe by the trading venue’s senior management as to whether an expansion of their system capacity is deemed necessary; and 3) immediately inform the competent authority of the decision made, including the schedule for the implementation of the capacity increase where appropriate, and the reasons supporting that decision.
47. An alternative proposal for setting the minimum capacity requirements was made by a
number of respondents, based on the average performance or the continuous load of a trading system rather than the historical peak. Other respondents proposed that the system should merely have controls in place to manage degradation in system performance once the number of messages has reached twice the historical peak. ESMA highlights that the draft RTS prescribes the absolute minimum that should be met by all trading venues to prevent market disruptions. In this respect, ESMA reiterates the arguments put forward in its Discussion Paper on this issue16 . In particular, ESMA reminds that in general, standard market practice is significantly more rigorous than the

16 http://www.esma.europa.eu/system/files/2014-548_discussion_paper_mifid-mifir.pdf; pages 245 and 246.

minimum standard proposed by ESMA. Since the specific capacity of each trading system should be determined according to the “nature, scale and complexity” of the venue’s business, ESMA does not expect the current standards to be reduced in any case.
48. Finally, the obligation of senior management to revise whether that capacity remains
appropriate has not changed and is triggered by a new historical peak of messages. The capacity of a trading system has to be expanded following the identification of system failures, outages or errors in matching transactions. On-going monitoring and periodic review of the performance and capacity of the trading systems
49. ESMA’s proposal was that, on an ongoing basis, trading systems should be well adapted
to the business which takes place through them and are robust enough to ensure continuity and consistency of performance. To this end, ESMA considered that trading venues should be able to demonstrate at all times to CAs continuous real-time monitoring of the performance and degree of usage of the elements of their trading systems in relation to a number of parameters.
50. ESMA received three comments on the ongoing monitoring of performance and capacity
of trading systems. One market participant considered that such monitoring depends upon the clear definition of the relevant baselines. ESMA agrees with this position, but considers that trading venues should set out such baselines. Other respondents considered that the monitoring obligation should not be conducted at all times. ESMA disagrees with this approach and has maintained the original approach. In this regard, ESMA wishes to stress that the infrastructure should be able to generate alerts within five seconds of the event, but the remedial processes do not need to take place in that timeframe as human involvement may be required.
51. Regarding the stress tests to be performed under the periodic review of the systems, the
baseline has been aligned with the record-keeping obligations of trading venues: the highest number of messages managed by the system during the previous five years instead of the historical peak of messages. Following the indications provided by one respondent, the ability of trading venues to determine which members should participate in those stress tests has been substituted by simulation of the members’ activity. Means to ensure resilience of trading venues Business continuity
52. ESMA’s proposal in this area focused on the requirement for a business continuity plan
and effective business continuity arrangements to ensure a timely resumption of trading, targeting a recovery time objective (RTO) of no more than two hours and a recovery point objective (RPO) close to zero. The business continuity plan should be supported

by an impact assessment, and subject to periodic revision and testing to ensure that the plan remains appropriate.
53. The feedback received from market participants addressed different points described
below.
54. Some market participants considered that an RTO of two hours would be too
demanding. Placing the trading venues on equal footing with more systemically relevant infrastructures, such as CCPs would create unnecessary pressure for the venues. In this respect, ESMA notes that different words are used in the draft RTS and Article 17 of Commission Delegated Regulation (EU) No 153/2013. Whereas Article 15 of the draft RTS refers to ensuring timely resumption of trading by “targeting a recovery time no later than two hours”, Article 17 of Commission Delegated Regulation (EU) No 153/2013 establishes that “the maximum recovery time for the CCP’s critical functions to be included in the business continuity policy shall not be higher than two hours”. These differences are in acknowledgement of the fact that in exceptional circumstances, the resumption of trading may take longer than two hours.
55. Other respondents requested ESMA to clarify the concept of RPO. This is a reference to
the maximum tolerable amount of data that may be lost from an IT perspective that occurs as a result of a major incident and is directly linked to the minimum frequency of backups that trading venues must carry out. Therefore, this requirement obliges trading venues to back up the relevant data as frequently as possible.
56. One respondent noted that the list of disruptive events should be reduced to the effective
impacts that any disruptive incidents might have: loss of staff, loss of facilities or loss of technology. ESMA agrees with this point and has revised the text accordingly.
57. One respondent considered too onerous the obligation for the Board of Directors or any
competent management body to approve every amendment to the Business Continuity Plan. ESMA has revised the text, assigning much of the responsibilities with respect of the Business Continuity Plan to the senior management. However, if a deficiency in the Business Continuity Plan is detected in the course of a periodic impact assessment and the trading venue decides not to address it, then that decision should be endorsed by senior management.
58. One respondent remarked that obliging trading venues to have arrangements to ensure
timely resumption of trading would not be sufficient. This respondent considered necessary that members or participants of trading venues should be required to maintain, in addition to the connection to the trading venue’s production datacentre, connection to the trading venue’s disaster recovery facility. ESMA has addressed this issue in Article 18(2) of the Draft RTS 6 on the organisational requirements of investment firms engaged in algorithmic trading, where investment firms must have in place arrangements that are bespoke to each of the venues that they access.

Prevention of disorderly trading conditions
59. Following on from the comments received from the Discussion Paper, in the CP, ESMA
reviewed the definitions of ‘stressed market conditions’ and ‘disorderly trading conditions’ and proposed a revised set of arrangements that trading venues should have to prevent disorderly trading. Such arrangements were referring to limits per participant on the number of orders sent per second (throttle limits) to prevent flooding of the order book, mechanisms to manage volatility, pre- and post-trade controls, ability to obtain information from any member/participant or user to monitor compliance with the rules and procedures of the trading venue, suspension of access of a member or participant to the market, cancellation and amendment of orders under a set of predefined set of circumstances, cancellation and amendment of transactions and the ability to balance order entrance between different gateways.
60. In its CP, trading venues were required to:
i. ensure that appropriate mechanisms to halt trading were in place in all phases of
trading (i.e. from opening to close of trading);
ii. perform an in-depth assessment to evaluate the potential risks, pros and cons to
investors and the market arising from different approaches to trading halts, taking into account a number of elements (such as the specific trading model, the trading profile of the financial instrument, the volatility history of financial instruments that are considered to have similar characteristics);
iii. ensure that appropriate mechanisms and arrangements were in place for initial and
periodic testing of the mechanisms to halt or constrain trading as well as to allocate specific and adequate IT and human resources to deal with the design, maintenance and monitoring of the effectiveness of the mechanisms implemented;
iv. continuously monitor the adequacy of the thresholds in light of the observed volatility
to ensure that they are in line with market developments;
v. disclose on their website the relevant information relating to the basis for halting or
constraining trading and the rules and protocols under which they are implemented in order to provide market participants with sufficient predictability and certainty.
61. The definition of ‘disorderly trading conditions’ raised the attention of several market
participants, as discussed above.
62. Regarding the impact that these requirements may have on different trading models,
ESMA has added a recital clarifying that the analysis of the ‘nature, scale and complexity’ of the business is particularly relevant for RFQ and hybrid trading systems, whereby some of the requirements included in the draft RTS may not be appropriate.

63. One respondent noted that not all trading venues have an architecture based on
    different gateways. The text has been adapted to reflect this situation.

64. Regarding the obligation of trading venues to be aware of significant price movements in
    other venues of an instrument traded on them, the same respondent noted that that requirement would not be workable in the context of derivatives. Other respondents requested that trading venues and CAs agree on the price movement that would trigger the notification requirement under Article 20(2). Noting this, these requirements have been deleted.

65. Several market participants questioned the ability of CCPs to request the cancellation of
    orders or transactions. The text has been revised to clarify that the only individuals qualified to request the cancellation of pending orders are the member or the SA client who submitted the orders. The final version of the draft RTS also indicates that the cancellation of trades can only take place in the case of a malfunction of the trading venue’s mechanisms to manage volatility or of the trading system.

66. A number of respondents noted that correcting transactions ex-post would not be
    possible for trading venues, as they are not in the position to know the true value of an instrument. The draft RTS have been amended to reflect this point.

67. The proposal to include as part of the throttling arrangements the penalties to be
    imposed in case of inadequate behaviour from one member was criticized. Despite this specific provision being deleted from the draft RTS, nothing prevents trading venues from imposing such penalties under the ‘measures to be adopted following a throttling event’.

68. Article 20(6) of the draft RTS established the obligation of trading venues to document
    and report to the competent authority the rules and parameters of the mechanisms used to manage volatility. One participant requested limiting such reporting obligations to ‘material changes’. The draft RTS have been amended to clarify the requirement, however, ESMA notes that the requirement for trading venues to report to their authorities the parameters of halting trading and any material changes to those parameters is stipulated in Article 48(5) of the Directive.

69. Article 20(3) of the draft RTS required trading venues to consider historical volatility of
    the financial instruments with similar characteristics in their calibration of their mechanism to manage volatility. One respondent noted that such information may not be available. ESMA acknowledges such possibility but notes that they would still be liable to have mechanisms to manage volatility that are ‘appropriate’ to their trading systems, per
    Article 19(1). Although the Article 20(3) of the draft RTS has now been deleted, this will
    be addressed in the ESMA Guidelines on the calibration of trading halts provided in accordance with Article 48(13) of the MiFID II.

70. One respondent noted that post-trade controls were employed by investment firms for
    risk management purposes and the trading venues typically did not operate controls that would prevent a member or participant from trading when a pre-set threshold has been breached. ESMA has revised the wording to allow trading venues flexibility to establish separate post-trade controls which they deem appropriate on the basis of a risk assessment of their members’ activity.

71. One respondent requested limiting the requirement to disclose the policies concerning
    trading venue’s mechanisms to manage volatility to its members. However, ESMA has maintained the original approach of requiring public disclosure, but clarified that such obligation need not be as granular as, for example, to disclose the specific number of orders per second on pre-defined time intervals for throttling arrangements and the specific parameters of their mechanisms to manage volatility, given the obvious risk of such information being misused. Pre-trade and post-trade controls

72. ESMA proposed that trading venues should ensure that their members or participants
    operated the pre-trade controls specified in the drat RTS 6 on organisational requirements of investment firms engaged in algorithmic trading.

73. Additionally, the draft RTS established that trading venues should operate price collars,
    maximum order value and maximum order volume controls.

74. Some respondents noted that the requirement to have pre-trade controls as included in
    the draft RTS 6 on organisational requirements of investment firms engaged in algorithmic trading should be monitored by the competent authorities, not by trading venues. ESMA agrees with this and has amended the text accordingly.

75. Several respondents contested the requirement whereby pre-trade controls should
    ensure that ‘order submission is entirely stopped once a limit is breached’. These respondents agreed that trading venues should have such ability but this should in their view not be required in all instances. In their view, such an action would affect the firm’s ability to deliver best execution for its clients as further orders, even on different instruments, would be prevented from entering the order book. ESMA agrees with this point and has revised the draft RTS accordingly.

76. A number of respondents requested clarification on the requirement where order price
    collars should operate on both an order-by-order basis and over a specified period of time. In particular, the reference to a ‘specified period of time’ seemed problematic for some. One market participant considered that ‘specified period of time’ should be the period defined by a trading venue in which an incoming order or a trade is taken as reference price accordingly with current market practice. ESMA agrees with such a view, but upon reviewing its relevance to the draft RTS, it has deleted the reference.

77. The obligation to operate simultaneously the three pre-trade controls proposed by ESMA
    raised some concerns from one market participant. This respondent noted that not all of them might be appropriate for all types of trading, taking into account that some illiquid instruments may suffer abrupt price movements from one trade to the next. For some of these instruments it would be more appropriate to constrain trading by passing to a volatility auction. ESMA clarifies that the obligation to have in place arrangements to reject an order which exceeds certain volume and price thresholds or is clearly erroneous is stipulated in Article 48(4) of the Directive. Additionally, the obligation to have mechanisms to halt or constrain trading appears also in Article 48(5). Trading venues should set appropriate thresholds to make those different arrangements operate jointly. Direct electronic access

78. ESMA proposed in the CP a provision on Direct Electronic Access (DEA) which covered
    the following main obligations: i) trading venues should specify the framework to provide DEA by their members, participants or clients; ii) SA should be subject to the specific authorisation by the trading venue; and iii) trading venues should require specific monitoring requirements to their members, participants or clients with respect to the order flow generated by firms using DEA.

79. Two respondents agreed with ESMA that the responsibility of trading venues regarding
    DEA should be limited to setting the framework. ESMA wishes to clarify that the proposal sets out the minimum standards to be met by trading venues in this respect. However, where a trading venue considers it necessary to establish a stricter approach on the provision of DMA or SA, for instance by approving on a case by case basis DMA clients, nothing in the draft RTS prevents it from doing so as long as the provisions of the draft RTS are adhered to.

80. The feedback received pointed out to uncertainty regarding the definition of DEA which
    determines which firms will be in scope. In this particular regard, the reading of DEA provisions should be informed by the works undertaken by the Commission on the definition of DEA based on the technical advice provided by ESMA.

