Regulated market
Regulated market means a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments in the system, in accordance with its non-discretionary rules, in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title III of MiFID Directive.
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17 October 2023
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ESMA database of European regulated markets under MiFID I was a key source for credible data on regulated markets activity in Europe. Under MiFID I most European countries had only a small number of regulated markets. The exceptions were Germany, United Kingdom, Spain and Italy, which possessed a higher than average number. The MiFID II Impact Assessment of the UK HM Treasure (p. 17) referred to 13 regulated markets in the UK, which amounted to 13% of the total 104 regulated markets in Europe. In addition to the EU, the ESMA's list included also regulated markets in Norway and Iceland.
The database listed also identification codes for regulated markets. The list was published for the purpose of identification of the counterparty to the transaction as regards to transaction reporting.
According to Article 56 of MiFID II ESMA is also required to publish on its website and keep up to date a list of all regulated markets. This register contains the unique code (Market Identifier Code - MIC) established by ESMA in accordance with Article 65(6) identifying the regulated markets for use in reports in accordance with point (g) of Article 65(1) and point (g) of Article 65(2) of MiFID II and with Article 6, 10 and 26 of MiFIR. The register contains data related to the European Union and European Economic Area (EEA) / European Free Trade Association (EFTA) States. The register, as visited on 9 January 2018, was populated with data regarding 29 regulated markets.
The ESMA’s register of regulated markets under MiFID II can be accessed here.
MiFIR undelines that the definitions of regulated market and multilateral trading facility (MTF) represent effectively the same organised trading functionality. The said definitions exclude bilateral systems where an investment firm enters into every trade on own account, even as a riskless counterparty interposed between the buyer and seller. Hence, single-dealer system being a bilateral system must not be operated as regulated market. Both regulated markets and MTFs execute orders in accordance with non-discretionary rules - an element differentiating them from organised trading facilities (OTFs). Regulated markets and MTFs are not allowed to execute client orders against proprietary capital. As opposite to MTFs and OTFs, regulated markets are characterized by the fact that the operating this type of multilateral system does not represent an investment activity or service. The fifth sentence of recital 7 of MiFIR explains that regulated markets (similarly to 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.
Third-country markets considered as equivalent to a regulated market in the European Union
Pursuant to Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR) derivatives contracts the execution of which does not take place on a regulated market (or on an equivalent third-country market) are over-the-counter (OTC) derivatives. For the purposes of the definition of OTC derivatives, in accordance with Articles 2a(3) and 2(7) of EMIR ESMA publishes the List of third-country markets considered as equivalent to a regulated market in the European Union.
Commission Staff Working Document, EU equivalence decisions in financial services policy: an assessment, 27.2.2017 SWD(2017) 102 final, p. 15 |
In particular, European Commission deems US Designated Contract Markets (DCMs) that operate under the regulatory oversight of the CFTC as equivalent to EU regulated markets in accordance with EMIR - see the Commission Implementing Decision (EU) 2016/1073 of 1 July 2016 on the equivalence of designated contract markets in the United States of America in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council. The Decision went into force on 22 July 2016. A list of the relevant DCMs is set out in the Annex to the said Commission Implementing Decision. The practical effect of the Decision is that products traded on equivalent third-country markets (in this case DCMs subject to CFTC regulatory oversight) no longer fall under the OTC derivative definition under EMIR Article 2(7) and therefore are no longer subject to the EMIR obligations relevant to OTC derivatives (such as the inclusion within the calculation of the clearing threshold for non-financial counterparties).
Further:
- on 15 December 2016 the European Commission has adopted equivalence decisions to the same effect in relation to Australia, Canada, Japan and Singapore determining that the rules governing trading venues in those countries can be deemed equivalent to those in the EU (the European Commission's Press release IP/16/4385) - see Commission Implementing Decision (EU) 2016/2272 of 15 December 2016 on the equivalence of financial markets in Australia in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council;
- on 4 April 2022 the European Commission adopted the Implementing Decision (EU) 2022/552 determining that national securities exchanges of the United States of America that are registered with the Securities and Exchange Commission comply with legally binding requirements which are equivalent to the requirements laid down in Title III of Directive 2014/65/EU and are subject to effective supervision and enforcement.
