Multilateral system (MiFID definitions)
European Union Electricity Market Glossary

 


 

Legal definition of the 'multilateral system' is laid down by Article 4(19) of the MiFID II Directive. Pursuant to this provision 'multilateral system' means any system or facility operated and/or managed by an investment firm or a market operator in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system. 

 

MiFID I does not use this definition. 

info

The characteristic feature of the MiFID II is the requirement that all multilateral systems for the trading of financial instruments are a regulated market, MTF or OTF operated by an authorised firm or a regulated market.

 

 

 

Multilateral versus bilateral systems

 

 

It is sometimes underlined, MiFID II has introduced this term in the opposition to 'bilateral systems'.

 

UK Financial Conduct Authority (FCA) in the Consultation Paper I on the MiFID II implementation (CP15/43) of December 2015 observes: "Multilateral systems may be contrasted with 'bilateral systems' where an investment firm enters into every trade on own account. [...] Any system or platform is a multilateral system where more than one market participant has the ability to interact with more than one other market participant on that system or platform" (p. 264).

 

Article 4(19) MiFID II

  

'multilateral system' means any system or facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system

 

 

Article 1(7) of MiFID II requires all multilateral systems in financial instruments to operate as:

 

- a regulated markets,

 

multilateral trading facilities (MTFs), or 

 

organised trading facilities (OTFs).

 

It means, the definition of the 'multilateral system' under MiFID II is common to any trading venue, a new type - OTF - including.

 

MiFID I provides for two types of trading venues only, regulated markets and MTFs, definitions thereof being very similar as sharing a number of features (in essence, both regulated markets and MTFs are systems which operate in accordance with non‑discretionary rules that bring together multiple buying and selling interests in a way that results in contracts).

 

Article 1(7) MiFID II

 

All multilateral systems in financial instruments shall operate either in accordance with the provisions of Title II concerning MTFs or OTFs or the provisions of Title III concerning regulated markets.

 

 

 

Constituent elements of the definition of 'multilateral systems' - the requirement for trading interests to interact in the system

 

 

FCA in the above Consultation Paper of December 2015 (p. 48, 49) also argues, the MiFID II definition of the 'multilateral system' does not require the conclusion of contracts under the system's rules but only that trading interest is able to interact in the system.

 

FCA interprets the effect of combined Articles 4(19) and 1(7) that the MiFID requirement that a contract is executed under the system's rules by means of the system's protocols is now a sufficient but not necessary condition to be a multilateral system and hence to be regulated as a trading venue.

 

Instead it is required that trading interest is able to interact in the system.

 

FCA is of the opinion that the condition for trading interests to interact in the system is less stringent than that a contract is executed under the system's rules, or by means of the system's protocols or internal operating procedures.

 

FCA is, furthermore, of the view that interaction in a system or facility occurs when the system or facility allows multiple trading interests to exchange information relevant to any of the essential terms of a transaction in financial instruments (being the price, quantity and subject‑matter) with a view to dealing in such instruments.

 

The information exchanged need not be complete contractual offers, but may be simply invitations to trade or 'indications of interest'.

 

In conclusion, pursuant to FCA, at a minimum, a platform will be considered a multilateral system (and hence must operate as a regulated market, MTF, or OTF in accordance with article 1(7) of MiFID II) if the system provides the ability for trading interests to interact with a view to dealing and:

 

- allows multiple participants to see such information about trading interest in financial instruments, or submit such information about trading interest in financial instruments for matching, and

 

- enables them, through technical systems or other facilities, to take steps to initiate a transaction, or be informed of a match.

 

MiFID II wording as well as the above FCA's analysis of the core, decisive elements of the very definition of the multilateral system indicates it is somewhat subtle concept, for example:

 

- a system that provides participants confirmation or notification messages about a matching opportunity between those participants, with a view to a transaction in financial instruments, qualifies as such a system or facility, 

 

- on the other hand any system that only receives, pools, aggregates and broadcasts indications of interest, bids and offers or prices is not considered a multilateral system for the purpose of MiFID II (this is because there is no reaction of one trading interest to another other within these systems – they do not 'act reciprocally' (see also recital 8 of MiFIR)).

