The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has today published its Report on the implementation and functioning of the Intra-day Volatility Management Mechanism (IVM). Following an assessment of the IVMs introduced by trading venues and identification of differences in the approaches taken in their implementation and calibration, ESMA finds that they have been adequately set up. ESMA however also highlights some practical challenges.
The IVM aims at limiting extreme volatility of prices in energy derivatives markets within one day. ESMA finds them adequately calibrated, with the caveat of the assessment having been done in a period with no evidence of protracted volatility episodes affecting energy commodity derivatives trading.
In addition, ESMA has analysed how IVMs function in comparison with existing circuit breakers under MiFID II to assess the effectiveness added by the IVMs in managing volatility. ESMA find significant practical challenges in the implementation of IVMs for illiquid trading venues. ESMA suggests that the already existing circuit breakers under MiFID II could deliver on the objective to limit excessive intra-day price volatility. To ensure the appropriate implementation and application of circuit breakers by trading venues under MiFID II, ESMA is working on further guidance to be issued in the second half of 2023.
