In many cases, MiFID II illuminates markets that were formerly opaque. When developing the new rules, policymakers took great care to balance this transparency objective with its potential to adversely impact liquidity, creating a complex system of reporting deferrals – and subsequent flags intended to explain and provide context around published trade data. Bloomberg’s Gary Stone and Brad Small help you make sense of post-trade prices for non-equity securities.
By Brad Small, Fixed income product manager and Gary Stone, Regulatory Analyst and Market Structure Strategist at Bloomberg.
In many cases, MiFID II illuminates markets that were formerly opaque. When developing the new rules, policymakers took great care to balance this transparency objective with its potential to adversely impact liquidity. The concern, widely expressed by the industry, was that poorly calibrated post-trade transparency requirements may interfere with dealers’ ability to manage execution risk, and thus may reduce incentives for dealers to provide liquidity. A system of deferrals that includes publication time delays and aggregation of trades was therefore designed to achieve the public policy objective, while taking into account the practical risk.
However, the deferrals result in trades being released asynchronously and, in some cases, “price” potentially having different interpretations. For example, published trades may not be “price discovery” trades, because prices were negotiated based on a reference price or a benchmark.
To explain and provide context around published trade data, ESMA designed a system of “flags.” For those familiar with the equity market, ESMA’s “flags” are very similar to “condition codes.” In all, there are 17 flags for equity instruments (RTS 1) and 21 for non-equity instruments (RTS 2). Some of the flags overlap, others are unique. The EU investment firm that is responsible for submitting a post-trade transparency report has the option to defer publication but has to attach the appropriate set of flags to the trade to help the public gain a better understanding of the timing and context of the reported data. Let’s focus on non-equity securities since price transparency is new for those instruments.
The MOSB MIFID <GO> monitor (Figure 1) on the Bloomberg Terminal displaysenriched MiFID II trade transparency data for the most actively traded bonds.
Trade transparency can be immediate or deferred. “E. Time” (2) is the time that the execution took place and “P. Time” (1) is the time that the trade was published. ESMA’s flags (3) can be segmented into four general groups – to provide context and clarity on:
- What does reported price represent?
ESMA refers to these as the “descriptive flags” and the “package transaction flags”.
- Why was the transparency deferred?
ESMA refers to these as the “post-trade deferral flags” and the “supplementary deferral flags”.
- What does the deferred data represent?
ESMA refers to these as “full details flags”
- Any other “special condition” around trades and trade reports.
ESMA refers to these as the “general approach flags”
Let’s look at the groups in more detail:
1. What does the reported “price” represent? Descriptive flags and package transaction flags.
Unless specified by a flag, it is assumed that the prices in published trades are the actual price discovery prices from the transfer of an instrument from a seller to a buyer at a specific execution time.
Prices, however, can be formed in other ways. Rather than representing a specific price for the instrument, price can be set as part of a package or relative to the price of a benchmark or some other reference price.
2. Why was the transparency deferred? Post-trade deferral flags and supplementary deferral flags.
Transparency can be fully or partially deferred because the instrument is illiquid or because of the size of the trade. Flags can also be combined. ESMA created two sets of flags. Trades can be fully deferred due to an instrument’s liquidity or the size of the trade. These are the “post-trade deferral flags.”
MiFID II did not create a one-size-fits-all market. The local national competent authorities (NCA) have latitude to be more conservative. For example, on an instrument-by-instrument or sub-asset class level, an NCA may require the immediate dissemination of a limited set of trade information. A second set of flags was created for this type of NCA discretion. They are referred to as the “supplementary deferral flags” and generally denote the NCA’s desire for greater transparency.
In some cases, NCAs require limited details of individual trades to be disseminated.
In some instances, publication of post-trade information can be deferred for an extended period of time. An NCA, perhaps because the market has significant retail participation, may prefer trade information to be published earlier. To balance transparency and liquidity in such illiquid instruments, NCAs may allow reporting parties to aggregate their trades and submit the aggregated details of completed trades over a period of time (day, week, four weeks). Flags will identify when these trades were aggregated for more immediate publication, and indicate that the volume is the aggregated volume, and the price is the weighted average price. The number of trades that were aggregated is typically published with the flag.
3. What does the deferred data represent? Full details flags.
Full details of the individual trades, previously reported as aggregated trades, are disseminated at the end of the deferral period. A series of flags are used to indicate how these trades were originally published.
4. Any other “special condition” around trades and trade reports. General approach flags.
This article originally was published on the Bloomberg Professional Services Blog.