Organised Trading Facility (OTF)

 


 

 

Organised trading facility (OTF) is a multilateral system, which is not a regulated market or MTF and in which multiple third party buying and selling interests in bonds, structured finance product, emissions allowances or derivatives are able to interact in the system in a way which results in a contract.

 

OTF are regulated in the provisions of Title II of the MiFID II Directive, thus operating an OTF is classified as an investment service.

 

As a consequence, only persons licensed as an investment firm under MiFID are entitled to run an OTF (operation of an OTF is included in the Section A (investment services and activities) of the MiFID II Annex I point 9).

 

The conception for OTF is broad and includes a multitude of electronic platforms that were not so far subject to requirements applied to regulated markets and MTFs, for this reason an OTF is often perceived as a catch-all category of a trading venue.

 

However, it needs to be noted that "recital 8 of MiFIR clarifies that an OTF should not include facilities where there is no genuine interaction of trading interest, such as bulletin boards used for advertising buying and selling interests, other entities aggregating or pooling potential buying or selling interests, electronic post‑trade confirmation services, or portfolio compression. Any system that only receives, pools, aggregates and broadcasts indications of interest, bids and offers or prices shall not be 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'" (Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I, December 2015, CP15/43, p. 49).

 

 

 

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An entity should seek authorisation to operate an OTF where the three following conditions are met

 

 

 

  

 

numbering blue    Trading is conducted on a multilateral basis

 

 

 

Interaction with a view to trading in a financial instrument is conducted in such a way that a trading interest in the system can potentially interact with other opposite trading interests.

 

As OTFs are required to “have at least three materially active members or users, each having the opportunity to interact with all the others in respect to price formation” (Article18(7) of MiFID II), an OTF user’s trading interests can potentially interact with those of at least two other users.

 

On OTFs, the interaction of user trading interest can take place in different ways, including through matched-principal trading or market-making, within the limits set out in Article 20(2) and 20(5).

 

 

 

numbering blue    The trading arrangements in place have the characteristics of a system

 

 

 

MiFIDII/MiFIR is technology neutral and accommodates a variety of “systems”.

 

A system would be easily identified when embedded in an automated system.

 

This would cover a situation where, for instance, the arrangements in place consist of the automated crossing of client trading interests, subject to the exercise of discretion on an OTF.

 

However, other non-automated systems or repeatable arrangements that achieve a similar outcome as a computerised system, including for instance where a firm would reach out to other clients to find a potential match when receiving an initial buying or selling interest, would also be characterised as a system.


Where a firm would, by coincidence and accidentally, receive matching buying and selling interests, and decide to execute those orders internally, such unpredictable circumstances would not qualify as the operation of a system.

 

 

 

numbering blue    The execution of the transaction is taking place on the system or under the rules of the system

 

 

 

The execution of the orders would be considered to be taking place under the rules of the system including where, once the trade price, volume and terms have been agreed through a firm, the counterparties’ names are disclosed, the firm steps away from the transaction and the transaction is then legally formalised between the counterparties outside a trading venue.

 

If an investment firm arranges a transaction between two clients and the clients decide to formalise the trade on a regulated market or an MTF, the transaction would not be considered as taking place under the rules of the system because a transaction cannot be concluded on more than one venue.

 

If an investment firm were to arrange transactions on one system and provide for the execution of the transactions on another system for avoidance purposes, the disconnection between arranging and executing would not waive the obligation for the investment firm operating those systems to seek authorisation as an OTF operator.

 

 

   

 

 

 

 

Voice trading systems 

 

 

UK HM Treasure in the MiFID II Consultation Impact Assessment (p. 3) said:

 

"MiFID II adds one new investment service and activity: operation of an Organised Trading Facility (OTF). An OTF is the platform for multilateral trading interests to interact leading to transactions in the financial instrument. However, in contrast to an MTF where the operator of the platform plays a neutral role in bringing about transactions, the operator of OTF plays an active role in bringing together buying and selling counterparties and helping them to negotiate the terms of a trade. This will often involve voice trading where the operator contacts counterparties by telephone or electronic communications to develop a transaction."

