Amongst the most sweeping changes introduced under the new Mifid II legislation are those relating to pre- and post- trade transparency for transactions executed on trading venues. Transparency requirements under the existing Mifid regime are limited to shares admitted to trading on a regulated market. These new rules will apply to equity-like instruments, including depositary receipts and exchange traded funds, and many non-equity instruments including bonds, structured finance instruments, emissions allowances and derivatives.

The types of trading venues to which Mifid II apply will also be greatly expanded so that such instruments will be subject to transparency obligations if traded on a regulated market, multilateral trading facility (MTF) or organised trading facility (OTF). The OTF is a new type of regulated trading venue under Mifid II which will capture a wide range of organised trading venues for non-equity instruments including many broker crossing systems and swap execution facilities.

Pre-trade transparency obligates the relevant trading venue to make public current bid and offer prices and depth of trading opportunities in an instrument. Under Mifid II, as is currently the case, national competent authorities will be able to grant waivers from the requirements but the scope for such waivers will be limited. Waivers will be permitted for both equity and non-equity instruments in respect of certain transactions that are in excess of a size specific to the relevant instrument or above a size considered to be large-in-scale compared to normal market size.

For non-equity instruments, waivers may be available for transactions for which there is not a liquid market, derivatives not subject to the new Mifid II trading obligation and indications of interest in request-for-quote and voice trading systems above a certain size where liquidity providers would otherwise be subject to undue risk.

In respect of post-trade transparency, for both equity and non-equity instruments venues will have to make public the price, volume and time of transactions in as close to real-time as technically possible. Competent authorities will be able to permit deferred publication in certain circumstances to protect market-makers from adverse price movements on publication.

Waivers for pre-trade transparency and the deferrals for post-trade publication will be subject to notification to the European Securities and Markets Authority (Esma) which will publish an opinion as to whether the relevant waiver or deferral is consistent with Mifid II and the technical standards.

Esma will publish regulatory technical standards as to the implementation of the new transparency obligations and a key element of those standards will be rules relating to the granting of the above waivers and deferrals. On May 22 2014, Esma published a discussion paper and a consultation paper on Mifid II setting out its initial views on matters on which it is mandated to produce technical standards and advice to the Commission on topics where the Commission has asked Esma to provide technical advice. The consultation period for the Esma papers concludes on August 1 2014 and Esma is likely to publish draft technical standards later in 2014 followed by a further consultation period.

The Esma papers consider transparency in depth. In relation to equity instruments, Esma considers and seeks feedback as to whether the existing approach to large in scale waivers should be amended and whether the existing thresholds should be raised. It also considers and asks for advice as to the content of post-trade information and whether the current requirements are still valid for equity instruments.

In relation to non-equity instrument transparency, Esma indicates that its primary concern is to determine whether the relevant instrument has a liquid market. It states that trading in an instrument having a liquid market should be subject to real-time transparency whereas illiquid instruments are eligible to be granted a waiver for pre-trade transparency and for deferred publication post-trade. Esma states it has to consider various elements in determining whether an instrument has a liquid market and there are different methodologies for doing so.

Esma indicates the large-in-scale thresholds are likely to be calibrated at a higher level than the size specific thresholds. It also notes that the widening of the regime to non-equity instruments will obligate it to develop thresholds for an extremely wide range of instruments, classes of instruments and sub-classes of instruments.

In relation to derivatives, it states that it has not yet been able to analyse liquidity of relevant instruments and propose appropriate thresholds but will do so in time for its further consultation paper on the technical standards.

The new transparency rules and, in particular, their application to a wide range of debt and derivative transactions is likely to have a very significant effect on the market for some debt instruments and derivatives, and concerns have been raised as to the effect on the liquidity of many instruments.

It is therefore, not surprising, that Esma highlights liquidity concerns as key, especially in relation to calibrating the thresholds and criteria for waivers to be granted from the requirements in relation to non-equity transactions