Can the Size Specific to the Instrument Ssti Waiver Be Used with Other Waivers?

Concept

The question of whether the Size Specific to the Instrument (SSTI) waiver can be used in conjunction with other pre-trade transparency waivers under MiFID II is a query that goes directly to the heart of market structure design. It probes the architectural logic of a regulatory framework built to manage the fundamental tension between market transparency and institutional liquidity. The answer resides not in a simple ‘yes’ or ‘no’, but in understanding that these waivers function as distinct, specialized protocols within a trading venue’s operating system, each designed for a specific context. They are components of a system, and their interaction is governed by a clear hierarchy of purpose and application.

A single order does not typically “stack” multiple pre-trade waivers simultaneously. Instead, the characteristics of the order and the nature of the trading system it enters dictate which single waiver protocol is engaged.

At its core, the European Union’s MiFID II framework mandates a high degree of pre-trade transparency. This means trading venues are generally required to display real-time bid and offer prices to the public. This transparency is intended to create a level playing field and efficient price discovery. The system recognizes, however, that forcing the disclosure of very large orders or quotes for certain instruments can expose liquidity providers to significant adverse selection risk.

If a dealer is forced to publicly show their hand on a massive position, other market participants can trade against them, moving the price before the dealer can complete the full order. This ‘undue risk’ would disincentivize dealers from providing liquidity for large trades, ultimately harming the market. The waivers are the system’s corrective mechanism, designed to protect liquidity providers in specific, well-defined circumstances, thereby ensuring large trades can still be executed efficiently.

The various MiFID II waivers function as mutually exclusive protocols for pre-trade transparency, selected based on the specific context of an order and its execution venue.

Understanding the Primary Waiver Protocols

To grasp their interplay, one must first understand the primary tools in the transparency toolkit. Each waiver is calibrated for a different scenario, addressing distinct risks associated with different trading modalities and order sizes. Their designs reflect a deep understanding of market microstructure and the behaviors of institutional participants.

The Size Specific to the Instrument SSTI Waiver

The SSTI waiver is a highly specialized mechanism. Its application is explicitly limited to Request for Quote (RFQ) and voice trading systems. In an RFQ model, a client requests a price from a select group of dealers for a specified size. The SSTI waiver permits these dealers to provide firm quotes to the client without being obligated to publish those quotes to the wider market, provided the order size is above a calculated, instrument-specific threshold.

This threshold is determined based on the typical trade sizes for that particular financial instrument, often calibrated around the 60th percentile of the trade size distribution. The architecture of this waiver acknowledges the bilateral or quasi-bilateral nature of RFQ systems. It protects dealers who are quoting competitively for a specific, sizable inquiry from having that price information leak to the broader market, which could compromise their ability to hedge or manage the resulting position.

The Large in Scale LIS Waiver

The Large in Scale (LIS) waiver is perhaps the most well-known. It applies to orders that are significantly larger than the normal market size for a given instrument. Unlike the SSTI waiver, its application is not restricted to RFQ systems and is commonly associated with central limit order books (CLOBs). When an order qualifies as LIS, a trading venue can choose not to display it in the public order book before it is executed.

The LIS thresholds are set at a much higher percentile than SSTI thresholds (e.g. the 70th percentile), reflecting their purpose in handling truly substantial, market-moving orders. This waiver is the primary tool for facilitating block trading on lit venues without causing massive price dislocation. It allows large institutional orders to be worked in the market without telegraphing their full size and intent.

The Order Management Facility OMF Waiver

The Order Management Facility (OMF) waiver serves a different function entirely. It allows a trading venue to hold an order in a temporary, non-displayed buffer before it is exposed to the main trading system. This waiver is not primarily about the size of the order, but about the mechanics of order handling. It provides a brief period where pre-trade transparency obligations are suspended for orders residing within this facility.

This can be used to manage order flow, check for compliance, or prepare an order for execution without immediate information leakage. It is a temporal waiver, concerning the ‘when’ of disclosure, rather than a size-based waiver concerning the ‘if’ of disclosure.

The Principle of Contextual Application

These waivers are not designed to be cumulative. A trading venue’s compliance and execution logic assesses an incoming order against the available waivers and applies the one that fits the specific context. An order entering an RFQ system that is above the SSTI threshold but below the LIS threshold would use the SSTI waiver. An exceptionally large order entering a central limit order book would use the LIS waiver.

They are distinct pathways. The system is designed with a logic that asks ▴ What is the nature of this order, where is it being traded, and what is the appropriate level of transparency for this specific event? The answer determines which single pre-trade waiver protocol, if any, is initiated. The notion of “using them together” is better framed as a trade’s lifecycle potentially interacting with different waivers at different stages, a concept explored in greater detail in the subsequent sections.

