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EUROPEAN
WATCHDOG EYES
MAJOR CHANGES
to dark trading rules under MiFID II
ESMA is considering removing certain transparency waivers
which would make the DVCs redundant, or lowering the
threshold market-wide to further restrict dark trading in Europe.
E
U financial authorities are
contemplating massive
changes to rules for dark
trading under MiFID II, which
could see the removal of the
controversial double volume caps
(DVCs), as a review of the regula-
tion gets underway.
In an in-depth consultation
exploring changes to MiFID II for
equities, the European Securities
and Markets Authority (ESMA)
acknowledged that the regula-
tion has failed in its objective for
increased transparency and the
review will look to simplify the
transparency regime for market
participants.
One simplification that ESMA is
considering is removing the ref-
erence price and negotiated trade
waivers, after the regulator found
that the percentage of trading
under both waivers significantly
14 // TheTRADE // Spring 2020
decreased to almost half of its
previous value in 2018 compared
to 2017.
The move would leave the LIS
and OMF (order management
facility) waivers in place in a bid
to increase pre-trade transparency
in the market, with ESMA adding
that the proposal would make the
DVCs redundant, resulting in their
removal from the regulation.
The DVCs were introduced in
March 2018, following an initial
delay to implementation, and have
heavily affected trading volumes
in dark pools in Europe. They
trigger bans on dark trading when
a transaction accounts for 4% of
the total activity on a single dark
venue, or 8% of total trading EU
market-wide. Dark trading has
steadily increased since the first
set of DVCs expired in September
2018, despite early and dramatic
declines following the introduc-
tion of MiFID II.
ESMA stated in its consultation
that the DVCs have had positive,
but limited, effects on market
liquidity since they were imple-
mented, but these benefits need to
be balanced against the complexi-
ty of the DVC system.
Should the reference price and
negotiated trade waivers remain
in place and the DVCs maintained,
ESMA has suggested adjusting the
percentage at which the bans are
triggered, either by removing the
4% total venue cap but keeping the
8% market-wide cap, or removing
the 4% total venue cap and reduc-
ing the 8% market-wide cap to 7%.
Such a move would turn the
DVCs into a single volume cap and
lower the threshold to further lim-
it dark trading at the EU market
level. ESMA has also proposed the