The characteristics of negotiated transactions

The European Securities and Markets Authority (ESMA) recently released its final report on equity transparency (RTS 1 and CDR 2017/567)[1]. We commend the extensive efforts by ESMA to facilitate the implementation of the revised Markets in Financial Instruments Regulation (MiFIR).  

In addition to other changes and clarifications to the Level 2 provisions on equity transparency, the report also presents an amendment to Article 5 on transparency waivers for negotiated transactions. This amendment was not covered in the consultation process undertaken by ESMA.

We believe that this new amendment, introduced without due process of consultation, has the potential to adversely affect the competitive marketplace for equity transactions in Europe. We would like to take this opportunity to voice our concerns.

Norges Bank Investment Management (“NBIM”) is the investment management division of the Norwegian Central Bank (“Norges Bank”) and is responsible for investing the Norwegian Government Pension Fund Global. As a long-term investor, NBIM has a strong interest in well-functioning financial markets that facilitate the efficient allocation of capital and promote long-term economic growth and thus in a regulatory environment for trading in financial instruments that facilitates such outcomes.

Who should facilitate negotiated transactions

Under the Markets in Financial Instruments Regulation (MiFIR), the European Union maintains that market operators and investment firms must provide pre-trade price transparency unless exempt under specific transparency waivers. It is in this context that the definition of the specific characteristics of the negotiated transactions in RTS1 is relevant.

ESMA now propose to include additional wording into Article 5 of RTS1 which restricts privately negotiated transactions subject to the waiver to those that take place “without the assistance of a system or trading protocol operated by a trading venue”.

We suggest that the Commission considers the rationale for and implications of this restriction closely before it is implemented. Firstly, we question the assertion that this restriction is an obvious interpretation of policy intention. While separation between the negotiation and trade reporting is required under MiFIR, this can be maintained even if the negotiation is facilitated by the trading venue. Secondly, we are concerned that the additional restriction will prove adverse to competition, innovation and European capital market development.  

As a major international institutional investor NBIM is active in markets such as the United States and United Kingdom, where we have benefitted from the financial innovation represented by multilateral percentage of volume (POV) or “trajectory crossing” venues. These venues have effectively helped reduce our trading cost and therefore represent valuable financial innovation. ESMA’s proposal will effectively deny investors in European markets who (must) trade on European venues access to these enhancements to market quality.  

European equity markets are seeing an increased prevalence of bilateral, OTC and other off-book trading practices, which reflect a strong, and unintended competitive advantage for investment banks and other investment firms over trading venues.  

ESMAs restrictive wording on the negotiated trade waiver can create the following regulatory deadlock:   

• European POV trading will only be available through Systematic Internalisers, liquidity providers and broker crossing networks – similar to those that were restricted under MiFID II – multilateral trading venues will be prevented from offering this type of trading.
  
  
• Investors in European markets will be denied access to financial market innovation that has proven effective in bringing down trading cost in other markets and enhancing the attractiveness of those markets.
  
  
• European venues will be disadvantaged in competition with venues in other jurisdictions that may facilitate trading in European shares.

In our view, regulators’ overarching concern should be the facilitation of efficient competition among European firms, the promotion of multilateral trading, and the facilitation of innovation within the European secondary equity market. Regulation should not disadvantage European firms facing international competition. We ask DG Fisma to take these concerns into consideration when assessing the interpretation and amendments to Article 5 of the RTS 1 on equity transparency.

Yours sincerely,

Emil R. Framnes /s/                                                    
Global Head of Equity Trading and Transition        
Norges Bank Investment Management

Vegard Vik /s/
Lead Market Structure and Strategy
Norges Bank Investment Management 

Simon Emrich /s/
Principal Researcher
Norges Bank Investment Management 

cc: 
Charlotte Sickermann
Head of Secondary Markets
ESMA

[1] See https://www.esma.europa.eu/sites/default/files/2024-12/ESMA74-2134169708-7636_MiFIR_Review_Final_Report_on_Equity_transparency.pdf