 

Also ESMA underlined that MiFID II is technology neutral and the OTF definition includes voice trading in the same way as the definition of regulated markets and MTFs include voice trading systems.

 

Therefore, an investment firm executing transactions through voice negotiation would be considered as falling under the definition of an OTF where the arrangements in place would meet the aforementioned general conditions.

 

 

Regulated markets and MTFs vs. OTFs - comparison

 

 

A common feature of all trading venues, namely regulated markets, MTFs, and OTFs, is the requirement to lay down transparent and non discriminatory rules governing access to the facility.

 

However, while regulated markets and MTFs are subject to similar 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.

 

In this regard, OTF may specify parameters governing the system such as minimum latency provided this is done in an open and transparent manner and does not involve discrimination by the platform operator.

 

OTF-relevant financial instruments

 

1. bonds

2. structured finance products

3. emissions allowances

4. derivatives

 

 

OTF-Equities

OTFs follow similar organisational requirements to MTFs, however, OTFs have a number of a distinct features:

 

- OTFs may only trade in bonds, structured finance products, derivatives and emission allowance (non-equity instruments);

 

- there are less stringent limitations to the type of activities that the operator of the OTF may undertake both in relation to matched principal trading and trading on own account (additional restrictions apply as an OTF and a systematic internaliser (SI) cannot be operated by the same legal entity);

 

- as opposed to regulated markets and MTFs governed by non-discretionary rules, the OTF operator must must play an active role in bringing about transactions on its platform and exercise discretion either when deciding to place or retract an order on the OTF and/or when deciding not to match potential matching orders available in the system;

 

- as opposed to regulated markets and MTFs that have members or participants, OTFs have clients (as a consequence, transactions concluded on OTFs have to comply with client facing rules, including best execution rules, regardless whether the OTF is operated by an investment firms or a market operator); and


- wholesale energy products that must be physically settled do not qualify as financial instruments when traded on an OTF (so-called "REMIT carve-out" - see below).

 

 

Discretionary order execution

 

 

While regulated markets and MTFs have non-discretionary rules for the execution of transactions, the operator of an OTF carries out order execution on a discretionary basis subject, where applicable, to the pre-transparency requirements and best execution obligations (this is without prejudice to the fact that, because an OTF constitutes a "genuine trading platform", the platform operator should be neutral - Recital 9 MiFIR).

 

Discretionary order execution is potentially the most vague and ambiguous element of the OTF's regulatory set-up.

 

Intuitively, the application of discretion may be particularly interesting if put against the background of the neutrality, the OTF is required to preserve.

 

Pursuant to MiFIR the market operator or investment firm operating an OTF are required to "make clear to users of the venue how they will exercise discretion."

 

 

Execution on a discretionary basis means that the OTF's operator:

 

- has options to consider for the execution of a client’s order, and


- exercises a judgement as to the decision to make and the way forward.

 

An investment firm or market operator operating an OTF can only exercise discretion in the following circumstances (Article 20(6) of MiFID II):


(a) when deciding to place or retract an order on the OTF they operate;

 

(b) when deciding not to match a specific client order with other orders available in the systems at a given time, provided it is in compliance with specific instructions received from a client and with its obligations in accordance with Article 27 of the MiFID II (obligation to execute orders on terms most favourable to the client).

 

The discretion must be exercised at either or both of the above levels (the aforementioned FCA Consultation Paper I of December 2015, CP15/43, p. 114).

 

For the system that crosses clients' orders the OTF operator may decide if, when and how much of two or more orders it wants to match within the system. 

 

The OTF operator may facilitate negotiation between clients as to bring together two or more potentially compatible trading interests in a transaction.

 

ESMA has issued an extensive guidance on what is meant by the discretionary order execution by the OTFs - see Questions and Answers on MiFID II and MiFIR market structures topics, 5 April 2017, ESMA70-872942901-38.

