MiFID/MiFIR review: ESMA publishes series of consultation papers on transparency topics

On 21 and 23 May 2024, the European Securities and Markets Authority (“ESMA”) published three consultation papers, as part of the ongoing MiFID/MiFIR review.

The revised Markets in Financial Instruments Directive and Regulation (known as MiFID III/MiFIR II) came into force on 28 March 2024. The package was finalised amid widespread industry concern at the uncertainty created by apparent misalignments between the Level 1 text of MiFIR as amended, and the Level 2 text, which is yet to be updated, as well as other issues. On 27 and 28 March 2024 respectively, the EU Commission published an interpretative notice and ESMA published a statement, which addressed some areas of uncertainty in relation to the application of MiFIR II.

In addition to the three consultation papers covered in this update, three further consultations are due later in 2024 (also discussed below).

Summary of consultation papers published on 21 and 23 May 2024

• MiFIR review Consultation Paper 1 (CP1) on consolidated tape providers (“CTPs”), data reporting service providers (“DRSPs”) and assessment criteria for CTP selection.
  • A CTP is yet to emerge in the EU (or the UK under, so far, equivalent rules). A key objective of the MiFID/MiFIR review is to reform the CTP regime so that consolidated tapes in bonds, equities and derivatives emerge over the coming years. CP1 covers revisions to existing regulatory technical standards (“RTS”) and proposed new RTS on: (i) the input and output data requirements of CTPs; (ii) the revenue redistribution scheme for the equity CTP; (iii) the synchronisation of business clocks (following MiFIR II’s extension of the original MiFID II regime to systematic internalisers, designated publishing entities (“DPEs”), approved publication arrangements and CTPs); (iv) the authorisation and organisational requirements for DRSPs; and (v) ESMA’s initial reflections on assessment criteria for CTP selection. The draft RTS are due to be submitted to the EU Commission by 29 December 2024.
  • Due to the interrelationship between the CTP regime and other ongoing transparency reforms under the MiFIR review, ESMA is consulting on the revisions to the CTP regime in phases. CP1 addresses provisions in relation to the bonds and (certain aspects of the) equities CTP only. Proposals related to the input/output data applicable to the equity CTP will be included in CP3 (discussed below). ESMA then plans to then revise the RTS by incorporating provisions applicable to the derivatives CTP by 29 September 2025.
• MiFIR review Consultation Paper 2 (CP2) on review of RTS 2 on transparency for bonds, structured finance products (“SFPs”) and emission allowances (“EUAs”), draft RTS on reasonable commercial basis (“RCB”) and review of RTS 23 on supply of reference data.
  • MiFID RTS 2 (non-equity transparency). CP2 covers revisions to RTS 2 in relation to: (i) the definition of trading systems and the pre-trade transparency waiver regime; (ii) ESMA’s proposals to amend post-trade transparency fields and to specify the deferral regime for bonds, SFPs and EUAs; (iii) ESMA’s approach to transparency for exchange traded commodities and exchange traded notes; and (iv) ESMA’s approach to the temporary suspension of transparency obligations and the European System of Central Banks exemption in the transitional period.   
  • Due to the staggered deadlines for ESMA to develop the draft RTS for different classes of non-equity instruments and for different aspects of the non-equity transparency regime, CP2 mainly addresses the transparency mandate for bonds, SFPs and EUAs, with another later paper to address the transparency mandate for derivatives (discussed below).  
  • RCB regime. MiFIR II mandated ESMA to develop draft RTS to specify, on a legally binding basis, the criteria that must be met in order for relevant firms to deliver on their obligation to make pre-trade and post-trade data available on a “reasonable commercial basis”. CP2 also covers the conversion and strengthening of ESMA’s guidelines on the cost of market data into legal obligations. This contrasts with the current less detailed approach in the UK, including the UK’s revised CTP regime, which does not include an RCB regime.
  • MiFID RTS 23 (instrument reference data). CP2 also covers required changes to RTS 23, to reflect: (i) the extension of the use of reference data for the purposes of the transparency regime (in addition to transaction reporting); (ii) the obligation for DPEs to report reference data for certain instruments; (iii) the need to account for the new OTC derivatives identifier; and (iv) ESMA’s mandate to consider the alignment of RTS 23 with the EMIR and SFTR reporting rules and international standards.
  • ESMA’s Final Report on all of the above topics is due to be submitted to the Commission by 29 December 2024.
• MiFID review Consultation Paper on amendments to certain technical standards for commodity derivatives.
  • MiFID III as amended: (i) extends position management controls to trading venues which trade derivatives on emission allowances; (ii) amends the scope of position reporting, by excluding emission allowances; and (iii) introduces a new obligation for trading venues offering futures and options to report two weekly position reports (instead of one), one of which excludes options.
  • In order to implement the above amendments when they start applying on 29 September 2025, after transposition by Member States, revisions are required to certain RTS, implementing technical standards and the MiFID Org Regulation. Although MiFID III did not impose a deadline on ESMA in respect of these revisions, given the IT systems changes likely required to implement the changes, ESMA is consulting as early as possible. 