The said Decision of 4 April 2022 covered the following exchanges:
(a) BOX Exchange LLC,
(b) Cboe BZX Exchange, Inc.,
(c) Cboe C2 Exchange, Inc.,
(d) Cboe EDGX Exchange, Inc.,
(e) Cboe Exchange, Inc.,
(f) Miami International Securities Exchange, LLC,
(g) MIAX Emerald, LLC,
(h) MIAX PEARL, LLC,
(i) Nasdaq GEMX, LLC,
(j) Nasdaq ISE, LLC,
(k) Nasdaq BX, Inc.,
(l) Nasdaq MRX, LLC,
(m) Nasdaq PHLX, LLC,
(n) Nasdaq Options Market, LLC,
(o) NYSE American Options, LLC, and
(p) NYSE Arca, Inc.
On 17 July 2023 the European Commission opened the public feedback period on Commission Implementing Decision amending Commission Implementing Decision (EU) 2016/2272 on the equivalence of financial markets in Australia in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council to take account recent developments in the financial markets in Australia.
On 17 October 2023 Commission Implementing Decision (EU) 2023/2207 of 13 October 2023 amending Implementing Decision (EU) 2016/2272 on the equivalence of financial markets in Australia in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council to take account of recent developments in the financial markets in Australia has been published in the EU Official Journal.
Impact on collateral
As said above, unlike MTFs and OTFs, positions on regulated markets (or on an equivalent third-country market) do not count towards EMIR clearing thresholds. Pursuant to Article 29(1) MiFIR the operator of a regulated market must ensure that all transactions in derivatives that are concluded on that regulated market are cleared by a CCP. It means, collateral applied for regulated markets trading will have to fulfil identical requirements to the ones already used for OTC markets under EMIR. Hence, after the MiFID II entry into force derivatives trading settlements carried out on regulated markets will be governed by Article 46 EMIR (see here details for the collateral settlement on the OTC market under EMIR).
EMIR reporting
EMIR reporting requirement covers all derivatives, hence positions on all trading venues (regulated markets, MTFs, OTFs alike) and OTC are equally covered.
General operating conditions for regulated markets
MiFID II framework for regulated markets reflects the regulation of investment firms in respect of the conditions for authorisation and the general operating conditions. In particular, there are requirements governing:
- authorisation;
- the stability of the management;
- the suitability of those who control the management; and
- organisation.
MiFID I already had the category of regulated markets. The changes to the existing framework for algorithmic trading and transparency notwithstanding, the most significant change MiFID II makes with respect to regulated markets is the update of the provisions dealing with the suitability of the management in the same way as the similar provisions for investment firms, and, more broadly, the introduction of a modified regime for the operation of the management board. Consequently, when it comes to costs, regulated markets will need to commit resources to reviewing their existing management board arrangements to ensure that they comply with the specific requirements under MiFID II and make the necessary changes.
However, the management board requirements are aimed at ensuring that regulated markets are more effectively run. This should also help to strengthen the resilience of secondary trading and the quality of trading services that are offered (Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015, CP15/43, p. 56).
MiFID II contains, moreover, provisions, which deal with the specifics of regulated markets. Among them are:
- admission to trading of financial instruments;
- suspension and removal of instruments from trading;
- access to regulated markets;
- compliance with the rules of the market;
- clearing and settlement.
The above provisions are aimed at investor protection and ensuring that regulated market is properly run and has clear, transparent and non-discriminatory rules. Another purpose is that regulated markets are properly monitored and enforced. MiFID II Directive leaves these provisions largely unchanged (with some exceptions relating to the suspension and removal of instruments from trading). If operating under the reference price waiver, regulated markets will be affected by the double volume caps (ITG, MiFID II: Systematic Internalisers and Liquidity Unbundling, p. 2).
