ESMA final reports on MiFIR reform: Another piece of the jigsaw

What has happened?

ESMA has published final reports in relation to the following:

• Final report on RTS on bond transparency and reasonable commercial basis (RCB) under MiFIR.
• Final report on technical standards on consolidated tape providers (CTPs) and data reporting services providers (DRSPs).
• Final report on technical standards on equity transparency.
• Final report on amendments to commodity derivatives technical standards.

Areas covered by the final reports include:

• Definition of a liquid market for equity instruments.
• The review of the pre-trade transparency requirements for systematic internalizers, in particular the calibrating of two quoting sizes.
• Post trade transparency regime in respect of non-equities.
• Revenue distribution for CTP for shares and ETFs according preferential treatment to certain trading venues.
• For consolidated tape provide regime, minimum requirements for transmission protocols, choice of the technical data formats, definition of real time, data quality measures, and enforcement standards.

What's the wider context?

The Directive amending MiFID II (Updated MIFID) was finalized alongside Updated MiFIR (see our briefing here), with Updated MiFIR applying from 28 March 2024. A transitional provision exists and several aspects need to be supplemented by EU delegated acts in order to be fully operational.

ESMA has considered the feedback from stakeholders in respect of its consultation papers, including the expert stakeholder group on equity and non‑equity market data quality and transmission protocols (DEG), as well as the SMSG.

The DEG's report in October 2024 contained recommendations on post trade transparency (specifically deferral schedules for bonds) including the following: ESMA should reconsider the current bond grouping proposals using additional factors (e.g. issuer country); ESMA should look again at appropriateness of the trade size buckets and adopt an Average Daily Volume (ADV) / absorption time approach; and ESMA should distinguish between investment grade and high yield for corporate bonds. The DEG also recommended that: the consolidated tape provider is best placed to decide data format and transmission protocols; and ESMA should avoid prescribing particular protocols/formats on the input and output data for the CTPs in respect of equities.

In terms of other aspects of the EU MIFID reforms, ESMA announced next steps in relation to the bond CTP in January 2025.

In the UK, the FCA has published consultations and policy statements in respect of UK MiFID reforms, most notably final rules in relation to post trade transparency (see our briefing here).

Key takeaways:

• ESMA is proceeding with the majority of proposals set out in the consultation papers.
• Changes have been made to the post trade transparency regime in respect of bonds (grouping of bonds for the purposes of the deferrals regime and liquidity assessment).
• Further detail has been given on the staggered implementation of certain provisions concerning RTS 1 delegated acts (see grid below).

What do firms need to do?

• Follow the progress of RTS and note further detail provided by ESMA in proposed application dates for certain aspects of RTS 1.
• APA and firms to note and assess impact of deferrals regimes and new groupings for bonds, as well as divergent post trade deferrals regime in the EU and UK.
• Trading venues to note waivers and changes to LIS thresholds, as well as changes to liquid market test for post-trade reporting.
• Firms to familiarize themselves with new templates, fields and flags and prepare for changes to systems and operational processes and relevant policies. Firms operating cross-border to prepare for divergences in EU and UK regimes.

What next?

The reports have been submitted to the European Commission, with the European Commission to decide within 3 months to endorse the proposed RTS. Market participants are still awaiting final reports from ESMA in respect of: consultation on order execution policies; consultation on RTS on the single volume cap, ITS on notifications and RTS on circuit breakers; and consultation on transaction reporting and order book data. ESMA is also still to consult on RTS 2 review concerning transparency for derivatives.

RTS 2 on transparency for bonds, structured finance products and emission allowances and RTS on reasonable commercial basis

• ESMA will not proceed with proposal to use European System of National and Regional Accounts (ESA 2010) to classify bond issuers.
• The RTS 2 definition of sovereign bonds is to be aligned with the definition of sovereign issuer in Article 4(60) of MiFID II. The revised definition also captures a sovereign entity of a third country. The definition of "other public bonds" has accordingly been amended to reflect this change.
• Changes to post-trade fields and flags are to be implemented at the same time even if the proposals are contained in separate consultation papers.
• Consequential changes have been made to corresponding flags (Very Large Liquid Flag and Very Large Illiquid Flag) in light of amendments to the post-trade deferral regime proposals.
• ESMA is to add a field for negotiated transactions in non-equity instruments, defined as ‘"transactions which are negotiated privately but reported under the rules of a trading venue".
• Liquidity thresholds for bonds have been changed (consideration is also relevant in the context of the liquidity determination for the purposes of the illiquid waiver under Article 9(c) of MiFIR).
• Corporate, convertible and other bonds will be separated into two groups: one including investment bonds in the three major currencies (EUR, USD and GBP); the other to include corporate, convertible and other bonds. Level 3 guidance will contain more information on difference between IG and HY.
• The original thresholds set out in the consultation paper in respect of liquid bonds are to be increased, while the thresholds of illiquid bonds are to be decreased.
• Same liquidity size determination is to apply equally to all corporate, convertible and other bonds (despite different bond groupings being introduced). Any bond with an issuance size equal to, or above, EUR 500Mn will therefore be considered liquid.
• ESMA is to decrease the thresholds for all bonds that are not IG traded in one of the major currencies and to increase the price deferral from EOD to T+1 and T+2 for Categories 3 and 4.
• Thresholds for emissions allowances are to be set in tons of CO2 (tCO2) rather than lots, as tCO2 is the common unit of measurement for EUAs.
• Classification of ETCs and ETNs as bond types maintained, as well as proposal that all ETCs and ETNs are illiquid instruments. RTS 2 to be amended so that ETCs/ETNs benefit from a price deferral of T+2 and a volume deferral up to 2 weeks.