Strategy

The strategic deployment of MiFID II transparency waivers is a core component of a trading venue’s value proposition and a systematic internaliser’s (SI’s) risk management framework. The choice of which waiver to apply, and how to structure trading systems around them, is a deliberate architectural decision. It directly impacts execution quality, information leakage, and the ability to attract institutional order flow. The central theme is not about combining waivers on a single order, but about building a logical hierarchy that directs each order to the most appropriate transparency protocol based on its specific characteristics.

The strategic decision-making process can be visualized as a decision tree that a venue’s systems must navigate in microseconds. This logic is pre-programmed and represents the venue’s core strategy for balancing regulatory compliance with the commercial necessity of providing efficient, low-impact execution for its clients. The primary inputs for this decision tree are the instrument, the order size, the trading system it is entering, and the instrument’s regulatory liquidity status.

Waiver Application Logic a Decision Framework

For any given order, a venue’s system must determine the correct path. This is not a negotiation; it is a rules-based procedure governed by the MiFID II framework.

1. Instrument and Liquidity Assessment The first step is to identify the financial instrument and its official liquidity classification as determined by ESMA. An instrument is either liquid or illiquid. If an instrument is classified as illiquid, it may qualify for the negotiated trade waiver, which is a separate path for instruments where pre-trade transparency is deemed impractical.
2. Trading System Determination The system then identifies the specific trading protocol the order is entering. Is it a central limit order book (CLOB), a Request for Quote (RFQ) system, a voice trading desk, or another type of execution facility? This is a critical branching point, as the SSTI waiver is explicitly restricted to RFQ and voice systems.
3. Order Size Calibration The order’s size is then compared against the two primary size-based thresholds ▴ SSTI and LIS. These thresholds are pre-calculated and published by ESMA for each class of financial instrument.
4. Protocol Selection Based on the inputs above, the system selects the appropriate waiver.
   • If the system is RFQ/Voice AND the order size is >= SSTI threshold, the SSTI waiver is applied.
   • If the order size is >= LIS threshold (regardless of the specific system, though typically on a CLOB), the LIS waiver can be applied.
   • If an order is held pending release to the main book, the OMF waiver applies to that holding period.

This logic demonstrates that LIS and SSTI operate in parallel lanes. An RFQ order that is above SSTI but below LIS uses the SSTI waiver. If that same RFQ order were also above the LIS threshold, the venue could theoretically choose, but the SSTI is the native waiver for that trading system.

The LIS waiver provides a higher-level override for truly enormous orders across different systems. The strategy is about having the right tool for the right job, not using multiple tools for the same task.

A trading venue’s strategy revolves around implementing a sophisticated decision-making matrix that routes orders to the correct, mutually exclusive waiver protocol.

How Does a Venue Strategically Position Itself?

A venue can differentiate itself by how effectively it builds its systems around these waiver protocols. For instance, a venue specializing in corporate bond trading might build a very sophisticated RFQ platform. Its strategy would be to attract institutional clients by offering discreet liquidity discovery for sizes that fall squarely within the SSTI waiver range.

Its value proposition is built on the effective implementation of the SSTI protocol. Another venue might focus on highly liquid government bonds and equities, building its strategy around a robust dark pool or CLOB that efficiently manages LIS orders, minimizing market impact for the largest asset managers.

The table below outlines the strategic positioning of each primary waiver, clarifying their distinct roles within a venue’s operational architecture.

The Evolving Regulatory Landscape

The strategic importance of these waivers is highlighted by ongoing regulatory reviews. European authorities have considered simplifying the waiver regime, notably by proposing the deletion of the SSTI waiver and merging its function into a single, size-based waiver framework dominated by LIS thresholds. Proponents of this simplification argue it would streamline the transparency regime. However, many market participants, particularly sell-side firms, have argued that the SSTI concept is crucial for the functioning of the Systematic Internaliser (SI) regime and for providing liquidity in RFQ systems.

This debate underscores the strategic value of the SSTI waiver as a distinct tool. Its potential removal would force a significant strategic rethink for venues and SIs whose business models rely on the specific protections it offers for quote-driven trading.

Execution

The execution of a trade under a MiFID II waiver is the final, operational expression of the concepts and strategies previously discussed. It is where regulatory theory is translated into precise, automated, and auditable system behavior. The core principle in execution is that while a single trade lifecycle may interact with multiple regulatory provisions (e.g. an OMF waiver followed by a LIS waiver, followed by a post-trade deferral), the pre-trade transparency waiver itself is a singular event.

A venue’s systems apply one specific pre-trade waiver ▴ SSTI or LIS ▴ based on a rigid set of criteria. The idea of “combining” them at the point of execution is a misconception; the reality is a selection process.

The Operational Workflow for Waiver Application

A high-fidelity execution system must perform a series of checks to ensure compliance. This workflow is automated and forms a critical part of the venue’s matching engine and compliance infrastructure. The following steps represent a simplified but operationally accurate sequence for a non-equity instrument order arriving at a sophisticated trading venue.