Transparent and non-discriminatory access rules to regulated markets
Article 53(1) of MiFID II requires regulated market to establish, implement and maintain transparent and non-discriminatory rules, based on objective criteria, governing access to or membership of the regulated market. The brief overview of the non-exhaustive list of arrangements which are considered non-objective and discriminatory has been given by the EU financial market watchdog in the Questions and Answers on MiFID II and MiFIR market structures topics of 7 July 2017 (ESMA70-872942901-38).
In the document ESMA said:
a) Regulated markets should not require members or participants to be direct clearing members of a CCP. Given the protections afforded to non-clearing members under MiFIR and EMIR, as well as the rules on straight through processing (STP), a regulated market should not require all its members or participants to be direct clearing members of a CCP. Regulated markets may however require members or participants to enter into, and maintain, an agreement with a clearing member as a condition for access when trading is centrally cleared.
b) For financial instruments that are centrally cleared, regulated markets should not allow members or participants to require other members or participants to be enabled before they are allowed to trade with each other. There are legitimate checks that regulated markets might carry out before allowing a member or participant on to their venue. For example, in markets for non-centrally cleared financial instruments regulated markets may wish to carry out credit checks, or ensure that a member or participant has appropriate capital to support the positions it intends to take on the regulated market. In a non-centrally cleared derivatives market, there may be a need for bilateral master netting agreements to be in place between participants before the trading venue can allow their trading interests to interact. Regulated markets will also need to be comfortable that potential participants are meeting the regulatory requirements to be a member of a trading venue such as having appropriate systems and controls to ensure fair and orderly trading. However, in centrally cleared markets, enablement mechanisms whereby existing members or participants of a regulated market can decide whether their trading interests may interact with a new participant’s trading interest are considered discriminatory and an attempt to limit competition. Enablement mechanisms also reduce the transparency around the liquidity available on different regulated markets.
c) Regulated markets should not require minimum trading activity. Regulated markets should not require minimum trading activity to become a member or participant of a regulated market, as this could restrict the access to the regulated market to large members or participants.
d) Regulated markets should not impose restrictions on the number of participants that a participant can interact with.
In a request for quote (RFQ) protocol, a regulated market 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 regulated market. 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.
Eligibility to be a member or participant of a regulated market
The eligibility to be a member or participant of a regulated market in the EU is not restricted to authorised investment firms only, Article 53(3) of MiFID II provides that an entity that is not an investment firm or a credit institution can be a member of a regulated market under certain conditions. Hence, entities exempted from MiFID authorisation under Article 2(1) can also be a member of participant of a regulated market. The above stance is supported by the ESMA’s answer to the Question 4 (Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38, Multilateral and bilateral systems, General, updated on 07.07.2017).
Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38
Multilateral and bilateral systems, General, Question 4 [Last update: 07/07/2017]
Can a person that is not authorised as an investment firm but meets the requirements of Article 53(3) of MiFID II be a member or participant of a regulated market or an MTF?
Answer
Yes. Article 53(3) of MiFID II provides that an entity that is not an investment firm or a credit institution can be a member of a regulated market under certain conditions, this rule being extended to MTFs by Article 19(2) of MiFID II. ESMA considers that this provision should be read in conjunction with the requirements of Article 2(1). Under this provision, a person falling under any of the categories listed in Article 2(1) would not have to be authorised as an investment firm. However, pursuant to Article 2(1)(d) (ii) of MiFID II, when a person dealing on own account in financial instruments other than commodity derivatives or emission allowances or derivatives thereof and not providing any other investment services or performing any other investment activities in such instruments is also a member of or a participant in a regulated market or an MTF, it falls under the scope of MiFID II, and should accordingly be authorised as an investment firm unless:
- it is exempted under points (a), (i) and (j); or
- it is a non-financial entity which executes transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of that non-financial entity or its group.
