Trading venues

 


 

 

Trading venues under MiFID II/MiFIR mean facilities, in which multiple third party buying and selling interests interact in the system. Trading venues functionality embraces a regulated market, an MTF or an OTF.

 

Organisational requirements for all trading venues governed by MiFID II, namely regulated markets, MTFs, and OTFs, are generally analogous.

 

However, while regulated markets and MTFs under MiFID II continue to be subject to similar transparency and non-discrimination requirements regarding whom they may admit as members or participants, OTFs are able to determine and restrict access based, inter alia, on the role and obligations which they have in relation to their clients.

 

The specific aspect of the MiFID II regulatory regime is Article 35 of MiFIR grants trading venues the right to have their trades cleared at the CCP of their choice.

 

This provision aims at levelling the playing field on which trading venues compete, and in particular their capability to offer comparable trading and clearing costs (Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461, p. 19).

 

It is noteworthy, under Article 2(1) of the Commission Delegated Regulation (EU) 2017/580 of 24 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the maintenance of relevant data relating to orders in financial instruments operators of trading venues are required to maintain the records on the following for all orders:

 

(a) the member or participant of the trading venue who submitted the order to the trading venue, identified as specified in field 1 of Table 2 of the Annex to the said Regulation;


(b) the person or computer algorithm within the member or participant of the trading venue to which an order is submitted that is responsible for the investment decision in relation to the order, identified as specified in field 4 of the Table 2 of the Annex to the said Regulation;


(c) the person or computer algorithm within the member or participant of the trading venue that is responsible for the execution of the order, identified as specified in field 5 of Table 2 of the Annex to the said Regulation;


(d) the member or participant of the trading venue who routed the order on behalf of and in the name of another member or participant of the trading venue, identified as a non-executing broker as specified in field 6 of Table 2 of the Annex to the said Regulation;

 

(e) the client on whose behalf the member or participant of the trading venue submitted the order to the trading venue, identified as specified in field 3 of Table 2 of the Annex to the said Regulation.

 

 

Identification of the venue of execution in the MiFID II reporting legal framework

 

 

The venue of execution is identified in the MiFID II reporting legal framework with the use of Market Identifier Code (MIC).

 

Pursuant to the Annex I to the Commission Delegated Regulation (EU) of 28.7.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities the description of the respective Field (36 - Venue) of the Table 2 in the MiFID II reporting format (Content to be reported) is as follows:

 

"Identification of the venue where the transaction was executed.

 

Use the ISO 10383 segment MIC for transactions executed on a trading venue, Systematic Internaliser (SI) or organised trading platform outside of the Union. Where the segment MIC does not exist, use the operating MIC.

 

Use MIC code 'XOFF' for financial instruments admitted to trading, or traded on a trading venue or for which a request for admission was made, where the transaction on that financial instrument is not executed on a trading venue, SI or organised trading platform outside of the Union, or where an investment firm does not know it is trading with another investment firm acting as an SI.

 

Use MIC code 'XXXX' for financial instruments that are not admitted to trading or traded on a trading venue or for which no request for admission has been made and that are not traded on an organised trading platform outside of the Union but where the underlying is admitted to trading or traded on a trading venue."

 

As ESMA Guidelines Transaction reporting, order record keeping and clock synchronisation under MiFID II, 10 October 2016, ESMA/2016/1452 (p. 23) explain, for the purpose of the said Field 36, a transaction should be considered to be executed on a trading venue only when:

 

i) the buying and selling interest of two parties is brought together by the trading venue either on a discretionary or non-discretionary basis, or

 

ii) the buying and selling interest of two parties is not brought together by the trading venue either on a discretionary or non-discretionary basis, but the transaction is nonetheless subject to the rules of that trading venue and is executed in compliance with those rules.

 

Where an investment firm is not the direct market facing entity the investment firm is not regarded as executing on the trading venue for the purposes of transaction reporting.

 

In case of chains, where the transaction report is for a transaction that was executed on a Trading Venue, with an SI or on an organised trading platform outside of the Union, Field 36 of the market side report should be populated with the MIC code of the venue, trading platform or SI. All other reports in the chain should be populated with 'XOFF'.

 

 

Identification of the venue of execution in the EMIR reporting legal framework

 

 

 

Article 4b of the Implementing Regulation No 1247/2012 added by the Commission Implementing Regulation of 19.10.2016

 

Article 4b

Venue of execution


1. The venue of execution of the derivative contract shall be identified in Field 15 of Table 2 of the Annex as follows:

 

(a) until the date of application of the delegated act adopted by the Commission pursuant to Article 27(3) of Regulation (EU) No 600/2014:

 

(i) for a venue of execution inside the Union, the ISO 10383 Market Identifier Code (MIC) published on ESMA's website in the register set up on the basis of information provided by competent authorities pursuant to Article 13(2) of Commission Regulation (EC) No 1287/20066;

 

(ii) for a venue of execution outside the Union, the ISO 10383 MIC included in the list of MIC codes maintained and updated by ISO and published at ISO web site;

 

(b) from the date of application of the delegated act adopted by the Commission pursuant to Article 27(3) of Regulation (EU) No 600/2014, the ISO 10383 MIC.

 

The venue of execution is identified in the EMIR reporting legal framework (Commission Implementing Regulation (EU) 2017/105 of 19 October 2016 amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories according to Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories) with the use of ISO 10383 Market Identifier Code (MIC).

 

Pursuant to Commission Delegated Regulation (EU) of 19.10.2016 amending Commission Delegated Regulation (EU) No 148/2013 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories the description of the respective Field 15 of the Table 2 (Common data) in the EMIR reporting format is as follows:

 

"The venue of execution of the derivative contract shall be identified by a unique code for this venue.

 

Where a contract was concluded OTC and the respective instrument is admitted to trading or traded on a trading venue, MIC code 'XOFF' shall be used.

 

Where a contract was concluded OTC and the respective instrument is not admitted to trading or traded on a trading venue, MIC code 'XXXX' shall be used."

 

 

Transparent and non-discriminatory access rules to trading venues

 

 

 

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

 

Question 3 [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 3


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.

 

 

 

 

 

Advertisements


 

 

 

 



Last Updated on Sunday, 16 July 2017 01:38
 

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