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Request-for-quote (RFQ) system
European Union Electricity Market Glossary

 

 

 

A 'request-for-quote’ (RFQ) system is a trading system where the following conditions are met:

 

New

Questions and Answers on MiFID II and MiFIR investor protection topics, ESMA35-43-349

Question 19 updated on 3 October 2018

 

Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35 

Question 7 updated on 29 May 2018 - pre-trade requirements for the operator of an RFQ system

 

(a) a quote or quotes by a member or participant are provided in response to a request for a quote submitted by one or more other members or participants;

 

(b) the quote is executable exclusively by the requesting member or participant;

 

(c) the requesting member or market participant may conclude a transaction by accepting the quote or quotes provided to it on request.

 

The above definition is stipulated in Article 1(2) of the Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives (RTS 2)).

 

Moreover, the ’request-for-quote trading system’ is listed in the Annex I to the RTS 2 (the said Annex enumerates the types of systems and the related information to be made public for the purposes of pre-trade transparency requirements in articles 3(1) and 8(1) MiFIR), where the ‘description of the system’ is as follows:

 

“A trading system where a quote or quotes are provided in response to a request for a quote submitted by one or more other members or participants. The quote is executable exclusively by the requesting member or market participant. The requesting member or participant may conclude a transaction by accepting the quote or quotes provided to it on request.”.

 

The same description of the RFQ trading system is contained in the analogous Annex I of Commission Delegated Regulation (EU) 2017/587 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and on transaction execution obligations in respect of certain shares on a trading venue or by a systematic internaliser (RTS 1).

 

RFQ system in the light of the above Annexes can be considered as the one of the two types of ‘quote-driven systems’ (the second being the ‘quote-driven trading system’ and described in the Annex as ‘a system where transactions are concluded on the basis of firm quotes that are continuously made available to participants, which requires the market makers to maintain quotes in a size that balances the needs of members and participants to deal in a commercial size and the risk to which the market maker exposes itself’).

 

The description of this second type - quote-driven trading system - uses the plural and assumes that more than one market maker is active in the system (Christoph Kumpan, Hendrik Müller-Lankow, The multilateral single-dealer system - an oxymoron under MiFID II?, 13 September 2017, p. 11).

 

As regards the RFQ trading system as the type of a ‘quote-driven system’ the said publication highlights that in the system description:

 

- ‘a quote or quotes are provided’ in response to a quote request, and

 

- the requesting member can conclude a transaction by accepting ‘the quote or quotes’, which makes possible two potential interpretations:

 

The use of the singular may mean that:

 

- only a single market maker is acting in the system, or

 

- one market maker out of several market makers has responded to the quote request.

 

The authors invoke the wording of the fifth sentence of recital 7 of MiFIR:

 

„Regulated markets and MTFs are not obliged to operate a ‘technical’ system for matching orders and should be able to operate other trading protocols including systems whereby users are able to trade against quotes they request from multiple providers”

 

and conclude that the latter interpretation is likely intended.

 

Under that interpretation, regulated markets and multilateral trading facilities may implement a multitude of trading protocols including systems whereby users are able to trade against quotes they request from multiple providers.

 

 

Limiting the number of participants a firm can request quotes from

 

 

In the Questions and Answers on MiFID II and MiFIR market structures topics of 7 July 2017 (ESMA70-872942901-38) ESMA underlined that in a request for quote (RFQ) protocol, a trading venue should not impose limits on the number of participants that a firm can request a quote from.

 

Whilst a firm requesting a quote may, in compliance with Article 28 of MiFID II, want to limit the number of participants it requests quotes from in order to minimise the risk of unduly exposing its trading interest, which could result in it obtaining a worse price, this should not be mandated by the trading venue.

 

For instance, where a smaller firm is requesting a quote to execute a low volume trade, it might be less concerned about the risks of exposing its trading interest, and so happier to request quotes from a larger number of market makers or liquidity providers.

 

Limiting the number of participants a firm can request quotes from risks restricting the ability of market participants to access liquidity pools, and only sending requests to traditionally larger dealers who they assume might have larger inventories.

 

This simultaneously restricts the ability of the requestor to access the best pool of liquidity and reduces the likelihood of a smaller dealer receiving requests, despite it having a strong trading interest.

 

 

Pre-trade transparency of RFQ systems 

 

 

Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35

 

Question 7 [Last update: 29/05/2018]

 

When should the operator of an RFQ system provide pre-trade transparency?

 

Answer 7

 

Trading venues are responsible for designing their RFQ systems in compliance with the pre-trade transparency requirements defined in MiFIR and specified in Annex I of RTS 1 and RTS 2. The arrangements used may differ depending on the approach chosen by individual trading venues. Such approaches might include arrangements where trading interests become executable after a pre-defined period of time but would, in any circumstances, require the indications of interest to be disclosed no later than when they become actionable and in any case before the conclusion of a transaction. However, the conclusion of a transaction is not a condition for the publication of pre-trade transparency. Therefore, pre-trade transparency should also apply where a quote provided on request, including actionable indications of interest, is not acted upon.

 

The disclosure of the pre-trade quotes or actionable indications of interest only at the time of execution would not be consistent with the obligations set in Annex I of RTS 1 and 2.

 

 

In the Answer to Question 7 (updated on 3 October 2017, Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35) ESMA raised the issue when the operator of an RFQ system should provide pre-trade transparency.