 

In the FCA's view, interaction in a system or facility occurs when the system or facility allows trading interests to exchange information relevant to any of the essential terms of a transaction in financial instruments (being price, quantity, subject-matter).

 

The information exchanged need not be complete contractual offers, but may be simply invitations to treat or 'indications of interest'.

 

The FCA concludes that the definition of a multilateral system "goes beyond" the definitions of an OTF and MTF and of the systems operated by regulated markets.

 

 

Treatment for the portfolio compression and post-trade confirmation services

 

 

Pursuant to the aforementioned FCA's analysis, neither the service of portfolio compression, which reduces non-market risks in derivative portfolios without changing the market risk, nor post-trade confirmation services, constitutes a multilateral system by itself.

 

However, if a firm operates a system that comes within the definition of a multilateral system without taking into account these activities, any portfolio compression or post-trade confirmation services that it provides for that system can form part of the multilateral system that the firm is operating.

 

 

System providing quote streaming and order execution services for multiple systematic internalisers (SIs)

 

 

System that provides quote streaming and order execution services for multiple SIs is a multilateral system and is required to seek authorisation as a regulated market, MTF or OTF in accordance with Article 1(7) of MiFID II.

 

Such an opinion has been expressed by ESMA on 7 July 2017 in Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38.

 

 

 

Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38


Question 19 [Last update: 07/07/2017]

 

Should a system providing quote streaming and order execution services to multiple SIs be authorised as a multilateral system?

 

Answer 19

 

Articles 14(1) and 18(1) of MIFIR require SIs to make public firm quotes, which may be published through an APA. Some prospective APAs propose setting up arrangements which, on top of their APA services, provide a suite of quote streaming and order execution services to SIs and their clients. Clients cannot interact with more than one SI via a single message but can send multiple messages to multiple SIs participating in the service provided.

 

Article 4(19) of MiFID II defines a multilateral system as” [...] any system or facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system”. Article 1(7) of MiFID II requires all multilateral systems to operate as either a RM, an MTF or an OTF.


In line with the criteria set out in Q&A 3 on OTFs published on 3 April 2017 for identifying multilateral trading systems, ESMA notes that:


a)  If a system allows multiple SIs to send quotes to multiple clients and allows clients to request execution against multiple SIs, then this meets the interaction test foreseen in Article 4(1)(19) even if there is no aggregation across individual SI quote streams;


b)  The arrangements described above have the characteristics of a system as they are embedded in an automated facility; and,


c)  Those arrangements are not limited to pooling potential buying and selling interests from SIs but also cater for the direct execution of the selected SI quotes. Genuine trade execution would be taking place on the system provided.


Accordingly, a system that provides quote streaming and order execution services for multiple SIs should be considered a multilateral system and would be required to seek authorisation as a regulated market, MTF or OTF in accordance with Article 1(7) of MiFID II.


ESMA reminds that if a firm were to arrange transactions on one system and provide for the execution of the transactions on another system, the disconnection between arranging and executing would not waive the obligation for the firm operating those systems to seek authorisation as a trading venue.

 

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

MiFID II Directive, Article 4(19)

 

Questions and Answers on MiFID II and MiFIR market structures topics, 7 July 2017, ESMA70-872942901-38

 

Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015

 

 

 

 

 

clip2

    Links    

 

 

 

 

Advertisements


 

 

 

 

 

 

Add your comment

Your name:
Your website:
Comment:
Last Updated on Monday, 10 July 2017 20:31
 

Search

Twitter
Copyright © 2009 - 2017 Michal Glowacki. All rights reserved.
The materials contained on this website are for general information purposes only and are subject to the disclaimer