MiFID 2/MiFIR
What, When,
Who and How?
Double Volume Cap
Mechanism
October 2015
What does MiFID
currently do?
Are these provisions currently in MiFID?
No.
What are the key differences between the current regime and MiFID 2?
MiFID 2 retains the pre-trade transparency waivers, but controversially limits the use of the reference
price waiver and negotiated transaction waiver according to a “double volume cap” mechanism. Under
this mechanism, trading volume in a given stock on a given dark pool during any 12 month period cannot
exceed 4% of total volume on all EU trading venues, and total trading under these waivers (across all
dark pools) for a given stock cannot exceed 8%. This volume cap mechanism has been introduced as
part of MiFID 2’s wider package of reforms designed to limit dark pool trading by pushing trades off
broker crossing networks and onto transparent and regulated exchange markets.
What is MiFID
going to do?
2
What does Level 1 say?
Regulation 600/2014 Art 5
In order to ensure that the use of the reference price waiver and the negotiated transaction waiver from
pre-trade transparency 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 EU over the previous 12 months (per trading venue cap).
The first volume cap is calculated on a trading venue by trading venue basis and is set at a level of 4% of
the overall amount of trading across all trading venues in the EU. This 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. For example a trading venue would be in breach of the 4%
threshold if the amount carried out under the reference price waiver and relevant negotiated waiver is 2%
and 3% respectively. If the 4% is breached the relevant competent authority is required to suspend within
2 working days the use of the relevant waiver(s) for that trading venue and for that particular financial
instrument for 6 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 EU over
the previous 12 months (overall trading venues cap).
The second volume cap is calculated across all trading venues operating under one or both of the
relevant waivers and is at a level of 8% of the overall amount of trading across all trading venues in the
EU. This means that the 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. For example a trading
venue would be in breach of the 8% threshold if the amount carried out under the reference price waiver
and the relevant negotiated waiver is 4% and 5% respectively. If the 8% cap is breached the relevant
competent authorities are required, within 2 working days, to suspend the use of those waivers across all
trading venues in the EU.
These volume cap provisions do not apply to negotiated transactions which are in a share, depository
receipt, ETF, certificate or other similar financial instrument for which there is not a liquid market and are
dealt within a percentage of a suitable reference price or to negotiated transactions that are subject to
conditions other than the current market price of that financial instrument. The numerator for the volume
cap calculation excludes transactions conducted under waivers granted under Article 4(1)(c) of MiFIR
(for transactions that are large in scale compared with normal market size) which could continue and, to
the extent that a dark venue has such a waiver, transactions of the requisite size could continue to be
transacted on such a venue even during the 6 months suspension of a waiver.
This mechanism is to be implemented and supervised on the basis of ESMA publications regarding the
volume of the trading under the waivers. Level 1 dictates that ESMA shall be required to publish within 5
working days of the end of each calendar month, the total volume of EU trading per financial instrument
in the previous 12 months, the percentage of trading in a financial instrument carried out across the EU
under those waivers and on each trading venue in the previous 12 months and the methodology used to
derive those percentages. In the event that a report identifies any trading venue where trading in any
financial instrument carried out under the waivers have exceeded 3.75% of the total trading in the EU in
that financial instrument ESMA shall publish an additional report within 5 working days of the 15th day of
the calendar month. In the event that a report identifies that overall EU in any financial instrument carried
out under the waivers have exceeded 7.75% of the total EU trading in that financial instrument ESMA
shall publish an additional report within 5 working days of the 15th day of the calendar month.
Detailed provisions governing how ESMA is required to collect and collate the necessary information for
such publications and calculate the actual volumes traded and publish such information is set out in RTS
3.
What does Level 2 say?
Phase 1 (May 2014 to Aug 2014):
ESMA Consultation Paper CP 2014/549 (CP1) and Discussion Paper DP 2014/548 (DP)
ESMA acknowledged in the DP the sensitivities of publishing incorrect information which would lead to
the suspension of a waiver, the need to ensure IT structures for trading venues are sufficient in quality
and co-operation between trading venues is effective in order to ensure the timely and correct publication
of the required data. In the DP ESMA proposed the following options to collect, consolidate and publish
relevant data for these purposes:
Volume traded via waiver facilities
ESMA considers that each trading venue (i.e. dark pool) operating reference price waiver or relevant
negotiated trade waiver has to submit the total volume trading (the volume of individual transactions
calculated by multiplying price times number of units and the total volume being the sum of all individual
transaction in euro executed via each waiver facility during the 12 month period to ESMA. Trading in
currencies other than the euro will be converted into euro using the ECB monthly average rate.
The volumes collected from the waiver facilities then have to be measured against the volume traded in
the on-venue market as a whole. For this ESMA has proposed two approaches.
(a)
Collation of volume from trading venues:
Under this proposal ESMA will request all trading venues to submit the total volume of all trading
during the relevant 12 month period to ESMA in parallel to the requests for the volumes executed
via the waiver facilities. Accordingly, ESMA notes the quality of data submitted should be of
sufficiently high standard and consistent.
(b)
Collation of volume from Consolidated Tape Providers (CTP’s)
Under this option ESMA considers the data of the entire on-venue trading volume per financial
instrument could be retrieved from CTP’s. Under this option ESMA would not need to aggregate
trading volumes from a number of trading venues and all data would be received via one channel.
Consolidation and calculation of actual volumes
ESMA noted that it is minded to establish technical arrangements seeking to ensure that the data is
consolidated on a timely basis and procedures for corrections are adequately implemented and would
design a template for such purposes.
Publication