81. Another source of uncertainty was the relationship between the obligations set out in the
    draft RTS on organisation requirement for trading venues and the draft RTS on the organisational requirements of investment firms engaged in algorithmic trading. In particular, a number of respondents had objected to trading venues being able to impose different frameworks and subsequent requirements relating to DEA. To address this problem, a suggestion was made for the obligations on DEA to be exclusively covered through the latter draft RTS on organisational requirements for investment firms.

82. ESMA agrees with the point made and has revised the approach, avoiding the potential
    overlap between those draft RTS. Therefore, the requirements as set out in the draft RTS on the organisational requirements of investment firms engaged in algorithmic

trading are considered as a minimum. Trading venues may only introduce in their rules and conditions the technical specifications to provide DEA according to their own microstructure but without deviations from the minimum requirements.
83. Two respondents objected to the role that trading venues would have on the
authorisation of each SA client subsequent to the due diligence performed by the DEA provider. ESMA has decided to maintain the obligation for the trading venue to authorise the provision of SA on a case-by-case basis, given the higher risk of the trading flow under SA which does not flow through a DMA provider´s trading systems. In this regard, trading venues are required to ensure that the prospective SA client has at least the same pre-trade risk limits and controls as the prospective DMA clients, and that the SA provider is the only one with the capability to set or modify the parameters or limits of the pre-trade and post-trade controls of their SA clients.
84. One respondent disagreed with the obligation of SA providers to set the parameters of
the post-trade controls of their SA clients. ESMA has maintained that obligation in the final draft RTS and instead revised Article 20(3) of the draft RTS 6 on organisational requirements of investment firms engaged in algorithmic trading to clarify that DEA providers should apply pre-trade and post-trade controls on the order flow of each of their clients as well as real-time monitoring and market surveillance controls in accordance with Articles 13, 15, 16 and 17 of those standards.
85. Some responses noted that information regarding the disciplinary history of the
prospective client may not always be available in the due diligence process. ESMA has reflected this point in the draft RTS 6 on the organisational requirements of investment firms engaged in algorithmic trading by requiring a DEA provider to only check publicly available sources as part of its due diligence process.
86. Some stakeholders sought clarification on the proposed provision regarding the ability to
stop the order flow of DEA clients to be applied only to the order flow of a particular DEA client and not to the DEA order flow as a whole. To this end, ESMA has revised the draf RTS 6 on Organisational Requirements for Investment Firms engaged in Algorithmic Trading to reflect this. One respondent noted that such a requirement would be impossible to implement without the attribution of a specific DEA client ID. ESMA agrees with this point which is covered by the draft RTS on the organisational requirements of investment firms engaged in algorithmic trading.
87. One respondent noted that any infringement of MiFID II, MiFIR, MAR or the trading
venue’s internal rules would automatically lead to the cancellation of the SA provision, regardless of the nature and the magnitude of such an infringement. ESMA has revised the text taking this into account. Security
88. ESMA’s proposal on this topic focused on the following main elements:

i. trading venues should have procedures and arrangements for physical and
electronic security designed to protect their systems from misuse or unauthorised access and to ensure the integrity of the data that passes through their systems, including arrangements that prevent or mitigate the risks of attacks against their information systems;
ii. trading venues should set up and maintain measures and arrangements to promptly
identify and manage the risks related to any access to its trading system;
iii. trading venues should inform the competent authority of any breaches to their
physical and electronic security measures. An incident report should be promptly submitted to the competent authority indicating the nature of the incident, the measures taken in response to the emergency situation and the initiatives taken to avoid similar incidents recurring in the future.
89. ESMA did not receive feedback on this topic. Therefore the draft RTS remains in line
with the original proposal.

3.3. Market making, market making agreements and market
making schemes
Background/Mandate
Article 17(7) of MiFID II
7. ESMA shall develop draft regulatory technical standards to specify the following:
[…]
(b) The circumstances in which an investment firm would be obliged to enter into the market making agreement referred to in point (b) of paragraph 3 and the content of such agreements, including the proportion of the trading venue’s trading hours laid down in paragraph 3; (c) The situations constituting exceptional circumstances referred to in paragraph 3, including circumstances of extreme volatility, political and macroeconomic issues, system and operational matters, and circumstances which contradict the investment firm’s ability to maintain prudent risk management practices as laid down in paragraph 1;
Article 48(12), MiFID II
12. ESMA shall develop draft regulatory technical standards further specifying:
[…]
(f) The requirements to ensure that market making schemes are fair and non-discriminatory and to establish minimum market making obligations that regulated markets must provide for when designing a market making scheme and the conditions under which the requirement to have in place a market making scheme is not appropriate, taking into account the nature and scale of the trading on that regulated market, including whether the regulated market allows for or enables algorithmic trading to take place through its systems;

1. Articles 17 and 48 of MiFID II introduce requirements on investment firms pursuing what
   is defined as a “Market Making Strategy” and trading venues where market making activities are undertaken using an algorithmic trading technique. As stated in Recitals (62) and (113) of MiFID II, there are two main goals of MiFID II in this respect. Firstly, the introduction of an element of predictability to the apparent liquidity in the order book by introducing contractual obligations for firms performing certain types of strategies. Secondly, as advanced technologies may bring new risks to the market, MiFID II aims to

maintain market participants’ ability to transfer risks efficiently during stressed market conditions.
2. MiFID II introduces a number of concepts to promote orderly and efficient functioning of
markets in the current market environment in relation to firms pursuing market making strategies and trading venues.
3. Article 17(3) of MiFID II determines that “an investment firm that engages in algorithmic
trading to pursue a market making strategy shall, taking into account the liquidity, scale and nature of the specific market and the characteristics of the instrument traded:
i. carry out this market making continuously during a specified proportion of the
trading venue’s trading hours, except under exceptional circumstances, with the result of providing liquidity on a regular and predictable basis to the trading venue;
ii. enter into a binding written agreement with the trading venue which shall at least
specify the obligations of the investment firm in accordance with point (a); and
iii. have in place effective systems and controls to ensure that it fulfils its obligations
under the agreement referred to in point (b) at all times”.
4. According to Article 17(4) of MiFID II, “an investment firm that engages in algorithmic
trading shall be considered to be pursuing a market making strategy when, as a member or participant of one or more trading venues, its strategy, when dealing on own account, involves posting firm, simultaneous two-way quotes of comparable size and at competitive prices relating to one or more financial instruments on a single trading venue or across different trading venues, with the result of providing liquidity on a regular and frequent basis to the overall market”.
5. Further, Article 48(2) of MiFID II states that “Member States shall require a regulated
market to have in place:
i. written agreements with all investment firms pursuing a market making strategy on
the regulated market;
ii. schemes to ensure that a sufficient number of investment firms participate in such
agreements which require them to post firm quotes at competitive prices with the result of providing liquidity to the market on a regular and predictable basis, where such a requirement is appropriate to the nature and scale of the trading on that regulated market.”
6. The written agreement between the trading venue and the investment firm pursuing a
market making strategy is required to at least specify:

i. the obligations of the investment firm in relation to the provision of liquidity and
where applicable, any other obligation arising from participation in the scheme referred to in paragraph 2(b) of Article 48 of MiFID II;
ii. any incentives in terms of rebates or otherwise offered by the regulated market to an
investment firm so as to provide liquidity to the market on a regular and predictable basis and, where applicable, any other rights accruing to the investment firm as a result of participation in the scheme referred to in paragraph 2(b) of Article 48 of MiFID II.
7. The regulated markets are required to monitor and enforce compliance by investment
firms with the requirements of such binding written agreements. The regulated markets are required to inform their competent authority about the content of the binding written agreement and, upon request, provide to the CA all additional information necessary to enable the CA to monitor itself the compliance by the regulated market with the requirements of Article 48(3) of MiFID II.
8. Article 18(5) extends the obligations of Articles 48 and 49 to MTF and OTF.
Analysis following feedback from stakeholders
9. The main elements of the ESMA proposal as published in the CP were the following:
i. an investment firm would be considered as pursuing a market making strategy, and
therefore, should to sign a market making agreement when posting firm, simultaneous two-way quotes of comparable size and at competitive prices in at least one financial instrument on a single trading venue for no less than 30% of the daily trading hours during one trading day;
ii. the minimum obligations to be specified in such a market making agreement
included the obligation to post firm, simultaneous two-way quotes of comparable size and competitive prices for no less than 50% of the daily trading hours;
iii. only trading venues or market segments where algorithmic trading could take place
were subject to the obligation to have a market making scheme in place;
iv. a exhaustive list of exceptional circumstances where the provision of liquidity on a
regular and predictable basis would not be required;
v. the draft RTS prohibited the setting of a maximum number of investment firms taking
part in a market making scheme, but acknowledged the ability for trading venues to
limit the incentives to be provided only to those firms which perform better;
vi. access to incentives was expected to be proportional to the effective contribution to
the liquidity in the market, as measured in terms of presence, size and spread;

vii. an obligation to incentivise the presence of firms engaged in a market making
agreement during stressed market conditions; and
viii. an obligation for trading venues to make publicly available the terms and conditions
of the market making scheme.
10. Responses received to the CP raised a number of concerns about the ESMA proposal
which are summarised below.
General concerns
11. Firstly, some respondents raised concerns about the scope of the proposed regime
which would apply to:
i. all asset classes, regardless of the liquidity profile of the instrument;
ii. all trading venues, regardless of the trading system they operate (e.g. RFQ); and,
iii. all investment firms, irrespective of whether the quotes posted are provided at the
request of a client or in a genuinely proprietary capacity.
Specific comments made on the definitions
12. With regard to the definitions proposed by ESMA, respondents made the following
comments:
i. the definition of “trading venue allowing or enabling algorithmic trading through its
systems” was perceived to be too broad and would potentially include almost all the trading venues in the Union.
ii. the draft RTS would benefit from greater clarity on terms such as market hours,
trading hours, normal trading hours and daily trading hours.
iii. some respondents said that the proposed definition of ‘simultaneous’ as orders
being ‘entered into the order book within one second of the other,’ would not reflect the market practice and would be open to gaming and misapplication. Some exchanges also voiced concerns that it might be challenging for a venue to monitor whether two-way-quotes were entered at the same time.
iv. some respondents also stressed that the proposed definition of ‘comparable size’
added the risk of false measurement and misclassification of market participants’ trading activity as a market strategy. In their view, the comparable size requirement should be equal to, or superior to, a minimum size set by the venue.
v. many respondents were of the opinion that the definition of ‘competitive prices’
should reflect the maximum bid-ask spreads set by a trading venue for market

making in a given instrument. In the view of these market participants, this approach would be consistent with the Short Selling Regulation (Regulation (EU) No 236/2012).
vi. many respondents considered that the definition of stressed market situations which
included “situations where a significant change in the number of messages being sent to and received from, the systems of a trading venue” was not appropriate. Those situations might, in their view, materialise without stressed conditions. For instance, significant changes in number of messages and transactions would be natural in equity derivatives markets as a result of volatility changes, macro and corporate news, specific situations such as roll weeks, etc.
13. In ESMA’s view, the revised RTS addresses most of these concerns presented by the
respondents. In particular, ESMA has moved the definitions to the relevant provisions and where necessary, clarified them so as to provide stakeholders with greater clarity and address the concern raised about practical implementation.
14. In particular, the references to the time periods on which a market making strategy
should be observed or monitored have been aligned. ESMA has maintained the identification of ‘comparable’ quotes between the quotes posted on both sides permitting a maximum divergence of 50%. In ESMA’s view, the proposal made by market participants would not fulfil the Level 1 requirement that the size of quotes is ‘comparable’. ESMA agrees with the point made regarding ‘competitive’ prices and has revised the text accordingly. Finally, on the identification of ‘stressed market conditions’, ESMA agrees that these conditions relate to changes in prices and volumes but the situations of stress may vary a lot among trading venues and types of instruments traded. Therefore, it has revised the text leaving to trading venues the obligation to identify the specific parameters of stressed market conditions in terms of significant short-term changes of price and volume. Identification of market making strategies
15. Most respondents were of the opinion that trading venues should not be responsible for
detecting market making strategies. ESMA agrees that it is the investment firm’s duty to notify the venue if it intends to pursue this type of strategy. However, if a venue identifies such strategy without prior notification, it has to contact that investment firm to sign a market making agreement as prescribed by Article 48(2)(a) of MiFID II. Where the investment firm does not agree to sign the agreement or to disable that strategy, the trading venue may report an infringement of Article 17(3) of MiFID II to its CA. ESMA appreciates that the provisions would benefit from further clarifications in that respect. However, it notes that those elements are not covered by ESMA’s Level 1 mandate and hence the final draft RTS remains silent on those points. Circumstances in which an investment firm will be obliged to enter into a market making agreement

