|Multilateral trading facility (MTF)|
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Multilateral trading facility (MTF) pursuant to MiFID II Directive means a multilateral system operated by an investment firm or market operator, which brings together multiple third-party buying and selling interests in financial instruments in the system, in accordance with non-discretionary rules, in a way that results in a contract in accordance with the provisions of Title II of the MiFID II.
Operation of an MTF is included in the Section A (Investment services and activities) of the MiFID II Annex I point 8.
ESMA database of European MTFs can be accessed here. The list is published for the purpose of identification of the counterparty to the transaction as regards transaction reporting and it is a key source for credible data on MTFs' activity in Europe.
For example, the UK HM Treasure MiFID II Consultation Impact Assessment (p. 17) referred to the fact the ESMA database showed there were (at the time of the document) 74 MTFs in the UK and that was 49% of the total 152 MTFs in Europe.
Beyond that, the European MTFs are grouped mainly in Germany, Italy and Belgium.
In addition to the EU, the ESMA's list includes also MTFs in Norway and Iceland.
Characteristic feature of the MTF under MiFID II Directive is that investment firms or market operators operating an MTF are not allowed to execute client orders against proprietary capital, or to engage in matched principal trading.
The following articles of the MiFID II Directive are not applicable to the transactions concluded under the rules governing the MTF between its members or participants or between the MTF and its members or participants in relation to the use of the MTF:
- 24 (general principles and information to clients),
- 25 (assessment of suitability and appropriateness and reporting to clients),
- 27 (obligation to execute orders on terms most favourable to the client), and
- 28 (client order handling rules).
However, the members of or participants in the MTF must comply with the obligations provided for in the provisions of the said articles with respect to their clients when, acting on behalf of their clients, they execute their orders through the systems of an MTF.
MTFs may be operated by entities like investment firms, credit institutions or operators of regulated markets.
A firm can be an MTF operator whether or not it performs any other MiFID investment service or activity (FCA, The Perimeter Guidance Manual, Chapter 13, Guidance on the scope of MiFID and CRD IV, p. 16).
MTF/regulated markets/OTF comparison
MiFID II provisions governing how MTFs should operate draw on the regime covering regulated markets, however, with slightly different obligations. They require that MTFs have:
- transparent criteria for determining financial instruments that can be traded under their systems,
It is noteworthy, pursuant to Article 2(2)(d) of Commission Implementing Regulation (EU) 2016/824 of 25 May 2016 laying down implementing technical standards with regard to the content and format of the description of the functioning of multilateral trading facilities and organised trading facilities and the notification to the European Securities and Markets Authority according to Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments a relevant operator has an obligation to provide its national competent authority with a detailed description of the functioning of its trading system specifying, in particular, "a description explaining how the trading system satisfies each element of the definition of an MTF."
Market operator at issue is, moreover, required to provide information on:
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.
Both regulated markets and MTFs execute orders in accordance with non-discretionary rules - an element differentiating them from Organised Trading Facilities (OTFs), which are able to restrict access based on the role and obligations they have in relation to their clients.
OTFs are distinguished from MTFs in that the trading process will involve the use of discretion by the operator, and because the operator of an OTF will owe client facing responsibilities to users of the system, it is necessary that OTFs shall provide further information.
Another element common to regulated markets and MTFs is their comprehensive - when it comes to financial instruments' categories - scope of application. This needs to be accounted for when compared to OTFs, where equity trading is excluded.
Regulated markets and MTFs alike are not allowed to execute client orders against proprietary capital.
It has been observed (MiFID II: The new market structure paradigm, Linklaters), pursuant to MiFID II regulated markets, MTFs, and OTFs will be subject to substantially identical pre- and post-trade transparency requirements, calibrated for different types of instruments, and similar organisational and market surveillance provisions.
Moreover, the current requirements under MiFID I, which are limited to shares traded on regulated markets, will be extended to cover other equity-like instruments such as depositary receipts and exchange-traded funds, as well as non-equity instruments including bonds, structured finance products, emission allowances, and derivatives, in each case including actionable indications of interest.
Operating an MTF is an investment service (the feature differentiating MTFs from regulated markets).
Treatment versus EMIR clearing thresholds
Note, under the EMIR Regulation compliance system, the derivatives' trades on an MTF (physically settled forwards including) are considered OTC derivatives, thus positions on an MTF (similarly to an OTF and unlike regulated markets) count towards EMIR clearing thresholds.
CRD IV application to MTFs
The operation of MTFs is not explicitly considered in CRD IV and the specific risks of such activities are not addressed.
By default, therefore, the full CRD IV capital requirements apply, despite not being tailored to the specific risks of these types of investment firms (European Banking Authority in the Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20 (p. 20)).
MiFID II impact
MTF's legal framework is included in MiFID I, but MiFID II changes the regime by prohibiting MTF operators from dealing on own account on their own venue and strengthening the conflict of interest requirements applying to operators of MTFs.
The inability of the operator of an MTF to trade on own account in their own MTF could raise the costs of trading on MTFs by requiring alternative arrangements to be put in place, including where operators of MTFs have been acting as a riskless principal to settle trades.
On the side of benefits, members or participants of MTFs should be at reduced risk of losing out as a result of an MTF operator favouring their own interests over those of a member or participant Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015, CP15/43, p. 57).
|Last Updated on Thursday, 02 February 2017 20:01|