According to the share trading obligation imposed by MiFIR (Markets in Financial Instruments Regulation) on MiFID-licensed investment firms such firms must ensure that the trades they undertake in shares admitted to trading on a regulated market or traded on a trading venue take place on:

 

1) regulated markets,

 

2) MTFs, or

 

3) systematic internaliser, or

 

4) a third-country trading venue assessed as equivalent in accordance with Article 25(3)(a) of MiFID II Directive, as appropriate;

 

unless their characteristics include that they:

 

- are non-systematic, ad-hoc, irregular and infrequent, or

 

- are carried out between eligible and/or professional counterparties and do not contribute to the price discovery process.

 

 

Moreover, an investment firm that operates an internal matching system which executes client orders in shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments on a multilateral basis must ensure it is authorised as an MTF under MiFID II Directive and comply with all relevant provisions pertaining to such authorisations.

 

In the Public Statement of 19 March 2019 (Impact of Brexit on the trading obligation for shares (Article 23 of MiFIR), ESMA70-155-7329) ESMA underlined that the trading obligation is directly addressed to EU investment firms, and branches of third-country firms to which MiFID II applies, and not to the trading venues on which they trade.

Consequently, where a share is delisted from a regulated market but continues to be traded on any other EU trading venue, the trading obligation remains applicable.

 

 

Equivalence decisions to recognise trading venues as eligible for compliance with the trading obligation for shares

 

 

On 13 November 2017 ESMA issued the Q&As where the authority stated:

 

- ESMA is aware that the scope of the trading obligation in Article 23, and the absence of the relevant equivalence decisions, might cause issues for investment firms that wish to undertake trades in non-EEA shares in the primary listing venues of such shares,


- ESMA and the European Commission are working closely together to resolve those issues,


- while the European Commission is preparing equivalence decisions for the non-EU jurisdictions whose shares are traded systematically and frequently in the EU, the absence of an equivalence decision taken with respect to a particular third country's trading venues indicates that the Commission has currently no evidence that the EU trading in shares admitted to trading in that third country's regulated markets can be considered as systematic, regular and frequent.

 

The said ESMA’s Q&As were welcomed by the industry as the literal interpretation of the MiFIR rules on the trading obligation in shares - in the absence of equivalence determinations and in the absence of the said clearance - would prohibit investment firms from accessing material pools of liquidity normally accessed outside the EEA.

 

Hence, ESMA has provided interpretational direction which removes some of the potential wide reaching territorial ambit of the share trading obligation (Deutsche Bank, MiFID II: Share Trading Obligation). 

 

quote

Verena Ross, ESMA’s Executive Director, Keynote Address, ASIFMA Annual Conference 2017 – Hong Kong, 30 November 2017, ESMA71-319-65

 

Finally, I know that you’re particularly concerned about the application of the trading obligation for shares to shares which have their primary pool of liquidity outside the EU. I hope that our recently issued guidance together with the European Commission provided you with comfort that, in the absence of an equivalence decision, transactions in shares would not be considered to be of a systematic, regular and frequent nature and therefore not subject to the trading obligation for shares.

 

 

 

The European Commission has adopted a series of decisions to recognise trading venues as eligible for compliance with the trading obligation for shares, in particular:

 

- Commission Implementing Decision (EU) 2017/2320 of 13 December 2017 on the equivalence of the legal and supervisory framework of the United States of America for national securities exchanges and alternative trading systems in accordance with Directive 2014/65/EU of the European Parliament and of the Council,


- Commission Implementing Decision (EU) 2017/2319 of 13 December 2017 on the equivalence of the legal and supervisory framework applicable to recognised exchange companies in Hong Kong Special Administrative Region in accordance with Directive 2014/65/EU of the European Parliament and of the Council,


- Commission Implementing Decision (EU) 2017/2318 of 13 December 2017 on the equivalence of the legal and supervisory framework in Australia applicable to financial markets in accordance with Directive 2014/65/EU of the European Parliament and of the Council,


- Commission Implementing Decision of 21 December 2017 on the equivalence of the legal and supervisory framework applicable to stock exchanges in Switzerland in accordance with Directive 2014/65/EU of the European Parliament and of the Council.

 

 

 

Article 23 MiFIR

Trading obligation for investment firms

 

1. An investment firm shall ensure the trades it undertakes in shares admitted to trading on a regulated market or traded on a trading venue shall take place on a regulated market, MTF or systematic internaliser, or a third-country trading venue assessed as equivalent in accordance with Article 25(4)(a) of Directive 2014/65/EU, as appropriate, unless their characteristics include that they:

(a) are non-systematic, ad-hoc, irregular and infrequent; or

(b) are carried out between eligible and/or professional counterparties and do not contribute to the price discovery process.

 

2. An investment firm that operates an internal matching system which executes client orders in shares, depositary receipts, ETFs, certificates and other similar financial instruments on a multilateral basis must ensure it is authorised as an MTF under Directive 2014/65/EU and comply with all relevant provisions pertaining to such authorisations.

 

3. ESMA shall develop draft regulatory technical standards to specify the particular characteristics of those transactions in sharesthat do not contribute to the price discovery process as referred to in paragraph 1, taking into consideration cases such as:

(a) non-addressable liquidity trades; or

(b) where the exchange of such financial instruments is determined by factors other than the current market valuation of thefinancial 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.

