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Author: FI Regulation Matters

Peeling back the layers

Changes to the Large in Scale (LIS) thresholds in MiFID II appear to be relatively balanced at first sight – lower than under MiFID I for shares with a low average daily turnover (ADT) and significantly higher for those with a high ADT (Graph 1). However, include the transparency calculations recently published by ESMA and it paints a starkly different picture. As Graph 2 shows, shares with a high ADT are deemed liquid by ESMA, and those with a low ADT are classified as illiquid. By combining Graph 1 and 2 it becomes apparent that it’s mainly illiquid shares that benefit from the decrease in LIS thresholds, whereas most liquid shares experience an increase in minimum block sizes. This becomes crucial when considering the double volume caps (DVC) which are now expected to bite sometime after March 2018. For liquid instruments, use of the LIS waiver is one of the few available options to stay outside the DVC, hence the growing importance for block trading (as shown in our Top of Blocks report). Under MiFID II illiquid instruments can continue to trade in the dark without restrictions and outside the DVC. In other words, the LIS waiver is particularly significant for liquid instruments (for which the thresholds have increased). The reduction in the threshold that might benefit illiquid stocks is largely immaterial. The fact is MiFID II simply increases...

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ESMA’s third-country venues – the naughty or nice list

ESMA recently issued guidance on the treatment of commodity derivatives traded on third-country venues in the context of the MiFID ll position limit regime. Prior to this is was not clear if commodity derivatives traded on a third-country exchange would be considered economically equivalent OTC (“EEOTC”) contracts and would consequently fall under the position limit regime. The guidance states that a third-country venue will be considered a trading venue for the purposes of this regime only if it meets certain objective criteria concerning its operation of a multilateral system, being subject to authorization and having a supervisory framework in place. ESMA will publish a list of the venues that meet the requisite criteria and a list of those that do not. Perhaps in the spirit of ESMA holiday giving, until the publication of these ‘naughty’ and ‘nice’ lists, third-country commodity derivatives will not be considered EEOTC contracts for EU position limits. As with many things MIFID ll, we have now been given some direction, but not complete certainty, on these third-country...

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