 

Firstly, ESMA has explained that the exercise of any form of discretion does not automatically mean that a venue is an OTF.

 

Further, referring to the aforementioned MiFID II Article 20(6), ESMA analysed in greater detail what is covered by the exercise of discretion at each of the respective levels: a) order discretion and b) execution discretion.

 

 

 

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               Exercise of discretion by the OTF at order level 

 

 

 

numbering blue   When an investment firm or a market operator receives an order from a client, the “order discretion” refers to the judgement exercised by the OTF operator whether to place the order at all on the OTF, whether to place the whole order or just a portion of it on the OTF, and when to do so.

 

When an investment firm or a market operator receives an order from a client, the “order discretion” refers to the judgement exercised by the OTF operator whether to place the order at all on the OTF, whether to place the whole order or just a portion of it on the OTF, and when to do so.

 

This may be the case for instance where an investment firm would receive a buy order for a 500 lots and would decide to place an order for 200 lots only on the OTF, the remaining 300 lots being executed elsewhere.

 

numbering blue   Similarly, and as opposed to the operator of an MTF which may not withdraw an order from the MTF at its own initiative unless for fair and orderly market purposes, the operator of the OTF is expected to make a judgement as to whether and when an order should be retracted from the OTF.

This may be the case where, at a given point of time, the OTF operator considers that a more favourable outcome would be obtained by executing the order on another execution venue foreseen in the best execution policy.

 

numbering blue   The OTF operator may also have placed the order on the OTF, sent it to another trading venue simultaneously, subsequently decided to have the order executed on the trading venue and retracted it from the OTF.

 

numbering blue   The exercise of order discretion would always have to comply with the OTF best execution policy and with client order handling rules.

 

numbering blue   Where clients would be providing a specific instruction to the operator of the OTF, the OTF operator would not be considered as exercising order discretion when complying with that specific instruction.

 

  

 

 

 

 

 

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               Exercise of discretion by the OTF at execution level

 

 

  

numbering blue   Under MiFID II Article 20(6), the exercise of discretion at execution level has to be in compliance with client specific instructions and the best execution policy.

 

The mere implementation of client specific instructions or of best execution obligations would not be the exercise of discretion.

 

numbering blue   The operator of the OTF is expected to exercise a judgement as to if, when, and how much of two matching orders in the system should be matched.

 

For instance, assuming a buy side order for 500 bonds and an opposite order of 200 bonds have been placed into the OTF, the operator of the OTF would exercise discretion when deciding whether the 500 buy side order should not be matched with the sell side order.

 

numbering blue   The exercise of discretion, be it “order discretion” or “execution discretion”, should not be just a possibility foreseen in the rules of the OTF and in the best execution policy of the OTF operator.

 

numbering blue   Discretion has to be actually implemented by the operator of the OTF as part of its ordinary course of business and should be a key part of its activities. It is not expected that any quantitative threshold would be set to assess the exercise of discretion.

 

numbering blue   However, as provided for under Article 20(7) of MiFID II, at the time of authorisation or on ad-hoc basis, the market operator or the investment firm operating an OTF should be able to provide to its national competent authority a detailed description of how discretion will be exercised and in particular when an order may be retracted from the OTF and when and how two or more client orders will be matched in the OTF.

 

numbering blue   The OTF operator should be able to explain to its national competent authority the rationale underpinning the exercise of discretion, such as the set of reasons and the logical basis for not matching two opposite buying and selling interests.

 

numbering blue   Random placing, retracting, matching or non-matching of orders on the OTF would not be considered as the exercise of discretion.

 

numbering blue   Likewise, the exercise of pre-trade controls by the operator of the OTF to ensure fair and orderly trading would not qualify as the exercise of discretion.

 

numbering blue   Post-trade decisions, for example over where transactions are settled, are not relevant either for the purposes of these provisions.