16. The vast majority of the respondents disagreed with ESMA’s proposal, i.e. that
    investment firms pursuing a market making strategy in at least one financial instrument during 30% of the daily trading hours during one trading day should sign a market making agreement with the trading venue. In this respect, respondents raised concerns about both the 30% threshold and the proposed observation period (one single trading day).
17. In their view, both the threshold of 30% and the short observation period of one day
    would likely lead to erroneously capturing firms that rarely trade on a particular market but which have, for various reasons (e.g. market turmoil, necessity to liquidate a position, etc.), a high presence on a particular day. It would also be possible, for instance, that a firm liquidating its position provides quotes for more than 30% of the trading hours on a single day in at least one instrument. Such an activity should not accidentally trigger a substantive commercial obligation.
18. It is worth noting that the 30% threshold proposed in the CP relates to two-way quotes
    which should be of comparable sizes and posted simultaneously. Hence in ESMA’s view it is unlikely that this requirement would capture investment firms liquidating a position in one specific instrument. However, ESMA recognises that the proposed threshold and in particular the short observation period associated with it could lead to investment firms being captured without pursuing genuine market making strategies. ESMA has therefore decided to revise its proposal.
19. Various alternative thresholds and observation periods were suggested by the
    respondents. With regard to the specific threshold, most of the respondents favoured a 50% threshold instead of 30% in the observation period. As far as the observation period is concerned, a large majority of respondents suggested an observation period of at least one month as evidence of undertaking such an activity on a regular basis. They also stressed that the trading hours of trading venues in Europe vary between one and 24 hours’ continuous trading and that it was important for the new regime to accommodate all situations.
20. In line with these responses, ESMA has modified its initial provision. In the final draft
    RTS, investment firms are now obliged to enter into a market making agreement when posting firm, simultaneous two-way quotes of comparable size and at competitive prices in at least one financial instrument on a single trading venue for at least 50% of the daily trading hours of continuous trading at the respective trading venue, excluding opening and closing auctions, and for half of the trading days over a one month period.
21. Respondents also pointed out that the regime proposed in the CP could have
    unintended consequences on the liquidity of European markets. In their view, there was a risk that investment firms would try to avoid being captured and undertake less “firm, simultaneous two-way quotes of comparable size and at competitive prices” on the trading venues and more trading through SIs. To mitigate such concerns, ESMA has

raised the proportion of the time that a market making strategy has to be operative to trigger the obligation to sign a market making agreement.
22. Other respondents highlighted the excessive administrative burden on the trading
venues and firms in requiring them to conclude market making agreements even though many firms may not be genuine market makers. In this respect, some respondents suggested that it would be better to base the market making requirements on the deliberate intention of a firm to be a market maker, and that no firm should be forced to enter into market making agreement. ESMA believes that this approach suggested by the respondents would not be compliant with the requirements of Article 17(3) of MiFID II.
23. Lastly, it was mentioned that a DEA provider should not be obliged to sign a market
making agreement due to the activity of a DEA client. ESMA wishes to clarify that under
Article 17(4) of MiFID II, a market making strategy takes place when an investment firm
is dealing on own account “as a member or participant”. Therefore, a DEA provider should not be liable for the trading activities of its DEA clients under this provision since in this specific case it would not be dealing on own account as specified under Level 1. Market making agreement
24. With respect to the market making agreements, respondents asked for clarification on:
i. the point in time when the market making agreement should be signed and come
into force suggesting a term of one month, as the one for SIs, for the signing of the contract after the conditions are met; and,
ii. how a firm could exit from market making obligations once the parameters were met
and for how long (a day, a week, a month, etc) would a firm meeting the thresholds on one day remain under the market making obligation.
25. ESMA appreciates that the provisions would benefit from further clarifications in that
respect. However, it notes that those elements are not covered by ESMA’s Level 1 mandate and hence the RTS remains silent on those points.
26. Respondents also sought clarity on whether a separate market making agreement
should be signed for each financial instrument. In ESMA’s view, the market making agreement should be limited to those instruments in which the investment firm is pursuing a market making strategy. However, nothing prevents, where appropriate, a trading venue and an investment firm, to cover more than one financial instrument under the same agreement.
27. With regard to the minimum threshold of 50% presence time for those market makers
having signed a market making agreement, the main points raised in the responses are:

i. Respondents generally considered this minimum threshold would be workable if an
application across all market sectors is intended. However, for ESMA, this should only apply to the trading venue the investment firm has signed the agreement with. It is worth noting that in the revised RTS, the threshold is now consistent with the threshold used to determine when a firm is obliged to enter into a market making agreement.
ii. Some respondents considered that the minimum threshold of 50% fails to take into
consideration the different trading models, the different asset classes, financial instruments and market environments. ESMA appreciates that there would be some merit in further calibrating the minimum threshold for each specific asset class but notes that this would on the other hand create extra complexity and burden for the stakeholders. Thus, it was decided to maintain a single threshold which will apply across the board.
iii. Some respondents welcomed the suggested 50% minimum presence for market
makers only during ‘normal trading conditions’ but were of the opinion that the level is not attainable during periods of stressed market conditions. ESMA understands the concern but notes that the provision of liquidity is particularly relevant in periods of stress. It should also be noted that Article 17(3)(a) of MiFID II stipulates that an investment firm under a market making agreement should “carry out this market making continuously during a specified proportion of the trading venue’s trading hours, except under exceptional circumstances” without making any reference to stressed market conditions. The proposal included in the CP was therefore maintained in this regard.
iv. Many respondents considered it necessary to clarify more precisely the
consequence of breaching this obligation. One respondent also asked for a clarification on how the proposed 50% will be monitored. In this respect, ESMA notes that under the second paragraph of Article 48(3) of MiFID II, trading venues are required to monitor and enforce compliance by investment firms with the terms of the agreement signed. In addition, the obligation for investment firms to sign a market making agreement and consequently provide liquidity during a significant proportion of the daily trading hours is also clearly stipulated under Article 17(3)(a). Therefore, Competent Authorities have the power to enforce this requirement under
Article 69 of MiFID II.
Exceptional circumstances
28. Some respondents considered that it should not be up to the trading venue to declare
‘exceptional circumstances’. In their view, an investment firm is best placed to determine whether it is able to continue pursuing a market making strategy in ‘exceptional circumstances’ and would in such instances inform the trading venue and be able to immediately suspend its market making agreement. On the contrary, other respondents felt that only trading venues should be allowed to determine exceptional circumstances.

ESMA appreciates the arguments raised but remains of the view that, in order to achieve harmonised application of the provision, trading venues should be responsible for identifying the occurrence of exceptional circumstances.
29. With regard to the list itself, most respondents disagreed with ESMA setting a hard￾coded list of exceptional circumstances and recommended rather establishing a non￾exhaustive list. ESMA believes that it is crucial, in order to achieve harmonised
implementation of those standards, to clearly delineate the list of events and circumstances which should be included and thus has maintained an exhaustive list in the final version of the draft RTS.
30. Some respondents made some suggestions about the list, recommending in particular
adding the following items:
i. Pre-planned information events (e.g. corporate action announcements); ESMA
disagrees with this suggestion as it considers that exceptional circumstances cannot, by their very nature, include any regular or pre-planned information events that may affect the fair value of a financial instrument. The RTS provides more clarity in this regard.
ii. Internal IT disruptions of the investment firm; ESMA has revised the text to identify
the exceptional IT circumstances that may impede performing this activity; and
iii. The situation when a market maker has a conflict of interest due to insider
knowledge of a possible merger/acquisition of the entity. ESMA considers that under those circumstances an investment firm should have in place a conflict of interest policy as prescribed by Article 16(3) of MiFID II.
31. Lastly, some respondents did not want the public disclosure of exceptional
circumstances as it could increase the market distortion and monitoring this disclosure would be “operationally onerous”. ESMA does not consider that the determination of exceptional circumstance should have such a detrimental impact on markets. On the other hand, ESMA considers that it is crucial for the trading venues to communicate this information to all its members and participants in order to ensure a level playing field between them. Thus, the original proposal has been maintained in this respect expect for the case where those exceptional circumstances are due an investment firm’s inability to maintain prudent risk management practices. Conditions under which it is appropriate to have a market making scheme in place
32. Some respondents felt that insufficient guidance was given on the circumstances under
which trading venues would be exempted from the requirement to introduce market￾making schemes (‘nature and scale of trade’). In particular, some respondents considered that ESMA’s proposal did not sufficiently take into consideration situations where a trading venue designates a single market-maker per instrument who needs to

fulfil more obligations than normal market makers and who can directly influence the price determination process.
33. ESMA appreciates the comments made and has revised its proposal in this respect. In
its revised proposal, ESMA has decided to limit the obligation to have a market making scheme in place to those situations and instruments were algorithmic trading entails a greater risk of overreaction to eternal events which can exacerbate market volatility. More specifically, under the new proposal, it is now only required to have such scheme in place (i) for trading venues operating a continuous auction trading order book trading system; and (ii) for specific liquid financial instruments, namely shares, equity index futures and options, exchange traded funds and ETFs futures and options. However, nothing prevents trading venues which are outside this scope from establishing a market making scheme at their own initiative. Minimum market making obligations that trading venues must provide for when designing a market making scheme
34. Many respondents criticised that trading venues cannot and should not be required to
‘compensate’ a market maker for trading in an instrument under stressed market conditions (by providing incentives). In their view, trading venues should rather have discretion to determine the amount and format (fees or relaxed quoting requirements) of incentives. The respondents highlighted that it would be unrealistic in practice for trading venues to pay additional incentives for market makers who fulfil their obligations in tough times because of the extra costs for increased liquidity in such times which are necessarily paid by the venues. In this respect, it was also mentioned that the costs might be passed down the value chain.
35. ESMA understands the concerns but stresses that under Article 48(2)(b) of MiFID II it is
stipulated that the objective of any such schemes is to bring “liquidity to the market on a regular and predictable basis”. In ESMA’s view, it is particularly important to have those schemes in place during stressed market conditions where liquidity is the most volatile and where it is appropriate to incentivise trading and provision of liquidity. However, trading venues still have the ability to adjust their scheme of incentive and, for instance, only reward the best performers as long as this is done in a non-discriminatory manner. Fair and non-discriminatory market making schemes
36. Respondents provided in their answers some suggestions for changes to make market
making schemes fair and non-discriminatory such as:
i. Amendments to a market making scheme should be allowed with one month’s
notice rather than three months. ESMA agrees with the proposal and has amended the provision accordingly.

ii. There should be a cap on incentives given to market makers. ESMA believes that
this should be possible under the proposed regime as long as the conditions apply equally to all the members or participants of a trading venue.
iii. There should not be an exemption from market making schemes for trading venues
that do not permit algorithmic trading. ESMA disagrees with this approach. Recitals (59) to (65) frame the scope of the mandates under Articles 17 and 48 to algorithmic trading activity.
iv. Market making fees and schemes should be publically available although one
respondent specifically opposed the names of market makers to be publically disclosed. ESMA does not agree with this suggestion and remains convinced that there is some merit to disclose the individuals engaged in market making agreements to ensure fair and non-discriminatory treatment.
v. Volume should be considered when determining incentives based on the quality of
liquidity provided in a market making scheme. In ESMA’s view, incentives should be granted in accordance with pre-set parameters that must be met in terms of presence, size and spread. Therefore volumes are captured by the provision.
vi. Trading venues should have the ability to deregister market makers for not fulfilling
obligations rather than providing “negative incentives”. In the final RTS, the specific reference to negative incentives has been deleted. However, ESMA notes that trading venues are in charge of monitoring and enforcing compliance with the market making agreements under Article 48(3) of MiFID II. ESMA is also of the view that market makers that do not fulfil their obligations should not be able to access the incentives. Proposal
37. In the light of the comments received, ESMA has re-considered its proposal presented in
the CP. The main elements of the final draft RTS are:
i. An investment firm is considered to be pursuing a market making strategy, and
therefore should sign a market making agreement, if it is posting firm, simultaneous two-way quotes of comparable size and at competitive prices in at least one financial instrument on a single trading venue for at least 50% of the daily trading hours of continuous trading at the respective trading venue, excluding opening and closing auctions, and for half of the trading days over a one month period.
ii. The minimum obligations that a market making agreement must establish include an
obligation to post firm, simultaneous two-way quotes of comparable size and competitive prices for no less than 50% of the daily trading hours, excluding opening and closing auctions.

iii. The final draft RTS provides for a comprehensive list of circumstances which could
constitute exceptional circumstances impeding the provision of liquidity on a regular and predictable basis. The standards also clarify the role of trading venues in the identification of those exceptional circumstances and, where necessary, the dissemination of this information to all their members or participants.
iv. The final draft RTS restricts the obligation to have a market making scheme in place
to (i) trading venues operating a continuous auction order book trading system; and (ii) specific liquid financial instruments, namely shares, equity index futures and options, exchange traded funds and ETFs futures and options.
v. The obligation to incentivise the presence of firms engaged in a market making
agreement in stressed market conditions has been maintained.
vi. The requirements set to ensure that market making schemes are fair and non￾discriminatory include the following provisions:
a. no limitation of the number of investment firms taking part in a market making scheme, but acknowledgement of the ability of trading venues to limit the access to the incentives to those which have a better performance; b. access to incentives should be proportional to the effective contribution to the liquidity in the market measured in terms of presence, size and spread; and
c. obligation for trading venues to make publicly available the conditions of the
market making scheme and the name of the firms that have signed a market making agreement under this scheme.

