ESMA puts forward expectations towards effective circuit breaker implementation

ESMA has issued a supervisory briefing aimed at enhancing the implementation of circuit breakers in trading venues. Circuit breakers are vital tools used by TVs to safeguard against market volatility, mandated by MiFID II, and specified in DelReg (EU) 2017/584 (RTS 7). This supervisory briefing seek to strengthen convergence among NCAs in the EU regarding the calibration of circuit breakers, promoting compliance, shared understanding, and uniform enforcement practices.
This supervisory briefing comes in response to recent events that have highlighted the need for improved circuit breaker regulation. This includes Russia’s military aggression against Ukraine and the May 2022 flash crash, which resulted in extreme volatility in commodity derivatives and equity markets.
The key principles and expectations outlined in the briefing emphasize the importance of having at least one type of circuit breaker in place, with a preference for both trading halts and price collars for liquid instruments. To address different types of market volatility, ESMA encourages the implementation of both static and dynamic circuit breakers. The adequacy of circuit breaker types should be regularly reassessed, with adjustments made as necessary.
Circuit breakers should be calibrated using a statistically supported methodology, considering factors such as liquidity, volatility, external references, and market conditions. It is essential to update static and dynamic reference prices at appropriate frequencies, depending on market conditions.
Transparency is crucial in ensuring that market participants understand the circuit breaker framework. TVs should provide clear information about circuit breakers‘ functioning on their websites, with the option to withhold sensitive details that might be misused.