 

numbering blue   Similarly, the decision to enter into a client relationship in compliance with OTF rules on non-discriminatory access does not constitute discretion under Article 20(6) of MiFID II.

 

 

 

 

 

With respect to exercise of discretion by the OTF a number of specific issues arose.


Among them was whether a discretion have to be exercised on an order by order basis.

 

ESMA with this respect also differentiated legal circumstances at an order level and a at a transaction level.

 

Discretion at order level does not have to be exercised by the OTF order by order.

 

As an example, the OTF operator may consider, at a given point in time that some or all orders of a specific size in a specific instrument should be retracted from the OTF as more favourable conditions are temporarily available elsewhere.

 

However, the OTF operator must have the ability to exercise discretion at order level if circumstances so require, for instance in case of prior execution of an order on another trading venue.

 

Conversely, at execution level, discretion whether not to match two potential matching buying and selling interests can only be meaningfully exercised by the OTF at order level.

 

Another problem was whether the use of a fully automated system excludes the exercise of discretion and should therefore be automatically classified as an MTF.

 

ESMA answered to this question in the negative.

 

MiFID II is ‘technology neutral’ and permits any trading protocol to be operated by an OTF, provided it is consistent with fair and orderly trading and the exercise of discretion.

 

Tthe exercise of discretion as to if and when to place or retract an order could possibly be automated through artificial intelligence and algorithms, without necessarily the exercise of human judgement on a case by case basis.

 

Conversely, human intervention is not necessarily sufficient to prove the exercise of discretion.

 

Human intervention that is not based on the exercise of human judgement (for instance, only consisting in the random placing or retracting or matching/non-matching of orders) would not be considered as the exercise of discretion.

 

When discretion is exercised at execution level, i.e. when deciding if, when or how much of two or more trading interests should (or should not) be matched, the exercise of discretion would not preclude the use of automated systems, provided that certain conditions are met.

 

In particular, the sophisticated algorithms supporting automated matching would need to anticipate the circumstances under which the orders would not be matched; they would also have the capacity to ensure that the decision to match (or not to match) two opposite trading interests is in compliance with the best execution policy or a client specific instruction.

 

As one of the differentiating factors from execution algorithms operated by MTFs, the algorithms operated by the OTF would be expected to take into account external market factors or other external source of information to demonstrate the exercise of discretion.

 

 

Regulatory regime for OTF

 

 

MiFID II supplemented Annex I Section A of MiFID I (containing the list of investment services and activities) with point 10 which reads: "Operation of Organised Trading Facilities".

 

Hence, there should be no ambiguities that the operation of an OTF represents an investment service in the MiFID II meaning and, consequently, requires an investment firm licence.

 

The following effect is that market operator authorised to operate an OTF must ensure compliance with the provisions in Chapter 1 of the MiFID II regarding Conditions and Procedures for Authorisation for Investment Firms. 

 

Hence, contrary to MTF, the following articles of the MiFID II Directive are applicable to the transactions concluded on an OTF:
- 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).

 

Moreover, a relevant operator operating an OTF must provide its competent authority the rules and procedures to ensure compliance with the said Articles 24, 25, 27 and 28 of MiFID II for transactions concluded on the OTF where those rules are applicable to the relevant operator in relation to an OTF user (Article 6(e) of the 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).

 

The novelty in the design of the OTF as the regulated entity was presumably at the origin of the rule stipulating that the competent authority may require, either when an investment firm or market operator requests to be authorised for the operation of an OTF or on ad-hoc basis, a detailed explanation why the system does not correspond to and cannot operate as a regulated market, MTF, or systematic internaliser and a detailed description as to how discretion will be exercised, in particular when an order to the OTF may be retracted and when and how two or more client orders will be matched within the OTF.

 

In addition, the investment firm or market operator of an OTF is obliged to provide the national competent authority with information explaining its use of matched principal trading.

  

Moreover, pursuant to Article 2(2)(d) of the said Commission Implementing Regulation (EU) 2016/824 of 25 May 2016, a relevant operator has an obligation to provide its national competent authority with a detailed description of the functioning of its trading system specifying, among others, "a description explaining how the trading system satisfies each element of the definition of an OTF."

