[author: Charles Sheldon]

On February 28, 2017, the European Securities and Markets Authority (“ESMA“) published a final report on final draft Regulatory Technical Standards (“RTS“) on the treatment of package orders under Article 9(6) of the Markets in Financial Instruments Regulation (Regulation 600/2014) (“MiFIR“). Included in the report, ESMA has published a draft Commission Delegated Regulation supplementing MiFIR with regard to package orders. The draft Delegated Regulation is based on ESMA’s final draft RTS.

Article 9(6) of MiFIR requires ESMA to draft RTS to establish a methodology for determining whether there is a liquid market for a package order as a whole, assessing in particular whether packages are standardized and frequently traded.

ESMA consulted on an earlier draft of the RTS between November 2016 and January 2017. The final report presents a revised version of the draft RTS that takes into account the feedback received to the consultation. Annex I to the final report provides a detailed feedback summary.

The majority of respondents supported ESMA’s proposed methodology based on qualitative criteria that are characteristic for packages that are standardized and frequently traded. ESMA has decided to take forward this methodology as it continues to believe it is superior to a methodology relying on quantitative criteria. The chosen approach identifies package orders that are liquid as a whole based on general criteria (that is, criteria that identify standardized and liquid package orders across asset classes) as well as asset-class specific criteria (that is, criteria that reflect specificities of package orders traded in different classes of derivatives).

However, to accommodate respondents’ concerns that the qualitative approach would also consider potentially illiquid strategies within the concept of package orders that have a liquid market, ESMA has further refined the qualitative criteria and, in particular, enriched the approach by further asset-class specific criteria.

ESMA intends to provide guidance in the form of Q&As on the application of the systematic internalizer (“SI“) obligations under article 18 of MiFIR in the context of package orders. In the consultation, ESMA proposed to apply the SI obligations at the package order level where an investment firm is an SI in at least one component instrument of the package order. Around half of respondents agreed with this proposal. The other half of respondents disagreed and considered that the SI obligations should only apply where an investment firm is an SI in all components of the package. ESMA has indicated that it will be guided by the consultation responses received in relation to this issue as it decides on the appropriate approach.

ESMA also received various questions from respondents requesting more guidance on the application of pre- and post-trade transparency for package orders in general (that is, beyond the scope of the RTS on package orders). It intends to clarify these issues through Q&As in the coming months.

ESMA submitted the final report and final draft RTS to the European Commission on February 27, 2017. The Commission has three months to decide whether to endorse the draft RTS.