The European Securities and Markets Authority (ESMA) has launched a consultation on the development of draft regulatory technical standards to specify the pre-trade thresholds for ‘size specific to the instrument (SSTI)’ calculations for non-equity instruments.
Thresholds for transparency under the 2018 Markets in Financial Instruments Regulation (MiFIR) are based either on orders which are large in scale (LIS) compared to normal market size or SSTI modelling. Article 9(5)(d) of MiFIR required ESMA to develop draft regulatory technical standards to specify the pre-trade SSTI thresholds for all non-equity instruments. The system developed was based on annual recalibrations.
The MiFIR transparency regime for non-equity instruments is also subject to a four-stage phase-in for both, the determination of the liquidity status of bonds based on the criterion of ‘average daily number of trades’ and the level of the pre-trade SSTI threshold for bonds and most derivatives based on trade percentiles. The details of the phase-in regime are set out in Article 17 of RTS 2.
Under Article 17(4) of RTS 2 ESMA is required to submit to the European Commission (EC) an assessment of the operation of the thresholds for the liquidity determination of bonds and the trade percentiles determining the pre-trade SSTI-threshold by 30 July of each year, starting on 30 July 2019, until the final stage of the phase-in has been reached.
The same article species that ESMA should take the following factors into account for such assessment:
• The evolution of trading volumes in non-equity instruments covered by the pre-trade transparency obligations;
• the impact on liquidity providers of the percentile thresholds used to determine the SSTI; and,
• any other relevant factors.
Where, based on this assessment, ESMA considers that the thresholds should be adjusted to the next stage, it should submit an amended version of RTS 2 to the Commission as specified in Article 17(6) and 17(8) of RTS 2.
In 2020, ESMA published the RTS 2 Annual Report where it proposed to move to Stage 2 for the liquidity assessment of bonds. The analysis found that moving to Stage 2 would result in only a marginal increase in market transparency.
That was approved and the second stage has applied since 15 April 2021 to the thresholds of both the liquidity determination of bonds and the pre-trade SSTI of bonds.
Despite Stage 2 not yet being applied in the course of last year, ESMA argues in its consultation paper that “the assessment this year should not be delayed as ESMA is required to perform an annual assessment by 30 July of each year and, as the legislative process to be completed will always imply a certain delay before the next stage of the phase-in will apply in practice.”
ESMA has also highlighted that the RTS 2 Annual Report published in 2020 indicated that the increase in transparency in the market with the move to Stage 2 for the parameter of the liquidity assessment “would in all likelihood only be marginal and that the overall level of transparency would remain limited. Moreover, no significant negative impacts on the exposure of liquidity providers due to the slightly increased transparency could be identified, neither at the time when performing the analysis nor until spring 2021. This assessment was supported by the large majority of stakeholders replying to the consultation last year.”
Its new consultation paper asks if the average daily number of trades used to determine if a bond has a liquid market be set at 7 as provided for at stage 3 instead of 10 as provided for at stage 2; whether the trade percentile to determine the SSTI pre-trade threshold for bonds be set to 50% as provided for at stage 3 instead of 40% as provided for at stage 2; and if the trade percentile to determine the SSTI pre-trade threshold be set to 40% as provided for at stage 2 instead of 30% as provided for at stage 1 for many non-equity instruments including interest rate derivatives, and credit derivatives.
The consultation has requested comments by 11 June 2021.
Although responses are still to be received, some market commentators have noted that the acceleration of the process may set a precedent which could potentially be undesirable in the future.
©Markets Media Europe, 2021
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