Amendment of Spanish Securities and Exchange Commission’s circular related to liquidity contracts

The Spanish Securities and Exchange Commission (“CNMV”) has introduced two amendments to its Circular 1/2017 on liquidity contracts. The amendments involve (i) setting a new limit for the daily volume a financial intermediary can trade for illiquid stocks, and (ii) eliminating the restriction preventing financial intermediaries from simultaneously holding buy and sell orders for stocks during auction periods.

On November 27, 2019, the CNMV issued Circular 2/2019, which amends its Circular 1/2017, of April 26, on liquidity contracts (“Circular 1/2017”). Liquidity contracts aim to enhance liquidity for a particular issuer’s stock, through an agreement with a financial intermediary (the “Financial Intermediary”) that carries out buy and sell transactions for that stock.

In response to demand from market participants, the CNMV considered it necessary to introduce two amendments to its Circular 1/2017, for the purpose of:

• allowing access to liquidity contracts for a larger number of issuer companies, especially those issuing stock with low liquidity; and

• adjusting certain restrictions imposed on the transactions carried out by Financial Intermediaries during auction periods.

Consequently, the CNMV has made the following amendments to Circular 1/2017:

1.With regard to the daily volume limit a Financial Intermediary can trade under the scope of a liquidity contract:

A new limit has been set that will apply to contracts signed by issuers with stock that does not have a liquid market available (under Regulation (EU) No. 600/2014 of the European Parliament and of the Council, of May 15, 2014), and that is traded via a multilateral trading facility or on a regulated market through a fixing trading system.

With this amendment, the limit applicable to liquidity contracts signed by these issuers will now be the higher of the following two parameters:

• 25% of the average daily volume traded on the orders market of the regulated market or the Spanish multilateral trading facility during the last 30 sessions; or

• €20,000 during each trading session in which the liquidity contract is operating.

Since previously the limit was established only as 25% of the average daily volume traded, the CNMV’s introduction of a new hard threshold will guarantee a minimum trading volume for companies operating on the markets mentioned above (at least €20,000 per session).

The amendment of Circular 1/2017 includes the possibility that, in exceptional cases, this new limit will also apply to an issuer company with its stock traded on a regulated market through a general trading system, once authorization has been obtained from the CNMV with a favorable report from the governing body of the corresponding regulated market, justifying classification of the stock as highly illiquid.

2.With regard to the conditions that a Financial Intermediary must observe when operating during auction periods:

The restriction against simultaneous holding of buy and sell orders for a stock during auction periods is eliminated. However, an obligation is established stating that the Financial Intermediary must adopt the necessary measures to avoid execution of cross trades for those orders during the auction.

Both amendments comply with the points of convergence published by the European Securities and Markets Authority (“ESMA”) in relation to the conditions that liquidity contracts must meet to be considered as accepted market practices (“Points for convergence in relation to MAR accepted market practices on liquidity contracts”).

The amendments to Circular 1/2017 will come into effect on March 10, 2020.