The Association for Financial Markets in Europe (AFME) has published its recommendations for the Mifr/d II review Trilogues, arguing that no size restrictions should be placed on midpoint trading through any mechanism.
The EU Commission, with endorsement from the EU Parliament, proposed to replace the double volume cap (DVC) with a single volume cap (SVC) set at 7% of trades executed under the reference price waiver (RPW) or the negotiated trade waiver (NTW).
According to AFME, the Council is of the view that the DVC should be replaced by a higher SVC, set at 10%, only in relation to the RPW – adding that the Commission and Parliament believe that the use of the RPW should be further restricted to orders above a certain size.
AFME notes that such restrictions should not be placed on the RPW and that trading venues should be permitted to execute at the midpoint at any size.
“Ultimately, the ability for asset managers to maximise the sourcing of liquidity at a desired price level is important. However, displaying your full trading intention in highly focused liquidity events presents a risk of information leakage,” Simon Mason, head of equity products for UK and Ireland at SIX, told The TRADE.
“When the wider market knows a large position is in the process of being offloaded, price is invariably impacted. Asset managers want the ability to maximise the opportunity to unwind large trading positions, in a single trading session, without the price moving away from them.”
Instead, AFME has suggested the volume cap should be removed or, alternatively, suspended for a five-year period, after which ESMA should assess whether or not, and to what extent, the cap is negatively impacting price formation to ensure EU regulation is evidence-based.
If ESMA is able to prove that price formation is negatively impacted, AFME said only then should the Commission reinstate the restriction as well as the Council’s proposal.
The industry association stated that if the volume cap were to be maintained, the NTW should not be included. AFME said it would be more supportive of a shortened suspension period of three months each time the cap is reached, as per the Council’s proposal.
“The justification provided for changes to the volume cap is based on unsubstantiated claims that EU markets are not sufficiently robust as a result of trades being executed away from pre-trade transparent venues, which we strongly rebut,” AFME said in its report.
“We note that no evidence has ever been provided to support the notion that price formation is deteriorating and we caution against policies with an aim to force trading activity on to lit venues without any critical assessment of its impact.”
AFME also stated that a volume cap remains a measure misaligned with international best practices and midpoint execution restrictions disable the provision of a globally recognised fair execution price.