3.4. Ratio of unexecuted orders to transactions
Background/Mandate
Article 48, MiFID II
6. Member States shall require a regulated market to have in place effective systems,
procedures and arrangements, including requiring members or participants to carry out appropriate testing of algorithms and providing environments to facilitate such testing, to ensure that algorithmic trading systems cannot create or contribute to disorderly trading conditions on the market and to manage any disorderly trading conditions which do arise from such algorithmic trading systems, including systems to limit the ratio of unexecuted orders to transactions that may be entered into the system by a member or participant, to be able to slow down the flow of orders if there is a risk of its system capacity being reached and to limit and enforce the minimum tick size that may be executed on the market. […]
12. ESMA shall develop draft regulatory technical standards further specifying:
[…]
(b) the ratio referred to in paragraph 6, taking into account factors such as the value of unexecuted orders in relation to the value of executed transactions;

1. Under Articles 48(6) and 18(5) of MiFID II, trading venues must have in place effective
   systems, procedures and arrangements to ensure algorithmic trading systems cannot create or contribute to disorderly trading conditions on their market and to manage any disorderly trading conditions arising from such algorithmic trading systems, including systems to limit the ratio of unexecuted orders to transactions that may be entered into the system by a member or participant. In order to meet this objective, ESMA is required to further specify the ratio of unexecuted orders to transactions (OTR) that may be submitted to a trading venue by a member or participant taking into account factors such as the value of unexecuted orders in relation to the value of executed transactions.
2. For the CP, ESMA revised its original proposal in line with the Commission specifications
   according to which this Regulation would only focus on the methodology to determine the OTR. Analysis following feedback from stakeholders
3. ESMA published in its CP a proposal on the methodology to set out the ratio of
   unexecuted orders to transactions that may be submitted to a trading venue by a

member or participant taking into account factors such as the value of unexecuted orders in relation to the value of executed transactions.
4. While a number of market participants expressed a general support for ESMA’s
proposal, a lot of responses made specific objections with respect to the draft Regulation. The main issues that arose from the consultation are summarised below.
5. Regarding the scope of MiFID II mandate, some respondents considered that the
mandate does not refer to the methodology for determining the maximum OTR (which should be set out by trading venues) but to the methodology for calculating the OTR of members or participants. ESMA agrees with ths view and the draft Regulation has been amended accordingly.
6. For some respondents, the proposal did not sufficiently differentiate between the existing
types of market participants. Those respondents further stated that trading venues should have the ability to change the maximum OTRs according to the type of market participant on the basis of the different impact that their activity might have and the roles they play on that venue. In particular, those respondents had the view that market makers should be explicitly exempted from these obligations. ESMA appreciates the comments made and agrees that in some cases certain participants should be subject to a specific maximum OTR in order to allow them to perform their obligations vis-à-vis the trading venue. However, it should be noted that ESMA’s mandate is limited to specifying the methodology for calculating the OTR and not to determining the maximum OTR. Nevertheless, in ESMA’s view, the trading venues should set a maximum OTR appropriate to their trading systems in order to reduce the risk of disorderly trading conditions.
7. With regard to the scope in terms of instruments, some responses noted that there was
no value in setting a maximum OTR for certain categories of instruments such as interest rate swaps or bonds. ESMA has revised the draft RTS to clarify that only the calculation methodology of the OTR is set out and not the maximum allowable OTR.
8. On the methodology to set out the maximum OTR, some participants opposed this
proposal as it was based on previous year’s aggregated number of transactions, executions and volumes which may lead to an ever-decreasing OTR. Others noted the need for a “floor” to facilitate the activity of market makers in illiquid instruments and to capture those market participants that may effectively contribute to disorderly trading conditions, as opposed to small participants who may have a higher OTR, but their number of orders does not create any issue to the trading venue. As mentioned, the scope of the draft RTS is now limited to setting out the methodology to calculate the OTR effectively incurred by members or participants and not their maximum OTR.
9. A number of respondents proposed excluding from the calculations indicative
orders/quotes as they are not considered as genuine orders but as an “invitatio ad offerendum” that would be followed by a binding quote by the interested party. ESMA

agrees that the references to orders and quotes refer to executable orders or quotes and their modification or cancellation.
10. ESMA also asked whether the definition of “order” was sufficiently precise. Whereas a
significant number of stakeholders agreed with the proposal, some respondents proposed considering as “orders” only those messages that have the potential to create executions but not messages that are removing this potential so as not to include within the scope cancellations or any technical messages sent to the trading venue. In this respect, ESMA wishes to clarify that cancellations of orders are part of the calculations, with the exception of cancellations due to uncrossing in an auction, a loss of venue connectivity or the use of a kill functionality. The wording in the final draft has been amended accordingly.
11. Several market participants disagreed with using the reference period of one trading
session to assess the OTR as in their view Article 48(6) addresses strategies with consistently high cancellation rates. ESMA disagrees with that view and considers that the monitoring obligation and the appropriate observation period to calculate the effective OTR of members and participants is one trading session. However, nothing prevents trading venues from using shorter timescales to calculate their OTR. ESMA also requested views on whether the monitoring of the OTR by trading venues should cover all trading phases or only continuous auction. There were opposing views on whether auctions should be considered in the calculations. Given that each trading venue may establish its own maximum OTR, auctions have been considered part of the trading session.
12. On the annual determination of the OTR, many respondents insisted on the need for
trading venues to have sufficient leeway to react to changing market conditions. One respondent proposed to use as maximum OTR the highest OTR recorded during a five￾year period. These concerns have been addressed by clarifying that the draft RTS does not refer to the determination of the maximum OTR.
13. ESMA also asked market participants about the counting methodology proposed.
Despite a significant number of respondents supporting the proposal, some of them made technical comments regarding how some types of orders should be counted. The core argument of these respondents was that the counting methodology is dependent on the purpose of the Regulation: preventing disorderly trading conditions should lead to different counting methods than prevention of a critical system load. For example, some of the respondents argued that “penalising” order cancellations would actually increase the risk exposure of market makers. They disagreed with the proposal with respect to the ratio of the number of unexecuted orders (but not with the ratio of the volume of unexecuted orders).
14. ESMA considered such a view but decided to maintain the proposed counting
methodology, not only because there is a link between a capacity overload of one trading venue and the risk of disorderly trading conditions but also because trading

venues have the ability to set out the maximum OTR at the level they deem appropriate. The counting methodology for the different order types is included in the Annex to the draft Regulation.
15. ESMA also consulted whether further clarification was necessary in relation to the
calculation method in terms of volume. Most respondents did not consider it necessary.
16. A significant number of respondents made proposals to improve the Regulation with
regards to the annual determination of the maximum OTR. However, ESMA was not able to act upon these proposals as they are outside of the scope of its mandate.
17. In light of the comments received and the revised scope of ESMA’s mandate in this
regard, the draft Regulation does not limit the obligation to calculate the OTR for any type of financial instrument but limits the scope to those trading systems where there is a higher risk of disorderly trading conditions due to excessive OTRs, i.e. electronic continuous auction order book, quote-driven, and hybrid trading models.
18. Whereas trading venues running these systems should calculate the OTR for their
members or participants, it is clear that trading venues may set out the maximum OTR at the level they consider appropriate. As originally consulted, trading venues should calculate the OTR of their members or participants in terms of volume and in terms of number of orders. Accordingly, the breach of any of those OTRs by a member or participant should be considered as a breach of the OTR.
19. ESMA annexes a table with a list of order types and how they should be counted for
these purposes. It is noted that in case a trading venue uses an order type that is not included in that list, the venue should count such an order in accordance with the counting methodology commonly accepted in the market taking into account how a similar order type in the Annex is counted.

3.5. Requirements to ensure co-location and fee structures are
fair and non-discriminatory
3.5.1 Co-location
Background/Mandate

1. Article 48(8) of MiFID II mandates that regulated markets shall ensure that their rules on
   co-location are transparent, fair and non-discriminatory.
2. Article 48(12) of MiFID II requires ESMA to develop draft RTS to specify the
   requirements to ensure that co-location services are fair and non-discriminatory.
   Article 48, MiFID II
   […]
3. Member States shall require a regulated market to ensure that its rules on co-location
   services are transparent, fair and non-discriminatory.
   […]
4. ESMA shall develop draft regulatory technical standards further specifying (…) the
   requirements to ensure that co-location services and fee structures are fair and non￾discriminatory and that fee structures do not create incentives for disorderly trading conditions or market abuse. ESMA shall submit those regulatory technical standards to the Commission by 3 July 2015. Analysis following feedback from stakeholders
5. In the CP, ESMA maintained the general approach presented in the DP whereby co￾location services were addressed through three different aspects: the level of access to
   such services, the pricing models used by the providers of such services and the technical support that the service providers should offer to their users.
6. Taking into consideration the feedback from the DP, the CP proposed that trading
   venues should not be forced to expand their capabilities indefinitely to meet the demand for the co-location service. Respondents to the CP supported this view and so this is reflected in the final draft RTS.
7. Respondents raised concerns regarding the scope of the draft RTS, in particular that
   they may not be able to control the service provided by a third party provider of co-

location to the trading venue, as they cannot control what is outside of their perimeter. One possible solution suggested was to add a clarification that trading venues have no control over their third party providers; another proposed solution was to add a clause that such third parties should adhere to the same requirements as the trading venues.
6. ESMA appreciates the concerns raised and understands that where services are
contracted out to third parties, there may be an additional barrier to ensuring compliance with this Regulation. However, contracting out services to third parties does not absolve trading venues from remaining accountable for compliance with the draft RTS. In order to ensure a level playing field, trading venues must remain accountable even when they have contracted out the services. In such circumstances, the trading venue has the ability to contractually enforce compliance with the draft RTS through contractual means with the relevant third party.
7. Some respondents raised concerns about requiring trading venues to provide their users
with the same cable lengths. They remarked that complying with such a requirement would impose significant cost and complexity for trading venues. In addition, even if the fibre cable is cut at the same physical length, it would still yield different fibre strand lengths due to how the fibre is twisted within the cable sheathing.
8. ESMA recognises that there may be technical reasons that would prevent the trading
venues from providing cables of exactly the same length. As a general rule however, trading venues should provide access to their network under equivalent conditions for all users subscribing to the same co-location service. In this regard, ESMA has amended the draft RTS with respect to connections and latency monitoring to require that trading venues must take reasonable steps to monitor latency measurements and ensure non￾discriminatory treatment of any of their users.
9. Some respondents were of the opinion that as the information concerning co-location
services is commercially sensitive, access to this information should only be available upon request. However, other responses stressed that trading venues should be fully transparent about the co-location services they provide, and give details of the services’ specifications that they offer, the criteria for accessing those services and the costs of the services, and that the information should be published to ensure that it is equally available to all interested parties.
10. Having taken into consideration these comments, ESMA decided to maintain the
position that was stated in the CP, namely for the trading venues to publish their policies regarding co-location services on their website. ESMA remains convinced that a sufficient level of publicity is a prerequisite to fair and non-dsciriminatory co-location services. Proposal

11. ESMA has re-considered its proposal in line with the comments received as presented in
    the final draft RTS in the Annex.