As a consequence, the reference in Article 53(3) to persons other than investment firms and credit institutions only relates to entities that are exempted from authorisation under Article 2(1), such as insurance companies or collective investment undertakings, as long as their own regulatory framework permits them to do so.
This Q&A does not address the issue of non-EEA firms being a member or participant of an EEA trading venue.
Algorithmic trading
As with investment firms MiFID II introduces new provisions for regulated markets dealing with algorithmic trading. The requirements seek to ensure that the regulated markets have proper governance, testing and continuity arrangements around algorithmic trading to minimise disruption to trading on their markets. They also seek to ensure that trading venues encourage market making particularly in stressed market conditions.
Exclusion of members of or participants in regulated markets from the dealing on own account exemption under Article 2(1)(d) of MiFID II
Dealing on own account exemption under Article 2(1)(d) of MiFID II does not apply to persons who are a member of or a participant in a regulated market except for non-financial entities who execute transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups.
Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38
Question [Last update: 07/07/2017]
Article 18(3) of MiFID II requires that investment firms and market operators operating an MTF or OTF establish, publish and maintain and implement transparent and non-discriminatory rules, based on objective criteria, governing access to its facility. A similar requirement is applied to regulated markets through Article 53(1) of MiFID II. What sort of behaviour or restrictions should be considered as non-objective, or discriminatory?
Answer
One of the benefits of more on-venue, pre-trade transparent trading is to broaden access to liquidity for market participants. In order for these benefits to be fully realised, it is important that trading venues do not have restrictive criteria governing their access, which place unreasonable restraints on certain market participants’ access to particular liquidity pools.
In particular, ESMA does not consider the following arrangements to be in compliance with Articles 18(3) and 53(1) of MiFID II. This is not, however, an exhaustive list of arrangements which are non-objective and discriminatory.
a) Trading venues should not require members or participants to be direct clearing members of a CCP.
Given the protections afforded to non-clearing members under MiFIR and EMIR, as well as the rules on straight through processing (STP), a trading venue should not require all its members or participants to be direct clearing members of a CCP. Trading venues may however require members or participants to enter into, and maintain, an agreement with a clearing member as a condition for access when trading is centrally cleared.
b) For financial instruments that are centrally cleared, trading venues should not allow members or participants to require other members or participants to be enabled before they are allowed to trade with each other.
There are legitimate checks that a trading venue might carry out before allowing a member or participant on to their venue. For example, in markets for non-centrally cleared financial instruments trading venues may wish to carry out credit checks, or ensure that a member or participant has appropriate capital to support the positions it intends to take on the trading venue. In a non-centrally cleared derivatives market, there may be a need for bilateral master netting agreements to be in place between participants before the trading venue can allow their trading interests to interact. Trading venues will also need to be comfortable that potential participants are meeting the regulatory requirements to be a member of a trading venue such as having appropriate systems and controls to ensure fair and orderly trading.
However, in centrally cleared markets, enablement mechanisms whereby existing members or participants of a trading venue can decide whether their trading interests may interact with a new participant’s trading interest are considered discriminatory and an attempt to limit competition. Enablement mechanisms also reduce the transparency around the liquidity available on different trading venues.
c) Trading venues should not require minimum trading activity.
Trading venues should not require minimum trading activity to become a member or participant of a trading venue, as this could restrict the access to the trading venue to large members or participants.
d) Trading venues should not impose restrictions on the number of participants that a participant can interact with.
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.
Application of MiFID II after 3 January 2018, including issues of ‘late transposition’
Question [Last update: 18/12/2017]
Should authorisations as a regulated market granted under MiFID I still be valid after 3 January 2018?
Answer
Yes, the authorisations granted under MiFID I should continue to be valid after 3 January 2018. This applies also to the authorisations for market operators to operate an MTF. However, ESMA notes that competent authorities, as set out in Article 44 of MiFID II (and, already, Article 36 of MiFID I), should monitor that market operators comply at all times with the conditions for initial authorisation and therefore regularly review conditions for initial authorisation.