Group 1 (most liquid sovereign bonds). ESMA has produced several deferral matrixes revising its proposals in respect of different types of bonds.

RTS on Reasonable Commercial Basis

• ESMA has revised the application period in respect of the RTS, proposing to set 6 months after entry into force (i.e. 9 months after its publication in the official Journal of the EU).
• ESMA is proceeding with proposals to allow market data providers to establish client categories, under which a client must fall into only one category and market data providers may apply different terms and conditions, or charge different fees to clients in different categories.
• ESMA has added further guidance on the factual elements that could be used to establish client categories in the recitals of the RTS and has provided examples of valid categories (e.g. data redistributors).
• ESMA maintains its recommendation to the European Commission to level the playing field between market data providers subject to MiFIR and those entities that redistribute market data but are currently not in scope (e.g. redistributors, benchmark providers, credit rating agencies, and ESG providers)

Unbiased and fair contractual terms

• ESMA has increased the notice period for amendments of market data agreements to three months and further clarified the right of market data clients to withdraw from the contract in case of significant amendments.
• The overall approach to penalties is maintained, but the time period from the occurrence of an infringement to the imposition of a penalty has been increased to 5 years, in line with investment firms’ record keeping obligations as per Article 16 of MIFID.
• ESMA broadly maintains proposals requiring TVs, APAs, SIs, and CTPs to allow for free public access to market data policies. Following feedback, market data providers are to make their policies accessible on their websites for a minimum of 5 years.

Equity transparency (RTS 1 and CDR 2017/567)

• FITRS and DVC systems are to be decommissioned. FITRS quantitative data will be decommissioned on 1st January 2026 and FITRS reference data will be decommissioned on 1st January 2027.
• Minor amendments made to the definition of continuous order book and quote-driven trading system.
• ESMA is proceeding with proposals in relation to SI quote sizes but notes comments made by the SMSG in relation to ETFs.
• ESMA has not kept the proposed new article 12a and the relevant provision stays in RTS 13.
• ESMA is to move forward with the proposed thresholds for liquidity determination for shares, and with the introduction of a specific article for other similar financial instruments.
• ESMA sees merit in aligning the list of post-trade flags with the UK’s finalized list of flags (e.g. “CLSE,” “NTLS,” and “TNCP” ) to reduce reporting frictions for market participants.
• ESMA is to exclude technical trades as give-up and give-in trades (Article 1 defines these trades and they are excluded from post trade transparency by virtue of Article 13) from post-trade transparency.
• ESMA proposes a staggered implementation approach in relation to RTS 1.

RTS on input and output data of CTPs

• Adjustments to performance requirements based on asset class and differentiated timeliness requirements.
• FIX Market Model Typology (MMT) standards to be adopted to improve usability of regulatory data for CTP reporting.
• ESMA to proceed with approach to regulatory data requirements (regulatory data to be transmitted by data contributors to all three CTPs for bonds, equities and derivatives) despite concerns about applicability for bonds, as requirements cannot be changed under the current legislative mandate.
• Slight amendments made in relation to requirements for data contributors concerning “transmission of data as close to real time as technically possible" in respect of equity pre-trade data and post trade data (confidence intervals have been added). Confidence intervals not included for bonds and derivatives, as these timeliness thresholds are less stringent.
• Input data be submitted in a standardized format in accordance with ISO 20022 methodology.
• Changes have been made by ESMA to roles and responsibilities of a CTP in identifying and correcting erroneous trade. CTP to only flag trades appearing to be potentially erroneous (as opposed to blocking its publication). ESMA clarifies what constitutes a "potentially erroneous" trade. CTPs not expected to publish input data which is incomplete or does not adhere to the prescribed formats. Information appearing to be erroneous (e.g. anomalous numerical values) to have flag accompanying their publication and data contributor will be expected to verify.