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The new RTS are part of the European Markets in Financial Instruments Regulation (MiFIR), which comes into force from January 2017. The Regulatory Technical Standards now await endorsement by the European Commission and then any further changes by the European Parliament and European Council.
The Investment Association has previously argued that it is crucial that regulators agree a common European standard for measuring how liquid bonds are. ESMA has adopted a hybrid approach, bringing together the Instrument by Instrument Approach (IBIA), which considers the profile of individuals bonds when determining whether it is liquid, and the Classes of Financial Instrument Approach (COFIA), which groups individual bonds in to classes. If a market participant wishes to trade a bond that is labelled as liquid under this hybrid approach, pre-trade transparency requirements come into force that require details of the transaction to be published to the wider market.
The Investment Association previously supported the COFIA as a stand-alone calibration. The Investment Association will work with regulators across Europe to ensure that investment managers are fully equipped to implement this combination of approaches.
ESMA has decided to exclude transactions under €100,000 from the calibration of the transparency exemptions. We do not see an objective reason for this, as significant institutional trading takes place under this level. To have these transactions excluded will heavily skew the application of the transparency exemptions.
One forthcoming rule change is set to clamp down on the trading of equities through institutional 'dark pools'. These make it easier for investment managers to trade large numbers of shares without moving prices against themselves, meaning they are ultimately able to deliver the best possible performance to their clients.
The proposed change is known as the 'double volume cap' mechanism and restricts both how much of a company's equity can be traded in any one dark pool as well as the total proportion of a company's equity that can be traded that way across Europe.
For the first 11 months after the cap comes into force ESMA will be forced to apply it using a measure that was originally devised in the first Markets in Financial Instruments Directive (MiFID). This will lead to a significant number of shares being wrongly banned from benefiting from the price improvement available on dark pools - ultimately leading to investor detriment.
IA welcomes the simplification that has been made by ESMA to the reporting requirements for best execution, which makes sure that investment companies always seek the best execution for their clients. But it remains the case that the level and complexity of data to be received by the investment industry's clients will not assist them in getting a better understanding of how their assets are being managed.