On 13 July, 2018, ESMA launched a consultation on proposed amendments to the RTS (Commission Delegated Regulation (EU) 2017/588, also known as RTS 11) providing for the tick size regime under MiFID II. The tick size regime subjects orders in shares and depositary receipts to minimum tick sizes that are determined according to both the: (i) average daily number of transactions on the most relevant market in terms of liquidity; and (ii) price of the order. RTS 11 calibrates the minimum tick size based on the most liquid market in the EU, without any consideration being given to the liquidity on non-EU trading venues. The result is that EU trading venues have experienced a drop in market share in third-country financial instruments since January 3, 2018 when MiFID II came into effect. The trading venues have highlighted that the decrease in market share is because the RTS 11 methodology requires them to have in place larger price increments than those of their third-country competitor trading venues.
ESMA is proposing to change the calibration of the tick sizes for third-country instruments where the most liquid trading venue is located outside the EU to address the concern that the minimum tick size is based on "underestimated" liquidity for financial instruments where only a marginal proportion of trading is executed on EU trading venues. ESMA's belief is that the existing situation has the potential to create a competitive disadvantage for EU trading venues, because non-EU trading venues can offer tighter spreads since they are likely to be subject to a narrower tick size regime or none at all. The result may be less liquidity on EU trading markets.
ESMA proposes that national regulators of EU trading venues trading a third-country instrument be allowed to coordinate and to agree on an adjusted average daily number of transactions that reflects the liquidity available on third-country venues on a case-by-case basis. This proposed exception to the general tick size regime would only be applicable to shares that meet certain conditions. Depository receipts will be out of scope of the exception.
Feedback on the proposals is requested by September 7, 2018. ESMA will consider the feedback in formulating the final draft amending RTS it submits to the European Commission for endorsement.
ESMA's consultation is available at: https://www.esma.europa.eu/press-news/esma-news/esma-consults-tick-size-regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
