ESMA Publishes Double Volume Cap Data

Blog entry

After delaying publication of double volume cap (DVC) data just after go live of Markets in Financial Instruments Directive II (MiFDI II) and Markets in Financial Instruments Regulation (MiFIR), the European Securities and Markets Authority (ESMA) has now has published DVC trading volumes and calculations.

The purpose of the DVC mechanism is to limit the amount of trading under certain equity waivers to ensure the use of waivers does not harm price formation for equity instruments. More specifically, the DVC limits the amount of dark trading under the reference price waiver and the negotiated transaction waiver.

The DVC calculations published by ESMA this week are for January 2018 (totalling 18,644 instruments) and February 2018 (totalling 14,158 instruments). Based on this data, two caps will limit dark trading in equity and equity-like instruments, namely: 17 instruments for January 2018 and 10 instruments for February 2018 for which their percentage of trading on a single trading venue under the waivers goes beyond 4% of the total volume of trading in those financial instruments across all EU trading venues over the previous 12 months; and 727 instruments for January 2018 and 633 instruments for February 2018 for which their percentage of trading across all trading venues under the waivers goes beyond 8% of the total volume of trading in that financial instrument across all EU trading venues over the previous 12 months.

National Competent Authorities (NCAs) must suspend, within two working days, the use of waivers in those financial instruments where the caps were exceeded. Hence, the use of the waivers should be suspended for these instruments for a period of six months starting from Monday, March 12 2018.

Comment from Fidessa

Commenting on the ESMA publication of DVC calculations, Christian Voigt, senior regulatory adviser at Fidessa, questions whether the DVC is a ban in disguise. He says: “If you had asked me last year what the actual impact of the DVC would be, I would have said that it’s ridiculously complex to operate but wouldn’t matter all that much because it would likely only impact a few stocks. Seems I was wrong, judging by ESMA’s announcement. Combining the statistics for January and February 2018, a total of 755 ISINs are going to be capped due to the 4% or 8% thresholds starting March 12, including 685 ISINs deemed liquid by ESMA. While that is just 2.5% of all equities that ESMA lists in its transparency calculations, it represents a whopping 35% of all the liquid instruments listed, where the DVC matters more.

“The announcement will probably give another boost to the growth in periodic auctions, block trading and Systematic Internalisers (SIs), as they all provide MiFID II compliant alternatives. But what will happen in six months when the first wave of forced suspensions is lifted? Will trading revert to the old ways and the market manage to stay below the thresholds? Or does this herald a permanent change in market behaviour and a move away from anything related to DVCs? In which case, you might wonder what the difference is between the DVC and a simple ban.”

ESMA calculations

ESMA notes that despite substantial progress made since January, the data received for many instruments is still not 100% complete and it has therefor taken a modified approach to publication for January and February.

For illiquid shares and equity-like instruments, ESMA has only published DVC information if the data is 100% complete.

For liquid shares, ESMA took into consideration the specific importance of the DVC mechanism for this group of instruments and noted that without an adequate coverage for liquid shares any DVC publication would be of limited relevance. It considers the data is sufficiently complete to be published and that suspensions are only triggered if there is an actual breach of one of the caps. On this basis, the DVC results published today achieve a coverage of liquid shares of 85% for January 2018 and of 83% for February 2018 respectively.

ESMA intends to publish the DVC data for March 2018 on April 9, 2018.