3.5.2 Fee structures
Background/Mandate
12. Article 48(9) of MiFID II requires that regulated markets shall ensure that their fee
structures are transparent, fair, non-discriminatory and do not incentivise disorderly trading conditions or market abuse.
13. Article 48(12) of MiFID II requires ESMA to develop draft RTS specifying the
requirements to ensure that fee structures are fair and non-discriminatory and do not create incentives for disorderly trading or market abuse.
Article 48, MiFID II
[…]
9. Member States shall require that a regulated market ensure that its fee structures
including execution fees, ancillary fees and any rebates are transparent, fair and non￾discriminatory and that they do not create incentives to place, modify or cancel orders or to execute transactions in a way which contributes to disorderly trading conditions or market abuse. […]
12. ESMA shall develop draft regulatory technical standards further specifying:
[…]
(d) the requirements to ensure that co-location services and fee structures are fair and non￾discriminatory and that fee structures do not create incentives for disorderly trading conditions or market abuse; ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015. Analysis following feedback from stakeholders
14. In the CP, respondents were asked whether:
i. they agreed with ESMA’s proposal with respect to fee structures;
ii. they could provide further information on instances of improper trading occurring
possibly as a result of a particular rebate structure encouraging such an activity;

iii. there were any other types of incentive that should be covered in the draft RTS;
iv. they could provide further evidence about fee structures supporting an “early look”;
v. they could provide examples of fee structures that would support non-genuine
orders, payment for privileged access to market data, or any other abusive behaviour;
vi. they consider that the proposed distinction made between volume discounts and
cliff-edge fee structures were sufficiently clear.
15. Respondents generally agreed with the proposed approach of the draft RTS in the CP,
however the responses raised some points for clarification addressed below:
i. respondents asked ESMA to widen the proposed definition of ‘rebate’, as the way it
was drafted in the CP restricted the use of rebates only to shares. It was suggested that the definition should apply to all financial instruments. ESMA agrees with the view that rebates should be allowed for all financial instruments, and in order to avoid creating confusion and restricting inappropriately the definition has been deleted.
ii. respondents raised the issue of making the fee structure publically available on the
trading venue’s website. Some respondents stated that the fee structure should be publically available with sufficient granularity to allow market participants to be informed of the fees and the parameters, so that they are predictable and can easily be compared with that of other venues. Other respondents held the view that such information is commercially sensitive and that access to such information should be limited to existing and potential participants. Having considered these points of view, and the Level 1 text which requires for fee structures to be transparent and for participants and interested parties to be able to compare the fee structures across trading venues, ESMA decided to maintain that fee structures should be publically available on the website so that they are easily accessible by any prospective user.
iii. respondents raised the issue of trading venues charging investment firms for testing
their algorithms. The draft RTS in the CP proposed that an algorithm testing facility to prevent disorderly trading conditions should be provided on an at-cost basis. Some respondents posited that the testing facility should be provided on a commercial basis given that MiFID II does not mandate ESMA to set the basis of the fees that may be charged and that the trading venue will need to pay significant costs for providing such a testing facility. Other respondents held the belief that the testing facility should be provided for free if possible, or else on an at-cost basis. Given that algorithm testing was to become mandatory on every trading venue on which the algorithm was used, they argued that if the trading venue were allowed to charge excessively, investment firms may become disincentivised from testing their algorithms thoroughly.

iv. Following on from the responses regarding trading venues providing a testing facility
to both the draft RTS on organisational requirements for investment firms engaged in algorithmic trading and the draft RTS on organisational requirements for trading venues, ESMA decided to change its approach on this issue. The new approach does not mandate that investment firms use the testing facilities of the trading venue to prevent disorderly trading conditions. It also offers choice of using ‘test symbols’ provided by the trading venue, and for investment firms to test algorithms in a third party facility provided that such tests are adequate for the purpose. On this basis, ESMA has removed the section on fees charged for algorithm testing against disorderly trading conditions.
16. Overall, only very few respondents disagreed with the direction of the proposed draft
RTS taken in the CP claiming that it would contradict the principles of free market economy or because they were not supportive of trades being subsidised or of incentivising a fee structure that did not foster efficient transactions in general.
17. In the CP, ESMA also sought views on whether rebates could be set to encourage
improper trading. Views expressed included the following:
i. the rebate itself would lead to improper trading if the member was motivated to route
orders to a particular trading venue for the rebate, which it does not subsequently pass on to its client;
ii. if rebates were excessive to a degree that they generated profit without the need for
spread capture, they would not be sustainable;
iii. rebate levels were unlikely to encourage improper trading, as implementing the
basic principles (transparency, discrimination) should be sufficient;
iv. the parameters of fee structures, including rebates, were considered as a factor not
significant enough to encourage a behaviour which may lead to disorderly trading conditions; and,
v. provided that there are no “cliff-edge” elements, no specific thresholds were thought
to encourage improper trading.
18. Such comments provided ESMA with valuable insight, and ESMA took such views into
account when revising the draft RTS.
19. Furthermore, in the CP a question was asked as to whether there were any other issues
that should be included in the draft RTS. Although no specific information was provided on any particular incentives, respondents requested ESMA not to limit rebates, incentives and discounts to an exhaustive list. On this basis, ESMA decided not to highlight any particular incentives in the final draft RTS or to arbitrarily limit the rebates, incentives and discounts.

20. ESMA requested further information on fee structures that would support an “early look”.
    As none of the respondents provided further information on such a practice, ESMA decided not to take any specific action on this point.
21. ESMA asked for examples of fee structures that encouraged non-genuine orders,
    payments for privileged access to market data or any other type of abusive behaviour. Examples given by the respondents included the following:
    i. market data policies where the direct members of a trading venue receive its data at
    a lower price, or for free, as compared to users of the competing trading venues;
    ii. fees that were dependent on the latency of a real-time data feed;
    iii. payment of a regular retainer fee;
    iv. rebates on algorithmic and high frequency trading order flows;
    v. fees that provide the participant with order data before its order enters the trading
    venue’s matching engine; and,
    vi. thresholds on the amount of transactions/fees that would incentivise high frequency
    trading firms to exceed such thresholds by placing orders in small size, which in practice do not represent liquidity and vanish when market conditions deteriorate.
22. ESMA has carefully considered the above comments. ESMA does not share the view
    that the charging of data which varies between members and non-members is an example of abuse or privileged access to market data for a particular user group but considers that the pricing differentials between trading venues are due to commercial forces and competition. Regarding fees that were dependent on the latency of real-time feed, ESMA considers such practices permissible as long as no users were excluded from accessing low-latency feeds. Regarding retainer fees, ESMA considered that such fees in themselves did not support abusive behaviour. Regarding rebates given to algorithmic and high frequency flows, ESMA considers such practices not objectionable as long as they were based on non-discriminatory, measurable and objective parameters. ESMA considers that fees charged for providing order information before the participant’s order reaches the trading venue’s matching engine would be regarded as market abuse and therefore are not permitted.
23. The majority of respondents felt that the distinction between volume discounts and cliff￾edge was clear. A few respondents suggested minor amendments. ESMA has
    considered the application of the term “cliff-edges” in the revised draft RTS, and made appropriate text changes. The majority of respondents agreed with the proposal to prohibit fee schemes that have a “cliff-edge” component, as they recognised that they may encourage improper trading activity. ESMA agreed that ‘cliff-edge’ fee structure should be banned whereby upon a member‘s, participant's or client’s trading exceeding

a given threshold, all of its trades benefit from a lower fee for a set period, including trades which have been executed previously in addition to the trades executed subsequent to reaching the threshold. This has been expressly stated in the final draft RTS . Proposal
24. ESMA has reconsidered its proposal in line with the comments received as presented in
the draft RTS in the Annex.

3.6. Tick size regime for shares, depositary receipts and
exchange traded funds
Background/Mandate
Article 49, MiFID II

1. Member States shall require regulated markets to adopt tick size regimes in shares,
   depositary receipts, exchange-traded funds, certificates and other similar financial instruments and in any other financial instrument for which regulatory technical standards are developed in accordance with paragraph 4.
2. The tick size regimes referred to in paragraph 1 shall:
   (a) be calibrated to reflect the liquidity profile of the financial instrument in different markets and the average bid-ask spread, taking into account the desirability of enabling reasonably stable prices without unduly constraining further narrowing of spreads; (b) adapt the tick size for each financial instrument appropriately.
3. ESMA shall develop draft regulatory technical standards to specify minimum tick
   sizes or tick size regimes for specific shares, depositary receipts, exchange-traded funds, certificates, and other similar financial instruments where necessary to ensure the orderly functioning of markets, in accordance with the factors in paragraph 2 and the price, spreads and depth of liquidity of the financial instruments. ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015.
4. ESMA may develop draft regulatory technical standards to specify minimum tick sizes
   or tick size regimes for specific financial instruments other than those listed in paragraph 3 where necessary to ensure the orderly functioning of markets, in accordance with the factors in paragraph 2 and the price, spreads and depth of liquidity of the financial instruments.
5. MiFID II provides for the harmonisation of tick size regimes with the aim of preventing
   any disorderly functioning of the financial markets in the EU.
6. In its CP, ESMA proposed a tick size regime incorporating the feedback received to its
   May 2014 DP. ESMA’s proposal provided for a regime where tick sizes were determined taking into account both the liquidity of the financial instrument and the price of the submitted order. This approach did not prescribe for a specific tick size for each financial instrument (a per instrument approach would be too complex to implement and maintain as stressed by the respondents to the DP) but rather a tick size regime where the tick

size for financial instruments with similar liquidity is determined by the same price dependent tick size table. Analysis following feedback from stakeholders Scope of the proposed tick size regime
3. The vast majority of respondents agreed with the scope of the tick size regime as
proposed in the CP. They notably agreed that non-equity financial instruments should not be included in the scope as there was no need to have such a regime for the purpose of the orderly functioning of the markets for these instruments. They added that it was premature at this stage to envisage a tick size regime for non-equity instruments and that the scope of the regime should be reviewed in a few years once there is sufficient experience on the subject.
4. Respondents further considered that the only equity-like financial instruments that
should be subject to the tick size regime should be ETFs and depositary receipts.
5. A few respondents challenged the tick size regime proposed for ETFs arguing that it
resulted in too wide tick sizes compared to those currently used on a number of trading venues in the Union, especially for ETFs having non-equities as underlying. Some respondents also considered that certificates should not be subject to the tick size regime in light of their liquidity, scale and nature.
6. Some other respondents suggested that the tick size regime for ETFs should also cover
ETNs and ETCs. In this respect, it should be noted that ETNs and ETCs should be considered as debt instruments due to their legal structure and therefore they are included wihtin the scope of the final draft RTS on tick size.
7. In light of the above comments and to address the concerns raised, ESMA has adapted
the scope of the proposed tick size regime. In particular, it has excluded certificates from the scope given that their liquidity levels and trading characteristics do not warrant the inclusion in this tick size regime in order to prevent the occurrence of disorderly trading conditions.
8. ESMA has also slightly amended the tick size regime applicable to ETFs both in terms of
scope and process. With regard to the scope, it is proposed that the tick size regime only applies to ETFs where the constituent underlying instruments are all subject to the tick size regime. Consequently, where one or more underlying components of an ETF are not subject to the tick size regime (e.g. a bond), the ETF itself is not required to comply with the regime. For ETFs that are subject to the tick size regime, a tick size should be applied which is equal to or greater than the tick size corresponding to the liquidity band of the tick size table with the highest average number of transactions per day and the price of the submitted order.

Implementation of the proposed tick size regime
9. With regard to the liquidity indicator to be used to determine the liquidity profile of
financial instruments under the new tick size regime, ESMA asked in its CP whether the average number of transactions per day should be considered on the most relevant market in terms of liquidity or another market. There was no strong majority objecting to the determination of the average number of transactions per day on the most relevant market in terms of liquidity (as specified for the purpose of the reference price waiver in the draft RTS on transparency requirements in respect of equity and equity-like financial instruments). Some respondents who did not support the proposed liquidity proxy suggested instead to consider all transactions participating in the price formation process executed across all trading venues (or alternatively across trading venues with a relevant market share). Some respondents further suggested to take into account also trades executed off-venue (e.g. OTC transactions and transaction executed through an SI). Other respondents highlighted the importance of not taking into account auction data.
10. The various respondents supporting ESMA’s approach argued that relying on the most
liquid venue (“reference market”) will “yield the most representative trading frequency measure” and allow consistency. ESMA has maintained its original approach.
11. In the CP, ESMA also asked whether the tick size proposal was sufficiently granular so
as to take into account the case of very liquid but also poorly liquid stocks. Some respondents indicated that there were risks attached to the tick size proposal. In particular, it was argued that the most liquid liquidity band (i.e. for financial instruments with an average daily number of transactions higher than 15,000) was not suitable for all ETFs. It was also indicated that too large tick sizes could result in liquidity fleeing from lit order books to dark pools and SIs which are not subject to the common tick size regime, whereas too small tick sizes could be detrimental to liquidity by discouraging market makers from posting liquidity especially on less liquid stocks (e.g. many SME stocks). These respondents therefore insisted on the need to refine the liquidity bands of the tick size table taking those risks into account. They also stressed that the appropriateness of liquidity bands should be reassessed and, where necessary, recalibrated annually. ESMA has revised the tick size table to address these concerns.
12. In its CP, ESMA also proposed a particular regime for financial instruments for which the
most relevant market operates a periodic auction trading system or fixing segment (application of the lowest liquidity band) and another particular regime for instruments newly admitted to trading (application of the liquidity band on the basis of an estimate of the trading activity). These two particular regimes were supported by most respondents on the ground that they were fair and appropriate. Respondents nonetheless suggested a few clarifications notably in relation to the definition of periodic auction trading system and the time schedule for the estimates to be made by the trading venues. ESMA has revised the draft RTS to clarify these elements.

