EFAMA calls for reference price waiver to be retained
EFAMA is the representative association for the European investment management industry. EFAMA
represents through its 26 member associations and 59 corporate members approximately EUR 14
trillion in assets under management of which EUR 7.9 trillion was managed by approximately 54,000
funds at end March 2012. Just above 36,000 of these funds were UCITS (Undertakings for Collective
Investments in Transferable Securities) funds. For more information abou t EFAMA, please visit
www.efama.org. We are concerned by proposals to remove the waivers from pre-trade transparency including those
provided under MiFID. These waivers provide much needed protection for institutional long term
investors from the activities of short term profit takers while at the same time not impacting on the
overall transparency and efficiency of the markets – the Commission’s prerequisite in terms of this
element of policy.
Retaining a reference price waiver
Introduction
The reference price waiver has been recognized since the Level 2 MiFID I regulation. It has been the
subject of the majority of decisions made first by CESR and now ESMA concerning uses of pre -trade
waivers by regulated markets (“RM”) and Multilateral Trading Facilities (“MTF”). These are recorded
in ESMA's April 2012 publication “Waivers from Pre-trade Transparency”.
The publication and the number of decisions, as well as the recorded dissenters, demonstrate that:
1.
the waiver is critical to the functionality of several business models; and
2.
there is disagreement amongst some regulators as to what should or should not be allowed.
MiFID currently makes use of four waivers:
•
Large in Scale Waiver (LSW).
This is used to exempt large orders from pre-trade transparency thereby avoiding market impact.
•
Reference Price Waiver (RPW)
This allows trading venues to determine prices by reference to a widely published price instead of
actual prices and has numerous benefits for market efficiency and ultimately end-investors as we
explain below.
•
Negotiated Transaction Waiver (NTW)
This allows trades to be concluded off exchange (between two market participants or between a
market participant and the operator of the trading venue) at a price that is in line with current
market conditions.
•
Order Management System Waiver (OMSW)
This allows venues to split large (“parent”) orders into small (“child”) orders. The small pieces are
pre-trade transparent, but when the remaining size of the large order falls below large in scale, that
part is also kept dark.
EFAMA rue Montoyer 47, B-1000 Bruxelles
+32 2 513 39 69 Fax +32 2 513 26 43 e-mail : xxxx@xxxxx.xxx www.efama.org
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EFAMA key concerns for ca pital markets on revision of Mi FID
To fulfil best execution of large client orders, asset managers would typically seek to execute the
trade across the full range of execution venues. The buy-side trader will factor in the cost of
execution and more recently, the risk of interacting with the Central Limit Order flow provided by
High Frequency Traders (HFT).
The MiFID waivers are often used in combination with each other since they interact to safeguard
and facilitate institutional investors' ability to efficiently implement substantial investment decisions
- a key element of the MiFID I regime. Mid-point crossing is another satisfactory and commonly used
technique to match buyers and sellers where there isn’t any value from an end-investor perspective
in routing the order to the CLO.
How does the use of MIFID waivers translate into benefits for end-investors and the “real economy”?
MiFID waivers are the mechanisms through which execution choice is made possible:
•
Increased liquidity
The possibility to use waivers brings participants into the market that would not have otherwise been
there. Likewise, the removal of the waivers will not, we believe, translate to a direct shift of liquidity
from ‘dark’ to the ‘lit’ markets. Instead it will segment client orders into those which can benefit from
crossing and those that cannot.
•
Lower costs
At present, a broker with two opposing institutional orders can automatically match the orders, or
parts of them, at the same price. Without this possibility, the broker would be forced to incur spread
costs on behalf of both of its clients by accessing a ‘lit’ order book. The buying client then pays a
higher price than the selling client for no good reason.
•
Less risk of the market moving against the client’s interest
Without the protection the waivers provide, the broker would force to publish orders and thus flag
their clients’ intent to the market. With this information the market could move against the client,
which is an unnecessary risk and avoidable cost for the end-investor.
Execution choice and quality is an increasingly important element. The benefits to end-investors of
executing client orders away from the CLO are possible due to the existence of the MiFID waivers.
Which venues would be allowed to use waivers?
In any discussion as to the need to retain the waiver, it is important to be clear as to the trading
venues to which the waiver would apply. The reference price waiver which operates for MTFs and
RMs should be extended to Organized Trading Facilities (OTF) and must not be confused with the
subject of broker-crossing networks (which are part of the market infrastructure organization rather
than transparency efficient enhancement). It must not be forgotten that in any circumstance in
which the pre-trade reference price waiver operates, any executed transaction will always be
required to be published without delay and could not qualify for any post-trade delay.
Helping long-term investors and financing the SME market
The reference price waiver allows asset managers to place orders to buy or sell large blocks of
equities on behalf of their clients, commonly a range of funds, life pools and pension schemes. These
long-term investing clients are vulnerable to the risk that other market participants will identify their
need to trade in large size and move the price against them. The suppression of the reference price
waiver would limit the capacity of long term investors to invest in the SME market because of
important execution cost and impact finally the potential growth of the global economy.
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EFAMA key concerns for ca pital markets on revision of Mi FID
EFAMA’s proposal
Whilst there is a large in scale waiver from pre-trade transparency we fear it will be set at a level too
high to protect enough trades.
The reference price waiver needs to be retained in order for the asset managers to be comfortable
placing an order in any sort of real size either with a broker or directly on a platform. If we do not
retain only the “large-in-scale” waivers (or indeed the “negotiated trade” waiver) asset managers
would not have the confidence to place block orders in the market without their intentions being
made public; our members would have to micro-manage each order by showing only very small size
transaction requests to the market to avoid the “signaling risk”. We have already seen that the size
of available liquidity at the touch price in the lit market has diminished to extremely small amounts
since the advent of high-frequency-trading, and we would not want to have to slice orders down to
this extent.
Consequently, EFAMA members and their clients rely on the reference price waiver to allow them to
advertise block transactions without divulging the information to the wider market.
So we propose that:
1.
The waiver is retained and referenced in the legislative act (MiFIR, art. 4 and 8); and
2.
Implementing standards could be used to set out the detail of where the waiver could be
used, having regard to ESMA and CESR discussions and dissenting opinions (see below) ; and
3.
ESMA should be asked to draft implementing standards that provide a regime in which the
largest of trades were covered by the large in scale waiver, other trades will participate to the price
information; and
As regards the different viewpoints between members of CESR and now ESMA, it is entirely possible
for these to be dealt with in implementing standards.
Whilst the ESMA process is transparent as to the result, putting more detail in an implementing
standard might reduce demands on ESMA and provide greater ex ante certainty to those designing
new functionality at trading venues. So the uncontroversial issues could be recorded in
implementing standards but also the functionalities which do not satisfy the current MiFID criteria
could be set out.
In particular, it should be clarified whether or not and under which condition (references to examples
are as numbered in the ESMA document):
•
two sides of the quotes could be taken from different and multiple systems;
•
participants could place price caps or floors – price limits - on the order submitted for
crossing.
Conclusion
If EFAMA’s proposal were followed, we would hope that concerns that there any loss of information
for the price discovery process would be insignificant compared to the benefit to the long -term
investors. Additionally, as both markets and patterns of order execution are dynamic and as fulfill
best execution requirements practices evolve over time, it would be appropriate therefore to review
implementing standards over time.
We would welcome the opportunity to discuss these issues further.
11 December 2012
[12-4060]