 

 

 

 

Scope of the trading obligation where there is a chain of transmission of orders

 

 

In the said Q&As of 13 November 2017 ESMA also clarified that all EU investment firms that are part of a chain of transmission should ensure that the ultimate execution of the order complies with the trading obligation requirements under Article 23(1) of MiFIR.

 

 

Q&A - Trading Obligation for Shares

 

Q What is the scope of the trading obligation where there is a chain of transmission of orders?

 

A Article 23(1) of MiFIR determines the scope of the trading obligation for shares admitted to trading on a regulated market or traded on a trading venue by requiring investment firms to ensure that trades they undertake in shares take place on a regulated market, MTF, systematic internaliser or equivalent third country venue.

 

Where there is a chain of transmission of orders concerning those shares all EU investment firms that are part of the chain (either initiating the orders or acting as brokers) should ensure that the ultimate execution of the orders complies with the requirements under Article 23(1) of MiFIR.

 

As an example, where an EU investment firm transmits an order for a share admitted to trading on a regulated market or traded on a trading venue to an EU investment firm that subsequently passes it on to a non-EEA firm, the EU investment firms should ensure the trade is undertaken in accordance with the requirements set out in Article 23 of MiFIR, i.e. on a regulated market, MTF, systematic internaliser or equivalent third country venue.

 

 

 

The Q&As adopted by ESMA on 13 November 2017 are quoted in the box.

 

There were diverging interpretations of this issue before, for example the Association for Financial Markets in Europe (AFME Equities) in the publication “Share Trading Obligation: Scope of the Obligation” of 24 July 2017 believed that the share trading obligation “applies only to the firm in the final part of the execution chain”.

 

It is noteworthy, ESMA in the aforementioned Q&As has rejected this approach.

 

It is also to be noted that a chain of transmission of orders does not include General Clearing Members, the role of which concerns the post-trade processing of transactions.

 

 

Brexit


 

According to the the European Commission’s reminder of 13 July 2020 (Notice to Stakeholders on Withdrawal of the United Kingdom and EU rules in the field of markets in financial instruments, REV1 - replacing the notice dated 8 February 2018), in the absence of the relevant agreement:

 

1. UK market operators/investment firms operating a trading venue or execution venue will no longer benefit from the MiFID authorisation/licence;

 

2. UK based regulated markets (RMs), multilateral trading facilities (MTFs) or systematic internalisers (SI) will thus cease to be eligible venues for trading shares subject to the MiFIR share trading obligation; EU counterparts can no longer undertake trades in shares subject to the share trading obligation on such platforms.

 

The Commission is empowered to declare third country trading venues equivalent for the purposes of the EU share trading obligations.

 

As the Commission observes in the aforementioned Notice, while the assessment of the UK’s equivalence in these areas is ongoing, the assessment has not been finalised.

 

All stakeholders thus have to be informed and ready for a scenario where shares subject to the EU trading obligation can no longer be traded in the UK trading venues.

 

EU counterparts need to reassess their trading arrangements to ensure continued compliance with their obligations under the MiFID framework.

 

 

 

 

chronicle   Regulatory chronicle

 

 

 

 

16 July 2020

 

MiFID II/MiFIR Review Report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares, ESMA70-156-2682

 

4 February 2020

 

Consultation Paper, MiFID II/ MiFIR review report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares, ESMA70-156-2188

 

19 March 2019

 

ESMA Public Statement, Impact of Brexit on the trading obligation for shares (Article 23 of MiFIR), ESMA70-155-7329

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

MiFIR (Markets in Financial Instruments Regulation, Article 23

 

Consultation Paper, MiFID II/ MiFIR review report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares, 4 February 2020, ESMA70-156-2188

ESMA Public Statement, Impact of Brexit on the trading obligation for shares (Article 23 of MiFIR), 19 March 2019, ESMA70-155-7329

 

ESMA clarifies trading obligation for shares under MIFID II, 13 November 2017

 

Commission Implementing Decision (EU) 2017/2320 of 13 December 2017 on the equivalence of the legal and supervisory framework of the United States of America for national securities exchanges and alternative trading systems in accordance with Directive 2014/65/EU of the European Parliament and of the Council


Commission Implementing Decision (EU) 2017/2319 of 13 December 2017 on the equivalence of the legal and supervisory framework applicable to recognised exchange companies in Hong Kong Special Administrative Region in accordance with Directive 2014/65/EU of the European Parliament and of the Council


Commission Implementing Decision (EU) 2017/2318 of 13 December 2017 on the equivalence of the legal and supervisory framework in Australia applicable to financial markets in accordance with Directive 2014/65/EU of the European Parliament and of the Council


Commission Implementing Decision of 21 December 2017 on the equivalence of the legal and supervisory framework applicable to stock exchanges in Switzerland in accordance with Directive 2014/65/EU of the European Parliament and of the Council and Annex

 

 

 

 

 

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    Links    

 

 

 

 

 

Deutsche Bank, MiFID II: Share Trading Obligation

 

Association for Financial Markets in Europe (AFME Equities), Share Trading Obligation: Scope of the Obligation, 24 July 2017