13. ESMA further provided in its CP that trading venues could modify for a given instrument
    the applicable liquidity band where they considered a corporate action as significantly modifying that instrument’s liquidity so that the tick size prescribed by the regime may no longer be appropriate. In order to address the risk of disorderly market conditions arising from a corporate action likely to result in the tick size to be unsuitable for a given instrument, respondents proposed that the trading venue would treat the financial instrument as if it was first admitted to trading. Most respondents supported ESMA’s proposal on the ground that it was fair, reflective of the requirement resulting from a corporate action, practical and easy to implement. Respondents also suggested clarifying the concept of “corporate action” and the related time schedule and process. Some respondents requested that the list of corporate actions provided in ESMA’s proposal be reworded in a non-exhaustive manner. In this regard, ESMA considers it more appropriate to list in the recital of the draft RTS the most common corporate actions as a non-exhaustive list in order not to exclude any specific corporate actions that have not been anticipated at this stage and so as to be future proof.
14. Most respondents added that for the tick size regime to be efficient, it needs to be
    complied with at all times. Allowing exemptions would inevitably lead to a less predictable and transparent regime and add complexity (notably as regards the definition of the exemption process).
15. Therefore to ensure the predictability of the regime, ESMA proposes to limit the
    exceptional conditions under which it could be derogated from the regime to corporate actions only. The main change with respect to the original ESMA suggestion is that the proposal from a trading venue regarding a corporate action should be endorsed by its CA. Annual review and monitoring of the regime
16. The vast majority of respondents agreed that for the tick size regime to reach the
    objective of maintaining orderly market conditions, the liquidity bands have to be reviewed on a regular basis and at least annually (some suggesting a preliminary review after six months of implementation). Respondents further requested that the revision process be detailed notably in respect of the time schedule (from the commencement of the revision until the implementation of the revised table) and the procedures to be followed (e.g. communication channels).
17. With respect to the annual revision and adjustement of the liquidity bands where
    necessary, ESMA has examined this issue but neither the legal mandate provided to ESMA under Article 49 of MiFID II nor the regulatory tool used (i.e. RTS) allow such a provision.
18. However, some dynamic elements remain for the determination of the applicable tick
    size and this should partially address the concerns raised during the consultation. In particular, the liquidity band applicable to a financial instrument will be reassessed

annually allowing taking into consideration any potential change of the liquidity profile of an instrument. It is worth noting that the most relevant market in terms of liquidity will itself be re-determined annually.
19. Although it is not provided in the Regulation, nothing prevents ESMA and other
competent authorities from monitoring the implementation of this tick size regime and recalibrating the tick size table through a revision of the RTS, if and when necessary. Proposal
20. ESMA has decided to maintain the main features of the tick size regime described in the
CP with some refinements so as to incorporate the respondents’ feedback.
21. Thus, ESMA proposes to maintain the two-dimensional tick size table with one
dimension reflecting the financial instrument’s liquidity, expressed in terms of the average number of transactions per day on the most relevant market in terms of liquidity (as defined for the purpose of the reference price waiver), and with the other dimension being the price of the orders submitted. ESMA believes that the use of this two￾dimensional table will allow the assignment of a tick size to each single financial instrument at any point in time, taking into consideration its liquidity and its price. Under the proposed approach, the tick size for a specific financial instrument evolves continuously with the price of the order relating to that financial instrument.
22. For the purpose of simplicity of implementation, ESMA further proposes to build the new
tick size regime on the basis of the existing FESE table 2. However, whereas FESE
Table 2 only has two price increments (1 and 5); ESMA has created its table with three
tick size increments: 1, 2 and 5. In ESMA’s table the smallest possible tick size is
0.0001. The final table is presented below (with explanations on the structure of the table
and how it was built).
23. It is proposed to establish the common tick size regime provided under Article 49 of
MiFID II on the basis of the tick size table presented below. ESMA highlights that this tick size table was built with a view to being simple to understand and implement while having a controlled impact to the extent possible.
24. ESMA has refined the tick size regime proposed in the CPr with a view to addressing the
concerns raised by respondents. The main adjustments made to the CP approach relate to the following:
i. The scope: the proposed tick size regime applies to shares, depositary receipts and
certain ETFs only (please see below for ETFs). Certificates are no longer subject to the regime given their specific microstructural properties and the lack of evidence that a tick size regime would ensure the orderly functioning of markets for these instruments.

ii. The liquidity bands: they have been adjusted to better reflect the liquidity profile of
financial instruments. One additional liquidity class has been added to the tick size
table providing more granularity and allowing further calibration with a view to:
a. avoiding an overall large decrease or increase in the tick sizes currently applicable on EU trading venues (this will be monitored on the basis of a relevant control group for assessing the actual impact of the new regime); b. ensuring that there is a relevant cost to overbidding, to reduce excessive noise in the order book and to avoid discouraging market makers from posting liquidity; to that end, the tick size table was built such that the expected spread to tick ratio with the new regime would be smaller than 5 (ceiling) for most of the financial instruments;
c. avoiding increasing viscosity by constraining the spread which may lead to
liquidity fleeing to dark order book or SIs; in this regard, the liquidity bands have been designed so as to maintain an expected spread to tick ratio greater than
1.3 (floor) for most of the financial instruments.
iii. The regime for ETFs: In light of respondents’ comment that the tick size regime was
not suitable for all ETFs (notably those with underlying components trading with a very small tick size), the refined proposal excludes from the scope of the tick size regime those ETFs having at least one underlying component not subject to the regime. As a result, the proposed tick size regime will exclusively apply to ETFs with underlying components which are themselves subject to the regime.
iv. In addition, to avoid constraining the spread which can be detrimental to their
liquidity, ETFs which are subject to the tick size regime will be applied the tick sizes of the liquidity band corresponding to the highest average number of transactions per day.
Table 40: Tick size table as included in Annex of the final draft RTS

v. Finally, the proposal also includes a transitional provision to ensure that the regime
will be effectively applicable from 3 January 2017.
Price Ranges
0 ≤ Average number of trades per day < 10
10 ≤ Average number of trades per day < 80
80 ≤ Average number of trades per day < 600
600 ≤ Average number of trades per day < 2000
2000 ≤ Average number of trades per day < 9000 9000 ≤ Average number of trades per day 0 ≤ price < 0.1 0.0005 0.0002 0.0001
0.1 ≤ price < 0.2 0.001 0.0005 0.0002 0.0001
0.2 ≤ price < 0.5 0.002 0.001 0.0005 0.0002 0.0001 0.0001
0.5 ≤ price < 1 0.005 0.002 0.001 0.0005 0.0002 0.0001
1 ≤ price < 2 0.01 0.005 0.002 0.001 0.0005 0.0002 2 ≤ price < 5 0.02 0.01 0.005 0.002 0.001 0.0005 5 ≤ price < 10 0.05 0.02 0.01 0.005 0.002 0.001 10 ≤ price < 20 0.1 0.05 0.02 0.01 0.005 0.002 20 ≤ price < 50 0.2 0.1 0.05 0.02 0.01 0.005 50 ≤ price < 100 0.5 0.2 0.1 0.05 0.02 0.01 100 ≤ price < 200 1 0.5 0.2 0.1 0.05 0.02 200 ≤ price < 500 2 1 0.5 0.2 0.1 0.05 500 ≤ price < 1000 5 2 1 0.5 0.2 0.1 1000 ≤ price < 2000 10 5 2 1 0.5 0.2 2000 ≤ price < 5000 20 10 5 2 1 0.5 5000 ≤ price < 10000 50 20 10 5 2 1 10000 ≤ price < 20000 100 50 20 10 5 2 20000 ≤ price < 50000 200 100 50 20 10 5 50000 ≤ price 500 200 100 50 20 10 Structure of the tick size
table
Reference class +3 tick increments
Reference class +2 tick increments
Reference class +1 tick increment
Reference class corresponding to FESE
table 2 (with some
adjustements)
Reference class -1 tick increment
Reference class -2 tick increments
Liquidity Bands

3.7. Material markets in terms of liquidity relating to trading halt
notifications
Background/Mandate
Article 48(5) of MiFID II
5. Member States shall require a regulated market to be able to temporarily halt or
constrain trading if there is a significant price movement in a financial instrument on that market or a related market during a short period and, in exceptional cases, to be able to cancel, vary or correct any transaction. Member States shall require a regulated market to ensure that the parameters for halting trading are appropriately calibrated in a way which takes into account the liquidity of different asset classes and sub-classes, the nature of the market model and types of users and is sufficient to avoid significant disruptions to the orderliness of trading. Member States shall ensure that a regulated market reports the parameters for halting trading and any material changes to those parameters to the competent authority in a consistent and comparable manner, and that the competent authority shall in turn report them to ESMA. Member States shall require that where a regulated market which is material in terms of liquidity in that financial instrument halts trading, in any Member State, that trading venue has the necessary systems and procedures in place to ensure that it will notify competent authorities in order for them to coordinate a market-wide response and determine whether it is appropriate to halt trading on other venues on which the financial instrument is traded until trading resumes on the original market.
Article 48(12)(e) of MiFID II
12. ESMA shall develop draft regulatory technical standards further specifying:
[…]
(e) The determination of where a regulated market is material in terms of liquidity in that instrument;

1. Article 48(5) of MiFID II imposes on regulated markets which are material in terms of
   liquidity in a given instrument the requirement to have the necessary systems and procedures in place to notify competent authorities of trading halts. This requirement is extended to MTFs and OTFs by virtue of Article 18(5) of MiFID II. Analysis following feedback from stakeholders

2. In its CP, following the feedback received to the May 2014 Discussion Paper, ESMA
   proposed material markets in terms of liquidity in a financial instrument to be:
   i. the trading venues where the financial instrument was first admitted to trading,
   including all the venues where the instrument was simultaneously admitted to trading in case of multiple listing; or,
   ii. the most relevant markets in terms of liquidity for a financial instrument as verified
   during the preceding year.

3. Respondents to the CP asked ESMA to provide some clarifications on the scope of the
   Regulation and the provisions it contains. More specifically, some respondents sought clarification on whether the proposed definition applied only to regulated markets or also to MTFs and OTFs. In their view, the definition of material market in terms of liquidity should be workable and relevant for all types of markets. Other respondents recommended focusing only on the primary markets (which was viewed as the only venue having a natural relationship with the issuer) and to delete Article 1(2) of the draft RTS.

4. In ESMA’s view, although Article 48 of MiFID II refers only to regulated markets, Article
   18(5) specifies that “Member States shall require that investment firms and market operators operating an MTF or OTF comply with Articles 48 and 49 and have in place all the necessary effective systems, procedures and arrangements to do so” extending the requirements to other types of trading venues. The Level 1 text therefore does not restrict the requirement to inform the relevant competent authorities of a trading halt to regulated markets. Rather, for the purpose of Article 48(5) of MiFID II, all types of trading venues (RM, MTF or OTF) could be a material market in terms of liquidity for a given financial instrument. ESMA has therefore decided to maintain the two elements of its definition of market material in terms of liquidity.

5. With respect to the first part of the ESMA proposal, respondents had suggested to align
   with other RTSs using the same concept on the definition of “admission to trading”. ESMA agrees that alignment in this respect would be beneficial but notes that the concept of admission to trading is established under Article 51 of MiFID II and further specified in the draft RTS on the admission of financial instruments on trading on regulated markets. This definition applies to all Level 2 measures and therefore there is, in ESMA’s view, no need to further clarify the concept in this Regulation.

6. With respect to the second part of the ESMA proposal, some respondents had pointed
   out that this provision would not apply to non-equity instruments. For those, only the first paragraph would therefore be applicable. However, this first paragraph refers to the venue where the instrument was first admitted to trading while, the concept of “admitted to trading” does not apply to all derivatives. Also with regards to fixed income products, respondents noted that bonds are often listed on regulated markets but scarcely traded on these venues. They specified that for instruments that are exclusively traded on

MTFs or OTFs, the concept of admission to trading does not apply. In those cases, they highlighted that the draft RTS would not determine any material market in terms of liquidity.
7. A possible solution suggested by some respondents was to use a liquidity threshold to
allow further markets to be captured. This liquidity threshold would consist of a determination of when the percentage of trading taking place in a given venue is sufficiently substantial so that the information regarding one trading halt should be “passed on” to other venues to prevent potentially systemic events. It could be set as a percentage of the total turnover for the financial instrument executed on a specific trading venue or, as proposed in other responses, it could take into consideration other criteria such as the number of participants, the volume traded or spreads.
8. ESMA appreciates the concerns raised and the potential solutions proposed especially
with respect to non-equity financial instruments. ESMA acknoledges that under the proposal set out in the consultation, some financial instruments would not be captured by the definition and in particular non-equity financial instruments trading only on MTFs and OTFs and not admitted to trading on any venue. Therefore, ESMA has decided to revise its proposal and to extend the first part of the proposed definition to trading venues where a financial instrument was traded for the first time. This revised proposal should bring all financial instruments into the scope of the Regulation.
9. In ESMA’s view, setting out liquidity thresholds for the sole purpose of determining the
material markets in terms of liquidity in Article 48(5) of MiFID II would add too much complexity to the system since this would necessitate each trading venue to calculate its relative market share in terms of turnover for each financial instrument traded on it. ESMA therefore chose to opt for a more cost effective solution and to leverage, where possible, on existing provisions and concepts such as the determination of the most relevant market in terms of liquidity for the purpose of the reference price waiver (Article 4 of MiFIR). Proposal
10. ESMA proposes to amend its definition of the trading venues that should be considered
as material markets in terms of liquidity in a financial instrument in order to include trading venues which are:
i. the most relevant market in terms of liquidity as defined for the purpose of the
reference price waiver (for equity and equity-like instruments only); or,
ii. the regulated markets where the financial instrument was first admitted to trading,
(including all the venues where the instrument was simultaneously admitted to trading in case of multiple listing) or, for financial instruments not admitted to trading on any venue, the trading venue where the financial instrument was traded for the first time (for non-equity financial instruments).