Responses to CP1 and CP2 are due by 28 August 2024. Responses to the commodity derivatives paper are due by 23 August 2024. The Association for Financial Markets in Europe (AFME) and the International Swaps and Derivatives Association (ISDA) are leading the sell-side response.    

Summary of upcoming MiFID/MiFIR milestones

The above papers arrived on time during Q2, as indicated in ESMA’s overview of planned consultation papers in 2024, a useful initiative for tracking EU developments, which was first published on 19 January 2024 and last updated on 13 May 2024. In relation to next steps on the MiFID/MiFIR review, ESMA has indicated the following upcoming milestones: 

• Q3 2024: Order execution policy (“OEP”) effectiveness criteria. MiFID III mandated ESMA to develop draft RTS to specify the criteria to be taken into account by investment firms in establishing and assessing the effectiveness of their OEPs. Those criteria will at least cover the factors determining the choice of execution venues, the frequency of assessing and updating the OEP, and the manner in which different classes of financial instruments are identified in OEPs.
• Q3 2024: MiFIR review Consultation Paper 3 (CP3) on equity transparency, circuit breakers and the double volume cap (“DVC”). ESMA’s deadline for submitting draft RTS in relation to the review of MiFID RTS 1 (equity transparency) is not until 28 March 2025 (i.e. slightly later than the deadline for the RTS 2 (non-equity transparency) review for bonds. As such, ESMA intends to publish CP3 later this year. As discussed above, this has a knock-on impact on the new equities CTP regime, which is closely related, given the data produced under RTS 1 will be consumed by the equities CTP. Certain aspects of the equities CTP regime will therefore be included in CP3 later this year.
• Q4 2024: MiFIR review Consultation Paper 4 (CP4) on non-equity transparency for derivatives, transaction reporting and order books. Similar to the position in relation to CP3, ESMA’s deadline for submitting draft RTS in relation to the review of MiFID RTS 2 (non-equity transparency) in relation to derivatives is not until 29 September 2025. As such, ESMA similarly intends to publish CP4 later this year. As discussed above, this has a knock-on impact on the new derivatives CTP regime, which will be considered separately.   

One other upcoming aspect of the MiFID/MiFIR review in connection with transaction reporting, which will be of interest to alternative investment fund managers and management companies with MiFID top-up permissions, is the requirement for the Commission to assess whether or not to extend MiFIR transaction reporting requirements to such firms, in relation to their MiFID top-up business. The Commission has been mandated, together with ESMA, to carry out that assessment by 29 March 2025. If the Commission decides in favour of that extension, it is already empowered to adopt delegated acts to effect that extension. This possibility had previously been explored (and discounted) in the UK as part of the original implementation of MiFIR.

Our wholesale markets practice

Our leading financial services regulatory practice continues to support clients on interpreting and applying the transparency regimes in practice. Through our work with UK Finance, we have been working closely with the industry in its collective response to UK reforms in this area (including responses to FCA CP23/15 and FCA CP23/33). Together with our EU-based colleagues, we are able to offer a pan-European view on market practice and interpretation.

If you have any questions on any of the topics mentioned, please contact us.