Trading venues under MiFID II/MiFIR mean facilities, in which multiple third party buying and selling interests interact in the system. 

         
          
New  

 

 

Trading venues' functionality embraces:

 

 

 

 

ESMA Consultation Paper of 28 January 2022 on the Opinion on Trading Venue perimeter (ESMA70-156-4978) argues that with respect to the MiFID II investment services and activities, a clear distinction should be made between reception and transmission of orders (RTO) and the operation of a trading venue.

 

More specifically, multilateral systems should not be authorised as RTO but as trading venues.

 

In particular, systems broadcasting trading interests to multiple clients with those clients being able to interact, within the system or through the software, with those trading interests, are likely to constitute a multilateral system in the MiFID II sense.

 

The combination of Article 1(7) and the definition of multilateral system under Article 4(19) aims at ensuring that trading in financial instruments is carried out on organised venues and, under the same conditions.

 

Furthermore, the changes ensure that all such venues are appropriately regulated by requiring any multilateral system to seek authorisation as a trading venue.

 

Recital 6 adds that any trading system should be properly regulated and subject to authorisation as a trading venue or as a systematic internaliser (SI).

 


MiFIR, Recital 6

It is important to ensure that trading in financial instruments is carried out as far as possible on organised venues and that all such venues are appropriately regulated. Under Directive 2004/39/EC, some trading systems developed which were not adequately captured by the regulatory regime. Any trading system in financial instruments, such as entities currently known as broker crossing networks, should in the future be properly regulated and be authorised under one of the types of multilateral trading venues or as a systematic internaliser under the conditions set out in this Regulation and in Directive 2014/65/EU.

 

In 2007, MiFID I introduced competition in the market for equity trading.

Later iterations of MIFID extended competition to trading in non-equity asset classes, such as bonds and derivatives.

The consequence is that, when when a broker or investor wants to execute an order to buy or sell an asset, they can choose from different venues, such as regulated markets (RMs), multilateral trading facilities (MTFs), dark pools, and systematic internalisers (SIs).


Organisational requirements for all trading venues governed by MiFID II, namely regulated markets, MTFs, and OTFs, are generally analogous (in contrast to bilateral systems, like for example systematic internalisers).

 

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 central counterparty (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:

 

 

clip2  

 

See also:

 

Trading Venues Register

 

Financial Instruments Reference Data System (FIRDS)

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.

 

  

 

Non-discriminatory access to a trading venue by CCPs – Article 36(5) of MiFIR

 

 

Article 36 of MiFIR provides that trading venues shall provide trade feeds upon request to central counterparties (CCPs) that wish to clear transactions in financial instruments concluded on that trading venue.

 

A trading venue may notify ESMA and its competent authority of its intention to temporarily opt-out from the access provisions for exchange-traded derivatives (ETDs) provided its annual notional amount traded of ETDs falls below a certain threshold.

 

Those trading venues, and the CCPs to which they are connected by close links, do not benefit from any of the access rights under Article 35 and 36 of MiFIR for ETDs within the relevant threshold for the duration of the opt-out.

 

In accordance with Article 36(5) of MiFIR, ESMA on 9 January 2018 has published the list of trading venues ESMA has received notifications from in this context - see List of trading venues benefiting from a transitional exemption from the access provisions under MiFIR, ESMA70-155-3832.

 

According to the the European Commission’s reminder of 13 July 2020 (Notice to Stakeholders on Withdrawal of the United Kingdom and EU rules in the field of markets in financial instruments, REV1 - replacing the notice dated 8 February 2018), in the absence of the relevant agreement, without equivalence and recognition, after the end of the transition period, where previously applicable, UK based trading venues and central counterparties (CCPs) will no longer benefit from the open and non-discriminatory access to EU trading venues and EU CCPs and to EU benchmarks respectively.

 

 

Client relationships

 

 

 

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. 

 

 

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”. 

 

 

Real time post-trade transparency requirement

 

 

According to the ESMA, real time post-trade transparency requirements apply equally to trading venues and investment firms (Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35).

 

The said requirements are expressed in Articles 6 and 10 of MiFIR and further specified in:

 

- Article 14 of RTS 1 (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) and

 

- Article 7 of RTS 2 (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).

 

ESMA underlined that trading venues and systematic internalisers using similar technology and systems should process transactions for post-trade publication at the same speed.

 

Furthermore, trading venues and investment firms, in particular systematic internalisers, are expected to use expedient systems publish transactions as close to real time as technically possible.

 

 

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

 

Question 8 [Last update: 03/10/2017]

 

Do real time post-trade transparency requirements apply equally to trading venues and systematic internalisers?

 

Answer 8

 

Yes, the requirements in Articles 6 and 10 of MiFIR as further specified in Article 14 of RTS 1 and Article 7 of RTS 2 apply to both trading venues and investment firms. ESMA expects that trading venues and investment firms, in particular systematic internalisers, that use expedient systems publish transactions as close to real time as technically possible. In particular, since systematic internalisers are competing with trading venues over customers’ order flow, it is important to provide for a level playing field. Therefore, trading venues and systematic internalisers using similar technology and systems should process transactions for post-trade publication at the same speed.

 

 

 

 Third country dimension of the MiFID II/MiFIR requirements for trading venues

 

 

quote

Verena Ross, ESMA’s Executive Director, Keynote Address, ASIFMA Annual Conference 2017 – Hong Kong, 30 November 2017, ESMA71-319-65

 

Earlier in May we published two opinions clarifying under which circumstances transactions on third country trading venues are subject to the post-trade transparency requirements for investment firms and/or are considered to be economically equivalent over-the-counter (EEOTC) contracts for the purpose of the position limit regime. The two opinions set out a number of objective criteria that, if met by a third country trading venue, exempt transactions on those trading venues from the MiFID II/ MiFIR post-trade transparency requirements and the position limit regime.

 

We are now in the process of assessing more than 200 third-country trading venues for which we have received requests. Given the high numbers, this will take us some time. I can ensure you that we’ll treat all third country trading venues in the same manner. Furthermore, we are working on an interim solution that should ensure that, pending an assessment of the criteria listed in the two opinions, transactions on third country trading venues do not have to be made post-trade transparent and/or are not considered to be EEOTC contracts. Furthermore, the ESMA Q&As on transparency issues have a dedicated third country section.

 

 

According to the the European Commission’s reminder of 13 July 2020 (Notice to Stakeholders on Withdrawal of the United Kingdom and EU rules in the field of markets in financial instruments, REV1 - replacing the notice dated 8 February 2018), in the absence of the relevant agreement:

 

- UK market operators/investment firms operating a trading venue or execution venue will no longer benefit from the MiFID authorisation/licence;

 

- UK based regulated markets MTFs will thus cease to be eligible venues for trading shares subject to the MiFIR share trading obligation, EU counterparts can no longer undertake trades in shares subject to the share trading obligation on such platforms;


- Similarly, UK based regulated markets, MTFs or OTFs will cease to be eligible venues for the purposes of the MiFIR derivatives trading obligation and EU counterparts will no longer be able to undertake trades on these platforms.

 

As the Commission observed in the aforementioned Notice, while the assessment of the UK’s equivalence in these areas is ongoing, the assessment has not been finalised.

 

All stakeholders thus have to be informed and ready for a scenario where shares and derivatives subject to the EU trading obligations can no longer be traded in the UK trading venues.

 

In both cases, EU counterparts need to reassess their trading arrangements to ensure continued compliance with their obligations under the MiFID framework.