4. DATA PUBLICATION AND ACCESS
   4.1. Authorisation, organisational requirements and the
   publication of transactions for data reporting service providers Background/Mandate/Empowerment
   Article 61(4) (a) and (b) of MiFID II
   ESMA shall develop draft regulatory technical standards to determine:
   (a) the information to be provided to the competent authorities under paragraph 2, including the programme of operations; (b) the information included in the notifications under Artice 63(3)
   Article 64(8)(c) of MiFID II
   ESMA shall develop draft regulatory technical standards specifying:
   (c) the concrete organisational requirements laid down in paragraphs 3, 4 and 5.
   Article 65(6) of MiFID II
   ESMA shall develop draft regulatory technical standards to determine […] additional services the CTP could perform which increase the efficiency of the market.
   Article 65(8)(e) of MiFID II
   ESMA shall develop draft regulatory technical standards specifying:
   (e) the concrete organisational requirements laid down in paragraphs 4 and 5.
   Article 66(5)(a) and (b) of MiFID II
   ESMA shall develop draft regulatory technical standards specifying:
   (a) the means by which the ARM may comply with the information obligation referred to in paragraph 1; and (b) the concrete organisational requirements laid down in paragraphs 2, 3 and 4.

5. In the CP, ESMA proposed draft technical standards which would impose similar
   authorisation and organisational requirements on the three different types of data reporting services providers (DRSPs): Approved Reporting Mechanisms (ARMs), APAs and CTPs. This was on the basis that there are commonalities in the type of business being undertaken by DRSPs and therefore they should broadly be regulated under the same regulatory framework.

6. ESMA acknowledged however that slightly different requirements should apply
   depending on the specific type of DRSP service that was being provided as this may mean that some requirements may not apply or be relevant. ESMA also sought feedback on three specific topics related to DRSPs: periodic reconciliations, maximum recovery times and operational hours. In addition, ESMA requested general feedback on the other provisions of the draft regulatory technical standards.
   4.1.2 Periodic reconciliations
   CP Proposal

7. In the CP, ESMA proposed that an ARM would have to perform periodic reconciliations
   not only at the request of the CA of its home Member State but also at the request of any other CA to whom the ARM submitted reports. This was to acknowledge that CAs who receive data from an ARM also have an interest in the quality and completeness of that data. Analysis following feedback from stakeholders and proposal

8. Overall the 27 respondents to the CP supported ESMA’s proposal to allow the CA to
   whom the ARM submitted the transaction report to request that an ARM performs periodic reconciliations. Several respondents also indicated that they supported ESMA’s proposal for reconciliations to be undertaken by APAs and CTPs.

9. Some concerns were raised about the extent to which DRSPs would be required to
   reconcile reports and a few respondents suggested that competent authorities should apply a standardised approach when making reconciliation requests to DRSPs.

10. Based on the feedback, ESMA believes that it is necessary to further clarify its intention
    in relation to its proposal:
    i. In the case of ARMs, periodic reconciliations must be performed by the ARM at the
    request of its CA or any CA to which the ARM submits reports. The obligation has been phrased to be ‘on request’ because ESMA is aware that not all CAs provide data samples of transaction reports;
    ii. In the case of APAs and CTPs, the obligation to reconcile exists, even if a specific
    request is not made by the CA. This is because unlike ARMs, the APA or CTP is

reconciling the information which it has published with the information which it has received. Therefore the APA or CTP does not need to rely on data samples from a third party and as a result, should always be in a position to reconcile the trade information.
7. Given this approach, ESMA does not believe that it is necessary to standardise requests
by CAs as it does not believe that such standardisation is warranted. In the case of ARMs, it is not expected that CAs will make highly prescriptive requests about the specific data set that the ARM will reconcile, although it does not prevent a CA from doing so. In most cases, ESMA envisages that a CA may make a standing request to the ARM to periodically reconcile the transaction reports it handles. ESMA has also inserted a recital to state that the frequency and extent of those reconciliations should be proportionate to the volume of data handled by the ARM and the nature of the ARM’s activities in relation to the processing of the transaction report.
8. One respondent was concerned that the term ‘reconciliations’ may unduly limit the ability
of an ARM to implement other arrangements for detecting errors and omissions. ESMA is of the view that the draft RTS does not preclude an ARM from performing other checks of the data. However, ESMA believes that the ARM, should at a minimum, perform the reconciliations described in the regulatory technical standards as this provides a robust method for ensuring that the reports that it submits to the CA are complete and accurate.
4.1.3 Maximum recovery times
CP Proposal
9. ESMA requested feedback on its proposal to impose maximum recovery times on
DRSPs in the event of a disruptive incident. The proposed maximum recovery periods were 6 hours for APAs and CTPs and by the close of the next working day for ARMs. Analysis following feedback from stakeholders and proposal
10. There was strong disagreement amongst the 24 respondents in relation to ESMA’s
proposal to establish maximum recovery times for DRSPs.
11. The primary arguments against the proposal were that it would be too prescriptive and
would not necessarily lead to a quicker resumption of business. Furthermore, respondents did not believe that it was achievable even with robust continuity plans. For example, respondents argued that it would be difficult to comply with the requirements in the case of a severe situation such as a natural disaster. The majority of respondents also believed that DRSPs would already have a commercial incentive to recover as quickly as possible.

12. In light of these concerns, ESMA has refined its proposal. Although the DRSP must still
    aim to be operational as soon as possible after a disruptive incident, ESMA does not intend to be overly prescriptive in setting a deadline for the resumption of business. Therefore, the requirements now refer to these periods as the ‘target’ maximum recovery times. ESMA believes that this strikes an appropriate balance because it means that DRSPs should establish arrangements to resume business as quickly as possible but also recognises that there may be extreme situations, such as force majeure where it is not feasible to expect a DRSP to recover within the set time limit.
    4.1.4 Operational Hours
    CP Proposal

13. ESMA’s original proposal in the CP was to allow DRSPs to be permitted to establish
    their own operational hours provided that the hours are pre-established and made public. Analysis following feedback from stakeholders and proposal

14. In general, the 27 respondents to this question supported ESMA’s proposal. However, a
    small number of respondents disagreed with the proposal and an argument was made that APAs should be open 24 hours/7 days a week to ensure that there would always be an APA available to publish the trade.

15. Given the strong support for the proposal, ESMA maintains its proposal to not prescribe
    operational hours for DRSPs in the draft RTS. Giving DRSPs flexibility to determine their own operational hours will foster competition amongst DRSPs, with the possibility that some DRSPs may specialise in providing services during certain hours.
    4.1.5 General comments
    CP Proposal

16. In addition to the specific questions posed in the CP, ESMA requested general feedback
    on the other provisions of the draft DRSP regulatory technical standards. Analysis following feedback from stakeholders and proposal

17. The majority of the 23 respondents agreed with the provisions of the draft RTS although
    a few respondents believed that the technical standards were too onerous. Respondents raised concerns focussing on a number of areas. For example, concerns were raised about the rationale for specifying a list of other services that a CTP can perform as well as the requirement to provide information on the remuneration of the management body and determination of fees charged by a DRSP.

18. The list of other services that a CTP can perform is required under Article 65 of the
    Directive. For this reason, ESMA has not made any changes to the technical standards but would like to clarify that this list does not compel a CTP to provide any of these other services. The list is also not intended to be exhaustive, meaning that it does not restrict the ability of a CTP to offer other services not listed. However, the CTP must ensure that this additional service does not interfere with the CTP’s core function of consolidating and publishing trade information.

19. Several respondents also queried why CAs should be permitted to request information
    on the remuneration of the management body and the determination of fees charged by the DRSP. These respondents did not believe that it was justified and expressed doubts about why a CA would be involved in the determination of prices.

20. To clarify, this information will be useful to help CAs to determine whether the manner in
    which the DRSP remunerates its management body or sets its fee structure will give rise to any conflicts of interest with the DRSP’s clients. This information is not intended to be used for regulating prices or remuneration, although ESMA notes that APAs and CTPs must charge clients on a reasonable commercial basis.

21. Other comments included a suggestion that APAs should provide information relating to
    submitted trades back to the submitter. ESMA agrees with this proposal and has inserted a provision requiring APAs to assign a transaction identification code to a trade report, notify the client of this identification code and refer to it in all subsequent communications with their client. This will allow APAs and their clients to more precisely identify the trade report and will facilitate traceability of the report.

22. On the issue of the security of the data handled by DRSPs, some respondents
    suggested that the technical standards should be expanded. It was suggested that in the event of a breach of the security of the data, DRSPs should not only provide an incident report to the CA but also to any clients of the DRSP. ESMA agrees with this proposal because clients which have been affected by a breach should be notified of the incident in case they need to take any steps to mitigate the effects of the breach.

23. In the draft RTS, ESMA had proposed some provisions regarding outsourcing. The
    effect of these provisions was to ensure that the DRSP would retain responsibility for any outsourced activities and to ensure that the DRSP’s CA would still be able to obtain information about the outsourced activities.

24. There were mixed responses to the proposals. A few respondents commented that they
    would like the provisions to be strengthened to explicitly state that the DRSP must still comply with the technical standards in relation to the outsourced activities. On the other hand, some respondents raised concerns around the right of CAs to be able to access information from the third party service provider on the basis that this would be excessive and may potentially reduce the appetite for third party service providers to provide services.

25. On balance, ESMA believes that it should continue with its original proposal to introduce
    outsourcing rules. ESMA believes that a robust set of rules are needed to deal with outsourcing arrangements because on principle, there should be no difference in terms of regulatory treatment between when a DRSP carries out the activities itself compared to where it outsources those activities. In particular, the existence of an outsourcing arrangement should not inadvertently restrict the ability of the CA to supervise the DRSP. Obtaining information about how those activities are being carried out is fundamental to a CA’s obligation to monitor that the DRSP is continuing to comply with the conditions of its initial authorisation. This information may be retrieved from the third party service provider directly or via the DRSP.
    4.1.6 Publication chain
    Scope of the consolidated tape for equity and equity-like instruments Background/Mandate/Empowerment
    Article 65(8)(c) of MiFID II
    ESMA shall develop draft regulatory technical standards specifying:
    (c) the financial instruments data of which must be provided in the data stream and for non-equity instruments the trading venues and APAs which need to be included.

26. ESMA proposed in the CP that a CTP should collect data from a new trading venue or a
    new APA as soon as possible and in any case no later than 3 months after the start of the APA’s or trading venue’s operations. Analysis following feedback from stakeholders and proposal

27. Some respondents reiterated their doubts regarding the viability of a CTP given the
    requirement of a complete coverage in terms of sources.

28. With regard to the proposed grace period, potential clients of CTP services, including the
    buy side and the sell side communities, usually agreed with the 3-month timeline. Conversely, most exchanges, as mandatory contributors to the CTPs, considered the period as too demanding and recommended to extend the period to 6 to 12 months. Such a period was deemed to be more appropriate in particular for developing and testing the needed interface infrastructure.

29. In light of the responses received and given the relatively stringent requirement of the full
    coverage, ESMA proposes to extend the grace period from 3 to 6 months.

4.1.7 Technical arrangements facilitating the consolidation of
information - Machine readability
Mandate/Empowerment/Background
Article 64 (6) of MiFID II
ESMA shall develop draft regulatory technical standards to determine […] technical arrangements facilitating the consolidation of information as referred to in paragraph 1.
Article 65(6) of MiFID II
ESMA shall develop draft regulatory technical standards to determine […] technical arrangements promoting an efficient and consistent dissemination of information in a way ensuring for it to be easily accessible and utilisable for market participants as referred to in paragraphs 1 and 2 […].
30. In the CP, ESMA proposed requiring APAs and CTPs to disseminate data in a machine
readable format in order to ensure “fast access to the information” and suggested, based on the feedback received to the DP a definition of machine readable format. Analysis following feedback from stakeholders
31. Feedback of respondents was split. On the one hand, a number of respondents from
various sectors including exchanges, data vendors, buy side and sell side members agreed with the definition. On the other hand, a number of respondents - mostly exchanges- were opposed to requiring free, open source and non-proprietary solutions as some current proprietary solutions, are neither free (but “cost-effective”) nor open source as they contain certain IP rights.
32. Respondents also raised objections against the 1-month notice period prior to any
change in the instructions as to how to access and use the data, and suggested extending the period to 3 months as a general principle while providing for the possibility of a shorter notice in exceptional cases.
33. Some participants recommended explicitly ruling out websites as they are likely to hinder
consolidation and requiring instead data feeds pushed by the source. Proposal

