The European Commission has rushed to implement a last minute draft revision to its Mifir text to plug a dark trading loophole caused by a clerical error.
The draft interpretative notice on the transitional provision of the Mifir Review keeps the double volume caps in place until the implementation of the new single volume cap.
Until Wednesday’s (27 March) notice, Europe was set to face an unintentional removal of dark trading caps from 28 March due to an unforeseen clerical error in the Mifir text in the EU Official Journal.
After more than six years of deliberation over the desired cap on dark trading in the Bloc, the European Commission and Parliament finally settled on the deletion of the 4% and 8% caps in favour of a single cap of 7%. These figures have come under fire from participants for being arbitrary.
However, while the deletion was set to officially take place on Thursday, an overlooked detail unforeseen by the Commission and regulators was that the conversion of the single volume cap (SVC) into law by the National Competent Authorities (NCAs) is expected to take 18 months.
The Mifir text in January authorised the enforcement of the SVC in 18 months’ time and deletes the existing DVC as of 28 March – leaving a window with no caps.
Brussels subsequently began exploring possible ways to close the loophole in the new share trading rules and push through a last-minute clarification that reinforces caps on dark trading, with European trading venues waiting with bated breath.
“Being able to trade at the mid-point is clearly still valued by the market and it’s quite possible that a period of time without the caps would have been feasible and welcomed by market participants,” Aquis head of sales, Sakeena Lalljee, told The TRADE. “However, we welcome the clarity following uncertainty on if or how the volume caps would apply from tomorrow.”
LSEG’s Turquoise declined to comment. Euronext had not replied to a request for comment at the time of publication.
If they had been unsuccessful, Europe would have found itself without limits on dark trading until October 2025 and with an SVC of 7% from then onwards, creating an unintentional testing period of limitless dark trading.
“We appreciate the European Commission’s clarification on this matter,” Cboe’s president for North American and European equities, Natan Tiefenbrun said. “There will be no change in our approach to running our reference price waiver venues from 28 March and we will continue to adhere to the double volume caps until implementation of the new single cap next year.”
Read more – HM Treasury makes first set of sweeping changes to wholesale markets post-Brexit
The UK’s Financial Conduct Authority (FCA) confirmed it was set to remove DVCs all together from equity trading in 2021 following its departure from the European Union.
The changes to the UK framework came into force in August last year. Following the changes, dark trading market share increased modestly and then plateaued much like the activity seen in the US which does not use caps also.
More to follow…