ESMA will make available to the public on its website free of charge and machine readable all necessary
information for the operation of the volume cap mechanism and the monitoring of thresholds.
Phase 2 (Dec 2014 to September 2015):
Final Report 2014/1569 (FR), Consultation Paper 2014/1570 (CP2) and Final Report 2015/1464 (FR3)
In CP2 and in the proposed RTS 10 (in CP2), ESMA elaborated on its proposals set out in CP1. The
most significant development was that ESMA noted that the use of waivers should be monitored on a
more frequent basis and therefore proposes to request data from trading venues and CTP’s and perform
the relevant calculations twice a month. Updates would still be published monthly by ESMA or twice a
month in cases where an initial calculation produces a +3.75% (per trading venue) or +7.75% (overall
trading venue) as prescribed in Level 1. To this end trading venues and CTP’s will be required to send all
data (in respect of the immediately prior half month period) on the first and sixteenth day of each
calendar month by 13:00 CET to their respective competent authorities (subject to change to the extent
that they fall on a public holiday or non-business day in which case reports should be submitted the
following working day).
In order to simplify the periodic submission of data, ESMA notes that trading volumes should be
requested for the previous 15 days (rather than 12 months). The volumes will then be aggregated with
data collected previously. For example on 1 March 2017, trading venues and CTP’s will be requested to
submit data for the period 16 February 2017 to 28 February 2017 (end of the month). Volumes collected
will then be added to the calculation sample from which the volumes for the period from 16 February
2016 to 29 February 2016 (end of the month) would have been removed.
ESMA notes that it also foresees the need for ad hoc requests and therefore trading systems and CTP’s
should ensure that they have systems and IT infrastructures in place to submit by close of business on
the next working day following any such request, data for the last 12 months aggregated over different
time horizon’s (the last year, last 15 days).
A further significant development at Level 2 was ESMA’s confirmation that the obligation to put in place
systems to generate this data will commence in 2016. Article 5(3) of MiFIR notes 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. On this basis, trading venues and CTP’s will have to
submit their first report to their respective competent authority by 3 January 2017. This report will include
trading data for the previous 12 months (3 January 2016 to 31 December 2016) and will be published by
ESMA within 5 working days.
Many stakeholders have objected to this proposal arguing that it is flawed, given that both the numerator
and denominator in the calculation will be much changed by all market structure changes to be put in
place by MiFID 2, and owing also to that the provision of any data into the volume cap mechanism in this
period will most likely to be provided on an inconsistent, non-harmonised, and non-comparable basis.
ESMA has now produced its final version of the draft RTS (now re-numbered as RTS 3 in Annex I to
FR3), which adopts, without material change, the approach that was advocated by ESMA in CP2.
Assuming the draft RTS is not rejected in the final stage of the legislative process, this means that
trading venues and CTP’s only have months to ensure that they have adequate personnel and IT
systems in place to commence the relevant data collection from January 2016.
Will any Member States be gold-plating?
As MiFIR has direct effect across the EU, there are no separate provisions for Member States to impose
further obligations in this area.
When
will
happen?
it
When will these provisions apply?
Member States are required to adopt and publish measures transposing MiFID 2 and delegated acts into
national law by 3 July 2016. MiFID 2 and delegated acts under MiFID 2 will apply from 3 January 2017.
What happens next?
ESMA published (in FR3) the final draft version of RTS 3 on 28 September 2015. The European
Commission has three months (i.e. until 28 December 2015) to decide whether or not to endorse the
RTS in FR3.
How is it going to
impact
my
business?
Who will be affected by these changes and how will it impact their business?
The changes to the transparency regime under MiFID 2 will implement some of the most far reaching
and ambitious reforms within the EU market.
The volume cap mechanism will impose a significant restriction on the volume of trade currently being
carried out over broker crossing networks. Major sell-side firms that currently operate broker crossing
networks and other relevant dark venues may see a significant decline in trading activity as the volume
cap mechanism pushes trading activity onto LIT markets. A recent study by the LSE concluded that of
the 100 stocks in the FTSE 100, 99 of them would (based on 2014 trading volume data) have been
subject to an immediate 6 month ban on dark pool activity if the double volume cap mechanism had been
introduced at the beginning of 2015. Clearly if this pattern is repeated when the rule come into force at
the beginning of 2017, it could have a profound impact on the way that the European equity markets
function.
On a practical level the sheer volume of data which will be required to be submitted to ESMA will put
significant pressure on IT systems and personnel requirements which will prove costly to many trading
venues caught by the regime. Under the current proposals, trading venues and consolidated tape
providers (CTPs) –yet to be established - will have to send to their competent authorities 'dark' trading
data twice a month, rather than monthly (as was originally suggested). This data will need to be
evidenced from January 2016 and therefore those venues caught by the regime will need to start
considering what systems and procedures they need to put in place now in order to commence the
collection of trading data.
Buy-side and sell-side participants will need to consider the implications for their trading and execution
strategies and systems as some trades they have traditionally carried out using dark pools will potentially
need to be carried out on-exchange. Firms should consider the impact for them if dark pool activity in a
significant number of stocks in which they trade was to cease for 6 months.
Action for firms?
Q4 2015

Relevant trading venues should commence an analysis of their trading practices and volumes and
will need to review their IT systems and personnel requirements for the collection of trading activity
data as prescribed in Level 2 by ESMA.

Firms should, consider the implications for their trading of the introduction of the double volume cap
with effect from January 2017.
2016

Implement staff/ personnel training to ensure they are aware of/prepared for new trading
requirements and restrictions.
For more information please see our MiFID 2 Tracker or contact a member of our international MiFID 2 team.
Simmons &
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