34. ESMA finds it important to avoid format and protocol lock-in to which users might be tied
    to as it could be costly and compromise the provision of data on a reasonable commercial basis. Accordingly ESMA proposes to retain the principle of a free and non￾proprietary format and protocol but has slightly amended the definition to take feedback of stakeholders into account. Furthermore, APAs and CTPs will be able to offer proprietary solutions in addition as long as other more standardized protocols that are free and non-proprietary are available. This approach is the current practice of some exchanges.
35. ESMA proposes to extend the notice period to 3 months for making public any changes
    to the instructions explaining how and where to access and use the data, while introducing the possibility that changes to the instructions take effect more quickly in urgent and justified cases.
36. While ESMA recognises the weakness of some current web-based solutions, ESMA has
    decided not to prescribe a specific technology as new developments in the future may overcome current constraints and has maintained a technology-neutral approach based on criteria of robustness and scalability which need to be met.
    4.1.8 Consolidation of information specific to equities and equity￾like instruments
    Background/Mandate/Empowerment
    Article 64(6) of MiFID II
    ESMA shall develop draft regulatory technical standards specifying […] technical arrangements promoting an efficient and consistent dissemination of information in a way ensuring for it to be easily accessible and utilisable for market participants as referred to in paragraphs 1 and 2 […].
    Article 65(8)(d) of MiFID II
    ESMA shall develop draft regulatory technical standards specifying:
    (d) other means to ensure that the data published by different CTPs is consistent and allows for comprehensive mapping and cross-referencing against similar data from other sources, and is capable of being aggregated at Union level.
37. ESMA has to ensure that CTPs consolidate and publish transactions without any
    duplication. Since Article 20(1) of MiFIR does not prevent an investment firm from

reporting the same trade to several APAs, the CTP may collect the same trade from several APAs and there is a risk that a single transaction might be duplicated in the tape.
38. ESMA therefore proposed in the CP that an APA publishes transactions reported by
investment firms in a format that facilitates consolidation by including a reprint field which flags duplicative reports. ESMA considered that an APA can meet this requirement in two ways: (i) by requiring investment firms to report transactions exclusively to that APA; or (ii) by requiring the investment firm to use an identification mechanism which flags one report as the original one and all other reports of the same transaction as duplicates. This provision would allow a CTP to identify duplicates and keep them out of the published tape. Analysis following feedback from stakeholders
39. The vast majority of respondents agreed with ESMA’s approach. Some respondents
questioned the possibility of investment firms publishing the same transaction through different APAs for equity instruments (unlike for non-equity instruments, where such an option is explicitly ruled out in MiFIR). Others recommended flagging either originals or duplicates in any case to limit administrative burden.
40. Some stakeholders asked for clarification whether an investment firm would need to
publish all transactions, i.e. transactions in all equity instruments, via the same APA. The amended draft RTS clarifies that the requirement to make transactions public exclusively through one APA needs to be met on a per financial instrument basis. Proposal
41. As Article 20 of MiFIR does not prevent investment firms from making a transaction
public through several APAs for equity instruments, ESMA remains convinced that a rule for avoiding duplicative reporting for equity instruments is needed. ESMA considers that its proposal strikes the right balance between ensuring that duplicates can be ultimately avoided without restricting the freedom for Investment firms to choose how many APAs to report to. While the required flagging may create some administrative burden, these costs are limited and one-off. ESMA therefore maintains its approach.
4.1.9 Content of the information published by the equity CTP and
the APA
Trade ID
Background/Mandate/Empowerment

Article 65(8)(a) and (b) of MiFID II ESMA shall develop draft regulatory technical
standards specifying:
(a) the means by which the CTP may comply with the information obligation referred to in paragraphs 1 and 2; (b) the content of information published under paragraphs 1 and 2;
Article 64(8)(a) and (b) of MiFID II
ESMA shall develop draft regulatory technical standards specifying:
(a) the means by which an APA may comply with the information obligation referred to in paragraph 1; (b) the content of the information published under paragraph 1, including at least the information referred to in paragraph 2 in such a way as to enable the publication of information required under Article 64;
42. ESMA proposed in the CP the introduction of a trade ID assigned by the CTP which
would allow market participants to refer to a specific trade in the consolidated tape. Analysis following feedback from stakeholders
43. Respondents unanimously agreed that a trade ID would be a valuable element. However
views were split on whether the trade ID should be assigned at the level of the CTP or rather at the level of the APA, trading venue or investment firm. While some respondents agreed with ESMA’s proposal that the trade ID should be originated by the CTPs, most respondents suggested that APAs and trading venues should assign the trade ID which would then be used by the CTP. Respondents considered that this approach has the advantage of assigning the trade ID at the level of the venue that comes first in the publication chain and thereby reduces the possibility of errors. Furthermore, it would ensure that a trade ID is available in case no CTP emerges.
44. Some respondents recommended defining the format of the trade ID and so that trades
can be unambiguously sequenced regardless of the level of granularity of the timestamp used. Proposal
45. In light of the strong support for a trade ID assigned by APAs and trading venues rather
than by CTPs, ESMA has amended its approach and proposes to require APAs and trading venues to assign a transaction identification code.

46. ESMA considers that imposing a specific format for the transaction identification code
    would be overly prescriptive, disproportionate in terms of costs and benefits and pre￾empt initiatives for developing a unique transaction identification code in the future. Accordingly ESMA does not require the use of a unified transaction identification code across all APAs and trading venues but opts for a pragmatic approach requiring the use of a string of characters leaving much flexibility to APAs and trading venues when determining their own transaction identification code. This code in combination with the identification of the APA or trading venue publishing the trade and the time of publication will enable users to unambiguously refer to any trade published that day. To avoid duplications in requirements, the transaction identification code for trading venues is identical to the transaction identification code required for transaction reporting purposes.
    4.1.10 Publication time for CTPs when trades take place on
    trading venues
47. APAs and CTPs are required to publish “the time the transaction was reported” in
    addition to the time of the transaction according to Articles 64(2)(d) and (e), 65(1)(d) and (e) and 65(2)(d) and (e) of MiFID II.
48. ESMA proposed in the CP that the “time the transaction was reported” should be
    understood as the time when the transaction was published by the APA or the trading venue since this gives market participants valuable information to better understand to which events the market actually reacted and when. Analysis following feedback from stakeholders and proposal
49. A majority of respondents supported ESMA’s proposal for having a publication time
    assigned by the trading venue instead of the CTP when a trade takes place on a trading venue. This timestamp provided by the source of the publication corresponds to the time when market participants are first able to see the trade information released and is deemed as the most relevant. Only a few respondents wanted the CTP to originate the timestamp to allow for benchmarking across CTPs.
50. Some respondents argued against a publication time assigned by the trading venue,
    explaining that execution time was more important but without recommending or preferring a publication time allocated by the CTP either. The question as to whether or not trading venues should publish the publication time in addition to the execution time was specifically addressed in Q50 of the CP. Responses were largely supportive.
51. Given the majority of supportive responses, ESMA maintains its proposal.

4.1.11 Accuracy of the publication timestamp
CP Proposal
52. To ensure a reliable audit chain for trade information along the publication chain, ESMA
proposed to require an APA to timestamp trade reports in terms of granularity, i.e. up to the millisecond for electronic systems and up to the second for other trades, and accuracy, i.e. timestamping should not diverge by more than one second or millisecond from the UTC. Analysis following feedback from stakeholders and proposal
53. A significant number of respondents representing different sectors (mainly from the sell
side and data vendors, but also including some exchanges) were in favour of ESMA’s proposal. Some respondents suggested more accuracy in the maximum divergence with the time reference based on the capabilities of the originating trading system or service in line with the requirements on clock synchronisation for trading venues and their members or participants. Another group of respondents, composed largely of exchanges, recommended less accuracy, with a divergence up to one second also for trades taking place on electronic systems to avoid confusion with other trades (e.g. voice systems) and because transmission and processing will add latency to the primary source.
54. Given the split of responses, ESMA maintains the original requirement which appears to
strike the right balance of granularity and accuracy. ESMA considers it essential to require sufficient granularity and accuracy to ensure meaningful and reliable timestamps
4.1.12 Identification of the source contributing to the CTP
CP Proposal
55. ESMA proposed to require for transparency purposes that the CTP should publish the
identification of its source for each trade. For on-venue trades this should be the venue of execution, whereas for OTC trades or trades that took place on an SI, the identification of the venue and the identification of the source (i.e. the APA) will be different and will add meaningful information. Analysis following feedback from stakeholders
56. Overall, the proposal gained large support with only very few respondents opposing the
identification of the reporting source, stressing that it was confusing, could reveal sensitive information and could result in undesirable competitive behaviour.

57. Some responses suggested that the identifiers for APAs should be assigned and
    published by ESMA.
    Proposal
58. Given the strong support, ESMA maintains its proposal. It should be recalled that the
    publication source is in any case public information and that the mechanism of deferred publication will further provide the necessary protection against undue market risk. ESMA is therefore not convinced of the arguments that such an approach could reveal sensitive information or result in undesirable competitive behaviour.
59. ESMA understands and shares the proposal that identifiers should be assigned to APAs,
    but is lacking the necessary legal mandate to require the use of such identifiers. However, in order to allow for a harmonised identification of APAs, ESMA will explore the possibility to have identifiers assigned in a similar way to MIC and to publish these identifiers on ESMA’s website in the list of DRSPs. The code identifying the source contributing to the CTP will be referred to as ‘Venue of publication’.

4.2. Data disaggregation
Background/Mandate/Empowerment
Article 12 of MiFIR

1. Market operators and investment firms operating a trading venue shall make the
   information published in accordance with Articles 3, 4 and 6 to 11 available to the public by offering pre-trade and post-trade transparency data separately.
2. ESMA shall develop draft regulatory technical standards to specify the offering of pre￾trade and post-trade transparency data, including the level of disaggregation of the data to
   be made available to the public as referred to in paragraph 1.
   ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015. CP proposal
3. The proposals contained in the CP were:
   i. each venue must offer its pre- and post-trade data disaggregated by four asset
   classes;
   ii. each venue must also disaggregate by further criteria, unless there is insufficient
   demand for such data streams. The criteria would be: country, currency, industry sector, membership of a major index, auctions vs. continuous trading, and different types of derivatives;
   iii. if a venue decides that there is not sufficient demand to disaggregate by a particular
   criterion, it should state this alongside its price lists, and in response to any request for pricing information. Analysis following feedback from stakeholders
4. The responses divided roughly equally into those who thought the proposals went too far
   and those who supported them or thought they should go further.
5. The opponents (mostly exchanges) included those who thought there should be no
   disaggregation, or that it should be by asset class only. Their arguments were that disaggregation would increase costs and complexity and create confusion. They argued very strongly that the lack of regulation of data vendors meant that disaggregation might not be carried through to end-users. ESMA recognises that there is a risk that disaggregation may not be fully passed through to end users. However, the scope of

MiFIR and the empowerment for ESMA is clear in requiring data disaggregation by trading venues.
4. Some of those who supported the proposals thought that they required the right amount
of disaggregation, while others thought they should go further in different ways, e.g. more or all criteria should be mandatory; there should be disaggregation to the instrument level; or there should be a mechanism for challenging venues who claim that there is not sufficient demand.
5. Many responses from all categories of respondents considered the phrase “[In]sufficient
demand” as too vague and asked for a definition.
6. Among other comments, a number identified the “membership of a major index” criterion
as particularly problematic as this criterion was considered not specific enough and ESMA should therefore specify the “major indices”. Another concern pointed to the changing population of such a data feed (including reference and historic data) as each index is rebalanced. Proposal
7. In the light of the comments on relying on the criterion “insufficient demand”, ESMA has
decided to dispense with it and to make all disaggregation mandatory.
8. Pre-trade and post-trade data relating to all instruments will have to be disaggregated by
the following criteria: asset class (separating equity from equity-like, and distinguishing fixed income, emission allowances and different types of derivatives), currency, scheduled daily auctions as opposed to continuous trading. In addition, shares and sovereign bonds will also be disaggregated by country of issue.
9. As the proposed requirements are mandatory, ESMA removed two criteria for which, on
the basis of the responses, there was the least demand and which were criticised for being too costly or too vague: membership of a major index, and industrial sector. Furthermore, the draft RTS clarifies that a trading venue has to offer data on a reasonable commercial basis using any combination of the disaggregation criteria provided that it is requested at least by one market participant. Trading venues may, in addition, offer bundles of data.

4.3. Access in respect of central counterparties and trading
venues
Introduction

1. Articles 35 and 36 of MiFIR require ESMA to develop draft RTS in relation to various
   issues covered in the following sections of this final report. As both trading venues and CCPs are regulated under Union law, that fact has to be taken into account when drafting implementing measures under the said MiFIR articles.
2. Therefore, this section takes the assumption that both entities are regulated and
   supervised (e.g. under EMIR, MAD/MAR and MiFID/MiFIR or, if not EU entities, under legislation recognised as equivalent by a decision prior to an access request being made – Article 25 of EMIR for CCPs, and Article 38 of MiFIR for trading venues) and does not question the proper enforcement of such regulations against the relevant entities.
   4.3.1 Denial of access by a CCP or trading venue
   Background/Mandate/Empowerment
   Article 35(6)(a) of MiFIR
   ESMA shall develop draft regulatory technical standards specifying:
   the specific conditions under which an access request may be denied by a CCP, including:
   (a) the anticipated volume of transactions,
   (b) the number and type of users,
   (c) arrangements for managing operational risk and complexity, or (d) other factors creating significant undue risks.
   Article 36(6)(a) of MiFIR
   ESMA shall develop draft regulatory technical standards specifying:
   the specific conditions under which an access request may be denied by a trading venue, including:
   (a) conditions based on the anticipated volume of transactions,