 

According to the ESMA, trading venues are responsible for designing their RFQ systems in compliance with the pre-trade transparency requirements defined in MiFIR and specified in Annex I of the RTS 1 and Annex I of RTS 2.

 

The arrangements used may differ depending on the approach chosen by individual trading venues.

 

Such approaches might include arrangements where trading interests become executable after a pre-defined period of time but would, in any circumstances, require the indications of interest to be disclosed no later than when they become actionable and in any case before the conclusion of a transaction.

 

ESMA underlined that the disclosure of the pre-trade quotes or actionable indications of interest only at the time of execution would not be consistent with the obligations set in Annex I of RTS 1 and 2.

 

The aforementioned Annex I to the RTS 1 and Annex I to the RTS 2 require the following to be made public by the RFQ trading systems:

 

“The quotes and the attaching volumes from any member or participant which, if accepted, would lead to a transaction under the system's rules. All submitted quotes in response to a request for quote may be published at the same time but not later than when they become executable.”

 

Recital 7 of the RTS 1 reads:

 

“A trading venue operating a request for quote (RFQ) system should at least make public the firm bids and offer prices or actionable indications of interest and the depth attached to those prices no later than at the time when the requester is able to execute a transaction under the system's rules. This is to ensure that members or participants who are providing their quotes to the requester first are not put at a disadvantage.”

 

 

Client relationships

 

 

In the answer to the Question 5 (Questions and Answers on MiFID II and MiFIR market structures topics, Multilateral and bilateral systems, updated on 15 November 2017) ESMA underlined that “there is no new client relationship between two counterparties to a trade that takes place on a trading venue, including when the trading venue operates on a request for quote basis”. 

 

 

 

Questions and Answers on MiFID II and MiFIR market structures topics

 

Multilateral and bilateral systems, Question 5 [Last update: 15/11/2017]

 

Does a client relationship exist between two counterparties that trade on a trading venue?

 

Answer 5

 

No, there is no new client relationship between two counterparties to a trade that takes place on a trading venue, including when the trading venue operates on a request for quote basis.

 

 

 

 

Questions and Answers on MiFID II and MiFIR investor protection topics, ESMA35-43-349

 

Question 19 [Last update: 3 October 2018] 


In some instances, investment firms use the RFQ system of a trading venue that allow firms to identify and select the different counterparties they wish to obtain quotes from, before concluding the trade with the selected counterparty on that trading venue’s RFQ system.


Where an investment firm agrees a trade via such systems, should it identify the counterparty with whom the transaction was agreed with or the trading venue used to ultimately conclude the transaction for its RTS 28 reporting?


Answer 19


Sometimes, investment firms select and approach one or more potential counterparties, obtaining quotes from them using the non-anonymous request-for-quote (RFQ) systems of a trading venue and agree the trade with their selected counterparty on that trading venue’s RFQ system.


This is common across asset classes, but is especially prevalent, for example, in bond markets, where some trading venues allow investment firms to identify different liquidity providers that the firm may wish to deal with in the transaction, and obtain quotes from them before executing the transaction with their selected counterparty on the trading venue.


ESMA considers that a transaction is deemed to be executed on a trading venue, where it is carried out under the rules of the trading venue. Correspondingly, a firm executing orders on behalf of clients or decisions to deal under the rules of a trading venue would need to identify the trading venue in question in its RTS 28 reports.


ESMA also recognises that the objective of RTS 28 is to make the sources of liquidity used as well as firms’ order routing practices more transparent. ESMA is of the opinion that where in- vestment firms use the RFQ systems of a trading venue that allow the investment firm to identify the counterparty they are dealing with, this objective is better achieved if an investment firm provides information about the counterparty it has approached for a quote and selected to execute the transaction through such systems, before concluding the trade on that trading venue’s RFQ system.


For the RTS 28 reports to accurately reflect the investment firm’s venue selection process and order execution policy and behaviour, and to provide an accurate picture of the investment firm’s order routing practices and considerations,13 ESMA considers that as part of the summary of the quality of execution obtained on the different venues used (Article 3(3), Recital 11), the investment firm should also disclose the identity of the (five) counterparties it most commonly executes against where they have agreed the trade via an RFQ system of a trading venue that allows the firm to identify the counterparty they are dealing with. The firm should also disclose the proportion of volume traded with each of these counterparties as a percentage of the total in that class of financial instruments. This disclosure should also include information about the existence of any close links, conflicts of interest, common ownerships and specific arrangements with such counterparties in its summary of execution quality,14 and for this information to be consistent with the information to be provided under Article 3(3) of RTS 28.

 

 

 

 

 

 

 

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    Documentation    





 

 

 

Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives (RTS 2), Article 1(2)

 

Commission Delegated Regulation (EU) 2017/587 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and on transaction execution obligations in respect of certain shares on a trading venue or by a systematic internaliser (RTS 1)

 

Questions and Answers on MiFID II and MiFIR investor protection topics, ESMA35-43-349

 

Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38, Multilateral and bilateral systems, Question 5

 

Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35

 

Christoph Kumpan, Hendrik Müller-Lankow, The multilateral single-dealer system - an oxymoron under MiFID II?, 13 September 2017

 

 

 

 

 

 

 

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Last Updated on Sunday, 28 October 2018 08:22
 

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