ESMA has tidied up rules on volume caps, systematic internaliser (SI) reporting, circuit breaker mechanisms, and tweaked execution policy standards but missed an opportunity to use its CTP proposals to enforce consistency.
In the first of two reports published on 10 April, the European Securities and Markets Authority confirmed an industry-friendly approach to execution policy. It simplifies the categorisation of financial instruments into ten distinct asset classes. and requires firms to also adopt comprehensive monitoring processes, assessing their executed trades against reliable market data.
In its report, ESMA introduced new guidelines for assessing execution quality. Beyond simplifying the classification of financial instruments, firms must implement monitoring criteria, including predetermined thresholds for price deviations, the minimum percentage of traded volume meeting market reference prices, and the minimum number of compliant transactions.
Moreover, ESMA requires an annual evaluation of execution policy effectiveness—or immediate assessment if monitoring indicates possible shortcomings—hoping to uphold high standards of transparency and investor protection, while keeping administrative demands proportionate
Unlike in the US, these evaluations will not take the standardised shape of SEC Rule 605 or 606 and fall short of enabling the wider public to scrutinise effectively order flow routing and execution quality across all possible counterparties.
Despite such shortcomings, ESMA places its faith in the quality of industry disclosures. “From the policy perspective, order execution policies should effectively enhance the execution quality for retail and professional clients,” EMSA said.
Dashing any hopes that its consolidated tape proposals will improve the consistency of best execution disclosure, ESMA explicitly states that “it is not the intention of the draft RTS to introduce a de facto mandatory consumption of consolidated tape data. Firms are free to source the data they deem useful for the purposes of best execution, if it provides a reliable and truthful presentation, in terms of completeness and accuracy of the data, of the execution prices obtained in the market”.
Responding to Global Trading, an ESMA spokesperson referred to a 16 December report on equity transparency, which modified flags in post-trade reporting. These include, for example, a field specifying for bilateral trades if they were Benchmark (‘BENC’), Portfolio (‘PORT’), Reference Price Transaction (‘RFPT’) etc. However, this revised framework stops short of enabling greater public scrutiny into how bilateral orders are routed, or execution quality, leaving concerns around bilateral execution transparency largely unaddressed.
In its second report on SI notification, volume cap and transparency calculations (RTS 3), and harmonisation of circuit breakers (new RTS 7a), ESMA presents a new reporting regime.
The new reporting regime transitions the responsibility of trade data publication from SIs to DPEs clearly identified in a publicly accessible ESMA registry. This change aims to improve transparency and accountability, though questions remain the re too on whether the market will gain granular visibility of individual DPE contributions to APA-reported volumes—particularly significant given that APA (Approved Publication Arrangement) data represented 20-25% of total European equity volumes last year, according to BMLL Vantage.
Additionally, ESMA confirms moving from the double volume cap (venue-level at 4% and EU-wide at 8%) to a unified EU-wide cap at 7%, utilising transaction reporting data under Markets in Financial Instruments Regulation (MiFIR) Article 26. This transition reduces firms’ administrative burdens by eliminating legacy daily reporting obligations and retiring outdated data collection systems.
The recast RTS 7a on circuit breakers standardises their deployment across both dark and lit trading venues, granting trading venues flexibility in choosing suitable volatility management mechanisms—including trading halts and/or price collars—while mandating periodic reviews and public disclosure of key operational parameters.
ESMA has submitted these proposals to the European Commission, recommending adoption within three months.
