What Are the Key Differences in Transparency for Equity versus Non-Equity RFQs under MiFID II? ▴ Question

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Concept

The regulatory architecture of MiFID II approaches transparency with a calibrated design, reflecting the intrinsic structural differences between equity and non-equity instruments. The framework’s treatment of the Request for Quote (RFQ) protocol is a direct function of this design. For equities ▴ fungible, high-velocity instruments characterized by continuous price discovery ▴ the system mandates a high degree of pre-trade visibility.

The objective is to create a level playing field across competing venues executing trades in the same instrument. This systemic choice supports a market structure built on broad participation and instantaneous price information.

Conversely, the system addresses non-equity instruments like derivatives and bonds through a different lens. These instruments are often illiquid, bespoke, and used for precise risk management or hedging rather than pure capital appreciation. Their non-fungible nature means that a one-size-fits-all transparency mandate would impair liquidity.

A market maker cannot be expected to display a firm, public quote for a complex, large, or unique instrument without the risk of adverse selection. Therefore, the MiFID II framework provides a more flexible system for non-equities, one that facilitates liquidity sourcing through bilateral or semi-bilateral protocols like the RFQ while protecting participants from undue information leakage.

MiFID II’s transparency rules are engineered to match the inherent liquidity profile and market function of each distinct asset class.

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Foundational Divergence in Regulatory Philosophy

The core distinction arises from MiFID I’s legacy, which focused exclusively on shares traded on regulated markets. MiFID II expanded this scope dramatically, bringing an extensive range of non-equity products into the transparency fold. This expansion was not a simple copy-and-paste of equity rules. It involved creating a parallel but separate regulatory structure, codified in distinct Regulatory Technical Standards (RTS).

This bifurcation acknowledges that the mechanisms for achieving fair and orderly markets must be adapted to the product being traded. The result is a system where pre-trade transparency for equities is the standard, while for non-equities, a sophisticated regime of waivers and deferrals makes real-time public transparency the exception.

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What Defines an Instrument’s Transparency Mandate?

The primary determinant for an instrument’s transparency requirements under MiFID II is its classification as either equity or non-equity. This initial categorization dictates which set of rules applies. For equities and similar instruments (like ETFs and depositary receipts), the framework defaults to pre-trade transparency obligations for trading venues and Systematic Internalisers (SIs).

For the vast universe of non-equity instruments, the rules are designed to accommodate the reality of dealer-based markets and the necessity of off-book liquidity sourcing for complex products. The RFQ protocol, therefore, operates within two fundamentally different informational environments.

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Strategy

Navigating the bifurcated transparency landscape of MiFID II requires distinct strategic frameworks for sourcing liquidity via RFQ. The protocol’s function remains the same ▴ soliciting quotes from selected counterparties ▴ but the information environment and associated risks are entirely different depending on the asset class. An effective execution strategy is one that calibrates its approach to these regulatory realities, treating the rulebook as a system to be architected for optimal performance.

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Architecting RFQ Protocols for Equity Execution

In the equity space, the strategic challenge is managing market impact. While RFQs provide access to discreet, off-book liquidity, the overarching transparency regime creates information risk. Post-trade reports, even if slightly delayed, will announce a large trade to the market.

The key is to leverage the available waivers, such as the Large in Scale (LIS) waiver, to shield the order from pre-trade visibility. The strategy involves carefully selecting counterparties, managing the size and timing of the inquiry, and using the RFQ as a surgical tool for price discovery without alerting the broader market before execution is complete.

For equities, the RFQ is a tool for impact mitigation within a largely transparent system; for non-equities, it is the primary mechanism for price discovery in an inherently opaque one.

The table below outlines the strategic considerations for deploying RFQs across the two asset classes.

Strategic Dimension	Equity RFQ Framework	Non-Equity RFQ Framework
Primary Objective	Minimize information leakage and market impact for large orders.	Achieve reliable price discovery for illiquid or bespoke instruments.
Core Challenge	Executing without moving the market, given post-trade transparency rules.	Finding willing counterparties and negotiating a fair price in an opaque market.
Key Regulatory Tool	Large in Scale (LIS) pre-trade transparency waiver.	LIS and Size Specific to the Instrument (SSTI) waivers; post-trade deferrals.
Counterparty Selection	Based on reliability in providing capital for large blocks with discretion.	Based on specialization in the specific instrument or derivative type.

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The Non-Equity Advantage in Information Control

For non-equity instruments, the strategic use of RFQs is fundamentally different. Here, the protocol is the dominant mechanism for price formation. The regulatory framework is designed to support this, providing market participants with greater control over information. The availability of the Size Specific to the Instrument (SSTI) waiver, in addition to the LIS waiver, provides a robust shield against pre-trade transparency for a wide array of transactions conducted via RFQ or voice systems.

This allows liquidity providers to quote with confidence on large or complex trades, knowing their interest will not be broadcast publicly. The strategy for the buy-side is to construct an RFQ process that elicits competitive tension among a select group of dealers to achieve best execution, all within a confidential environment.

Systematic Internaliser (SI) Interaction ▴ For liquid equities, SIs must provide public quotes up to a standard market size. In non-equity markets, their quoting obligations are often only upon client request, making the RFQ process central to engaging with them.
Venue-Specific Rules ▴ When an RFQ is sent through a trading venue like an MTF or OTF, specific rules apply. For certain RFQ systems, the venue must make public all quotes received in response, though this occurs at the same time to ensure fairness among respondents.
Post-Trade Deferrals ▴ The ability to defer post-trade publication for non-equity trades is a significant strategic tool. It protects dealers who have taken on large risk positions from being targeted by other market participants before they can hedge.

