The EU’s securities markets regulator prioritizes flagging of non-price forming trades

May 6, 2022

Following an earlier consultation, ESMA published its final report on the review of equity transparency (RTS 1) at the end of March.

In July 2021, ESMA launched a consultation on a hefty set of changes to support an integrated view of EU trading, including post-trade transparency fields. Additional amendments to pre-trade fields, deferred publication, application of transparency calculations, and more, made this a large-scale review. I previously wrote about the potential compliance costs looming for the industry.

According to the regulator, since the 2018 application of MiFID II, issues with post-trade flags have persisted. Differences in the application are causing continuing problems for the usability of published data, particularly for OTC transactions. Understandably, ESMA wants trades to be flagged consistently by all market participants and has set out to provide more clarity on what should be reported. At the same time, aiming for better data quality in the context of establishing an equity consolidated tape.

ESMA wants to clean up overlaps in the text, and clarify which post-trade flags to use.

Focusing on the reporting fields, ESMA had proposed deleting various flags, amending certain existing flags, and introducing new ones. They also suggested requiring the publication of flags in the prescribed order, which many responders strongly disagreed with because this was disruptive, without adding value. Of more concern though, was that the proposed sequencing of flags was similar to but not wholly aligned with the structure of the widely used industry post-trade data standard FIX MMT. Reworking in this area will prove costly.

However, considering the consultation comments, and to avoid overlap with the ongoing more comprehensive MiFID II review, ESMA has now split its overhaul of post-trade flags into two phases.
The first phase prioritizes identifying non-price forming trades. This is a significant but arguably more manageable chunk of work to plan for. The second phase will cover other flag-related amendments and will look further into inconsistencies with FIX MMT.

The flagging of non-price forming trades has proven to be a challenge in practice.
In various articles across the rulebook, from transaction reporting exemptions to the equity share trading obligation, the scope of application depends on the type of trade executed. But there are no common definitions of these concepts in the regulation. Something ESMA intends to rectify.

“In the CP, ESMA identified four different concepts which are commonly used, including in the MiFIR framework, to characterize liquidity: i.e.

  1. transactions that do not contribute to the price discovery process or to the price formation (also referred to as non-price forming transactions);
  2. transactions subject to conditions other than the current market price,
  3. non-addressable liquidity trades and
  4. technical trades”

Several flags are currently relevant for non-price forming transactions. For example, a benchmark transaction executed as a negotiated transaction on a trading venue can be flagged with BENC, NPFT, TNCP, and PRIC.

From the sweeping EU review of RTS 1, we now have a cut-down to-do list emerging from the ESMA final report, but no firm dates yet for implementation.