1. Order Ingestion and Initial Parsing ▴ The system receives an order message, typically via the FIX protocol. It immediately parses key fields ▴ Instrument Identifier (ISIN), Order Quantity, Order Type (e.g. Limit, Market), and Session ID (to identify the trading system, e.g. RFQ platform vs. CLOB).
2. Regulatory Data Enrichment ▴ The system cross-references the ISIN with an internal regulatory database. This database contains real-time information from ESMA, including the instrument’s liquidity status (liquid or illiquid) and the applicable LIS and SSTI thresholds.
3. Venue and System Check ▴ The system confirms the trading system the order is routed to. If the destination is an RFQ or Voice platform, the SSTI waiver becomes a potential pathway. If the destination is a CLOB, the LIS waiver is the primary size-based consideration.
4. Waiver Eligibility Decision Gate ▴ This is the core logic where the selection occurs.
   • Path A (RFQ/Voice System) ▴ The system compares the order’s size to the instrument’s SSTI threshold. If Order Size >= SSTI Threshold, the order is flagged as eligible for the SSTI waiver. The quotes solicited and provided for this order will not be made public pre-trade.
   • Path B (CLOB/Order-Driven System) ▴ The system compares the order’s size to the instrument’s LIS threshold. If Order Size >= LIS Threshold, the order is flagged as eligible for the LIS waiver. It will be treated as a “dark” or non-displayed order within the lit book’s matching engine.
   • Path C (Illiquid Instrument) ▴ If the data enrichment step identified the instrument as illiquid, the negotiated trade waiver can be applied, allowing execution within a certain percentage of a suitable reference price without pre-trade disclosure.
5. Execution and Reporting ▴ The order is executed according to its flagged status. Post-execution, a separate set of rules is applied to determine if the trade qualifies for deferred post-trade publication, which also uses LIS and SSTI size thresholds that can be different from the pre-trade ones.

Quantitative Thresholds in Practice

The thresholds that govern this entire process are not arbitrary. They are calculated by ESMA based on historical market data to reflect the statistical properties of trading in different asset classes. The table below provides an illustrative example of how these thresholds might look for various types of non-equity instruments, demonstrating the granularity of the regime.

The execution of a waiver is an automated, rules-based process where a singular, appropriate waiver is selected, not combined, based on precise quantitative thresholds.

What Is the Systemic Interaction in a Trade Lifecycle?

The most accurate way to conceptualize the “use with” question is to map the potential interactions across a trade’s complete lifecycle. A single institutional order can, in its journey from inception to settlement, be subject to different waivers or deferrals at different points in time. This is not a combination, but a sequence of applications of different regulatory tools. The following table illustrates this sequential interaction.

Waiver Interaction Matrix in a Trade Lifecycle

Trade Lifecycle Stage	Applicable Protocol	System/Condition	Resulting Action
1. Order Staging	OMF Waiver	A large order is submitted to a venue but held in an OMF for 1 second for pre-flight checks.	Pre-trade transparency is waived for the duration the order is held in the OMF buffer. No market data is published.
2. Pre-Trade Execution (RFQ Scenario)	SSTI Waiver	The order is for a liquid corporate bond, its size is €600,000 (above the €500,000 SSTI), and it is sent to the venue’s RFQ platform.	The request for quote and the responsive dealer quotes are not publicly disclosed. The trade is negotiated privately among the selected LPs.
3. Pre-Trade Execution (CLOB Scenario)	LIS Waiver	An alternative order for €1,500,000 (above the €1,000,000 LIS) in the same bond is sent to the venue’s CLOB.	The order is accepted into the matching engine but is not displayed on the public order book, preventing market impact. It rests as a “dark” order.
4. Post-Trade Reporting	Post-Trade Deferral	The executed trade of €1,500,000 is below the post-trade SSTI deferral threshold of €2,000,000.	The details of the executed trade (price, size, time) must be published to the public as close to real-time as technologically possible. No deferral is granted.

This lifecycle analysis provides the definitive answer. The SSTI waiver is not “used with” the LIS waiver. They are alternative routes for pre-trade transparency.

However, a trading workflow is a sophisticated process where an OMF waiver might precede an SSTI or LIS waiver, and a post-trade deferral might follow it. Understanding this sequence is the key to mastering the operational execution of MiFID II’s transparency regime.

Reflection

The architecture of MiFID II’s transparency waivers reveals a profound understanding of market ecology. It acknowledges that a one-size-fits-all approach to transparency would fracture liquidity rather than foster it. The existence of distinct protocols like SSTI and LIS is not a complication; it is a necessary design feature for a complex, multi-faceted market. The true strategic question for an institution is not how to combine these waivers, but how to build an internal execution framework that intelligently routes order flow to the venues and protocols best suited to its specific profile.

This requires a deep, systemic understanding of how these regulatory components interact to shape liquidity. The knowledge of this system is, in itself, a component of a larger intelligence apparatus. The ultimate edge lies in designing an operational framework that not only complies with these rules but leverages their logic to achieve superior execution quality and capital efficiency.