|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;
MiFID I did not use this definition.
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 1(7) of MiFID II requires all multilateral systems in financial instruments to operate as:
- a regulated markets,
It means, the definition of the 'multilateral system' under MiFID II is common to any trading venue, a new type - an OTF - including.
MiFID I provided 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).
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.
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.
The concept of a multilateral system under MiFID II is not, however, uniformly understood even among the EU Member States’ regulatory authorities.
Christoph Kumpan and Hendrik Müller-Lankow in the article “The multilateral single-dealer system - an oxymoron under MiFID II?” of 13 September 2017 (p. 8, 9) refer to the view of the German supervisory authority BaFin, according to which it is a bilateral system if the system operator not only brings together (or facilitates the bringing together of) third-party trading interests, but is itself a party to transactions for the purpose of market making.
The said BaFin’s approach is supported by German regional supervisory authorities responsible for the supervision of the stock exchanges in Duesseldorf, Hamburg and Munich, which have authorised the single-dealer systems Quotrix (MIC: DUSC), Lang & Schwarz Exchange (MIC: HAMM) and Market Maker Munich (MIC: MUNC) as regulated markets.
The above authors also note the multilateral systems’ further differentiation criterion developed by Diego Valiante (‘“Setting an institutional and regulatory framework for trading platforms: Is there a case for a new trading venue under MiFID?”, Journal of Financial Regulation and Compliance, 2013, no. 1), where a trading venue is multilateral if the operator has two characteristics:
1. neutrality, and
2. riskless operations.
If an infrastructure does not meet at least one of these criteria, it should be considered, according to Valiante, as a bilateral trading venue.
Multilateral single-dealer systems
It is restricted for an operator of multilateral systems to deal on own account.
As a consequence, operators of multilateral systems are not allowed to bring together its own trading interests with other, third-party trading interests.
On the basis of this principle, Christoph Kumpan and Hendrik Müller-Lankow (op. cit, p. 13, 14, 21) conclude that a single-dealer system must be considered multilateral if the market operator only brings together the trading interests of the market maker and other third parties.
The differentiation of trading venues on the one hand and systematic internalisers and other OTC market makers on the other hand based on the terms ‘bringing together of third-party trading interests’ and ‘dealing on own account’ indicates that a single-dealer system can be multilateral if the market operator and the single-dealer are not the same person.
On the other hand, the bilateral trades are triggered by the European Commission, which in the public consultation launched on 17 February 2020 on the review of the MiFID II and MiFIR framework argues that the multilateral single-dealer systems offer very similar functionality to a multilateral system, hence MiFID II/MiFIR should encompass also these systems to ensure fair treatment for market players.
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.
MiFID II Directive, Article 4(19)
|Last Updated on Sunday, 01 March 2020 11:40|