Question [Last update: 18/12/2017]
Can regulated markets established in Member States that have not transposed MiFID II at the date of 3 January 2018, and that already have a valid authorisation, continue to provide appropriate arrangements in other EU Member States that facilitate access to and trading on those markets by remote members and participants after the entry into application of MiFID II?
Answer
Regulated markets established in Member States that have not transposed MiFID II by 3 January 2018 but that have already been authorised under MiFID I and have already provided appropriate arrangements that facilitate access to and trading on those markets by remote members and participants in other Member States, may continue to provide these arrangements in those Member States. The competent authorities of regulated markets that provide such arrangements on the territory of other Member States may be requested to reassure host Member States competent authorities that, pending transposition of MiFID II, they are applying the detailed operating conditions included in MiFID II.
Question [Last update: 05/12/2019]
Can member preferencing functionalities be used to formalise pre-arranged transactions?
Answer
MiFID II requires trading venues to use transparent rules and procedures providing for fair and orderly trading and to establish objective criteria for the efficient execution of orders (Articles 19(1) and 47(1)(d) of MiFID II). ESMA considers that trading venues may implement/offer member preferencing functionalities in the trading system they operate as long as those functionalities comply with the MiFID II requirements and in particular are transparent and available to all members or participants.
However, ESMA also considers that member preferencing functionalities cannot be used to formalise pre-arranged transactions. Trading venues should monitor the use of member preferencing on any type of trading system and establish arrangements and procedures to detect attempts to use member preferencing functionalities to formalise privately negotiated trades. Should trading venues detect such use of member preferencing functionalities, they should have appropriate means in place to ensure that those trading patterns are discontinued.
ESMA reminds market participants that pre-arranged transactions may only be formalised on a trading venue when that trading venue benefits from an appropriate pre-trade transparency waiver.
Question [Last update: 05/12/2019]
To which types of trading systems does Commission Delegated Regulation (EU) 2017/584 RTS 7 apply? In particular, are trading venues without auto-matching trading systems or that explicitly prohibit algorithmic trading subject to the provisions of RTS 7?
Answer
Article 1 of RTS 7 limits the scope of application of RTS 7 to trading venues which “allow or enable algorithmic trading”. Article 1(2) of RTS 7 defines those venues as trading venues “where order submission and order matching is facilitated by electronic means”. The rationale is explained in Recital 3 which clarifies that “risks arising from algorithmic trading can be present in any type of trading system that is supported by electronic means”.
ESMA further notes that Recital 5 of RTS 7 explicitly refers to request-for-quote systems, where transactions are usually not automatically executed based on pre-set parameters and logic (i.e. no auto-matching protocols), as being within the scope of the RTS. ESMA therefore consider that the absence of an auto-matching protocol should not exclude the trading venue operating such system from the scope of RTS 7.
Similarly, an explicit prohibition of algorithmic trading does not appear sufficient for the trading venue to be excluded from the scope of the RTS considering the definition of trading venues allowing or enabling algorithmic trading provided under Article 1(2).
Nevertheless, regarding the specific application of the provisions contained in RTS 7, Recital 5 clarifies that (i) “some organisational requirements may not be appropriate for certain trading models although their trading systems could be supported to a certain extent by electronic means” and that (ii) “the specific requirements to be set in relation to request-for-quote systems or hybrid systems should be considered according to the nature, scale and complexity of the algorithmic trading activity undertaken”. ESMA would for instance consider it unreasonable to require a trading venue that explicitly prohibits algorithmic trading to offer to its clients a simulation facility for testing algorithms in conditions that are as realistic as possible (Article 10(2) of RTS 7).
Lastly, Recital 3 clarifies that voice trading systems are excluded from the scope of RTS 7. It is however important to stress that trading venues operating such systems remain subject to the organisational requirements prescribed under Article 48(1) of MiFID II.
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