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Execution

The operational execution of RFQs under MiFID II is governed by a detailed set of Regulatory Technical Standards (RTS) that codify the differences between equity and non-equity market structures. Mastering the execution of large trades requires a granular understanding of these protocols, from how an instrument’s liquidity is assessed to the specific conditions under which transparency obligations can be waived or deferred. The distinction begins with the foundational approach to liquidity classification itself.

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How Is Liquidity Assessed Differently?

The method for determining whether an instrument is “liquid,” and therefore subject to the most stringent transparency rules, is a primary point of divergence. This technical assessment directly impacts the availability of waivers and the obligations of market participants.

Equities ▴ Follow an Instrument-By-Instrument Approach (IBIA). Each individual stock is assessed against quantitative criteria, such as average daily turnover and number of trades, to determine its liquidity status. This is a highly granular process.
Non-Equities ▴ Utilize a Class of Financial Instrument Approach (COFIA). Instead of assessing each bond or derivative individually, the rules group them into broader classes (e.g. by issuer type, issuance size, or underlying asset). An instrument is deemed liquid if its class is considered liquid, a methodology that can result in an instrument that trades infrequently being subject to transparency rules.

This difference in calibration has profound consequences for execution. A trader knows with high certainty the liquidity status of a specific equity. For a corporate bond, its liquidity status may be determined by the characteristics of its broader asset class, requiring a different analytical starting point before initiating a quote solicitation.

Operational success hinges on precise application of the correct waiver and deferral mechanisms codified within the distinct regulatory technical standards.

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A Comparative Analysis of Execution Protocols

The precise mechanics of pre-trade waivers and post-trade deferrals represent the most critical operational differences for firms executing RFQs. The following table provides a detailed breakdown of these execution-level distinctions.

Operational Protocol	Equity RFQ Execution	Non-Equity RFQ Execution
Governing Standard	MiFIR RTS 1	MiFIR RTS 2
Pre-Trade Waiver Basis	Primarily LIS (Large in Scale) compared to normal market size.	LIS, SSTI (Size Specific to the Instrument) for RFQ/voice systems, and a waiver for instruments without a liquid market.
RFQ on Venue (MTF/OTF)	Subject to pre-trade transparency unless a waiver applies. Volume caps may limit the use of certain waivers.	OTFs are designed for non-equities and provide more discretion. SSTI waiver is a key enabler of RFQ activity.
Post-Trade Deferral	Deferrals are possible but generally for shorter durations and tied to trade size.	More generous and longer deferral periods (e.g. up to two days, T+2) are available, particularly for large trades in illiquid instruments, to protect liquidity providers.
Systematic Internaliser (SI) Obligation	Must provide firm quotes for liquid instruments up to a standard market size.	Quoting obligations are more limited, often only upon request, reinforcing the importance of the RFQ protocol.

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What Are the Implications for Algorithmic and Voice Trading?

For institutional traders, the choice between an electronic RFQ platform and a traditional voice-brokered trade is influenced by these transparency rules. For non-equities, the SSTI waiver applies equally to orders on RFQ systems and voice trading systems, creating regulatory parity between the two execution methods. This allows firms to choose the appropriate channel based on the complexity of the instrument and the desired level of interaction, confident that the same transparency protections are available. In the equity world, while voice broking for large blocks persists, the push toward electronic venues and the application of volume caps on certain types of dark trading encourage the use of systematized RFQ protocols integrated within broader execution management systems.

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References

European Securities and Markets Authority. “MiFID II and MiFIR ▴ Final Report on Draft Regulatory Technical Standards.” ESMA/2015/1464, 2015.
International Capital Market Association. “MiFID II/R and the Bond Markets ▴ An ICMA Report.” 2016.
Hogan Lovells. “MiFID II ▴ Transparency.” Hogan Lovells Publications, 2017.
Lehalle, Charles-Albert, and Sophie Moinas. “Market Microstructure in the Age of MiFID II ▴ A Systems Perspective.” Quantitative Finance, vol. 18, no. 1, 2018, pp. 1-5.
Khwaja, Amir. “Systemic Implications of MiFID II Transparency Regimes for Swaps.” Journal of Financial Market Infrastructure, vol. 5, no. 2, 2017, pp. 45-62.
Foucault, Thierry, et al. Market Liquidity ▴ Theory, Evidence, and Policy. Oxford University Press, 2013.
ISDA, FIA, and AFME. “The Fundamental Differences Between Equities and Derivatives Markets.” Joint Association Paper, 2020.

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Reflection

The dual-track transparency regime under MiFID II is a complex, engineered system. It is designed to uphold market integrity while acknowledging the physical realities of different asset classes. Viewing these regulations as a set of constraints is a limited perspective.

A superior approach treats the framework as the operating system for European liquidity. Understanding its architecture, its specific protocols, and its calibrated permissions is the foundation for building a more effective execution logic.

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Optimizing Your Firm’s Liquidity Sourcing OS

How does your current execution framework account for this designed divergence? Is your firm’s RFQ protocol a monolithic process, or is it an adaptive system that recalibrates its parameters based on the unique regulatory environment of the asset being traded? The knowledge of these differences provides the schematics. The strategic potential lies in using them to build a capital markets interface that achieves greater efficiency, controls information with precision, and ultimately secures a more resilient operational edge.