 

Further, market operator is required to provide information on:
- whether the system represents a voice, electronic or hybrid functionality;
- in the case of an electronic or hybrid trading system, the nature of any algorithm or program used to determine the matching and execution of trading interests;
- in the case of a voice trading system, the rules and protocols used to determine the matching and execution of trading interests (Article 2(2)(a) - (c) of the said Commission Implementing Regulation 2016/824 of 25 May 2016).

 

 

Application of the best execution policy in an OTF

 

 

ESMA has explained that where an investment firm operates an OTF, the investment firm’s best execution should cover how orders are executed both at the level of the investment firm and at the level of the OTF and, in particular, how discretion is exercised at each stage.

 

Firstly, an investment firm operating an OTF should, in the same way as other investment firms that execute client orders, have a firm-level execution policy setting out the various execution venues, including its own OTF, that it will be considering when receiving a client order and explain in which circumstances an execution venue would prevail over the others.

 

Secondly, the investment firm should have either a separate policy or an additional section in the firm-level execution policy governing how, when a client order is sent to the OTF, the best possible result for the client is achieved taking into account the trading interests in the system and the different execution mechanisms that may be available on the OTF, such as voice execution, electronic RFQ or order book.

 

As the exercise of discretion by the investment firm in its OTF operator capacity is to be in compliance with its execution policy, the document should also set out in details the area(s) in which the OTF operator intends to exercise discretion and the basis on which such discretion will be exercised (Article 20(6) of MiFID II).

 

Equivalent requirements apply to a market operator operating an OTF.

 

In this regard, a market operator would need to have a best execution policy in place, setting out the conditions under which an order received by a client may be executed on its OTF, as described above.

 

 

OTF and systematic internaliser interrelations

 

 

The operation of an OTF and systematic internalisation within the same legal entity is not allowed under MiFID II.

 

Systematic internaliser (SI) and an OTF mustn't be operated by the same legal entity even when they do not trade the same instruments or class of instruments (e.g. an SI in equities and an OTF in derivatives). 

 

 

Article 20(4) MiFID II

 

Member States shall not allow the operation of an OTF and of a systematic internaliser to take place within the same legal entity. An OTF shall not connect with a systematic internaliser in a way which enables orders in an OTF and orders or quotes in asystematic internaliser to interact. An OTF shall not connect with another OTF in a way which enables orders in different OTFs to interact.

 

ESMA on 3 April 2017 expressed the view that the very general wording of Article 20(4) of MiFID II introduces a blanket prohibition of the combination of the OTF and SI activities by the same legal entity across asset classes and instruments.

 

On the ground of the above rule the ambiguity, moreover, arouse whether shared resources between separate entities are legally possible, where an investment firm that is an SI set up a separate legal entity to operate an OTF (or vice-versa).

 

According to ESMA, having two separate legal entities operating the OTF and the SI aims at ensuring that each venue is operated to the sole benefit of its respective clients and is not influenced in any way by the activity undertaken by the other venue.

 

To that end, ESMA is of the view that the two legal entities respectively operating the SI and the OTF should have arrangements in place that prevent information sharing on each other’s relevant activities regarding the operation of the OTF and the SI.

 

 

The OTF operator or any entity that is part of the same group or legal person as the investment firm or market operator should not act as systematic internaliser in the OTF operated by it (MiFIR Recital 9).

 

This would include for instance having distinct management and operational teams and physical separation of activities.

 

Similarly, whereas some elements of the IT infrastructure could be shared, execution systems would be expected to be segregated and safeguards in place to ensure that there is no information leakage across the SI and the OTF activities.

 

Outsourcing from one legal entity to the other should only be considered where the arrangements in place meet a similar test.

 

The above is without prejudice to the MiFID II provisions on identification and management of conflicts of interest to be met by each of the two investment firms.

  

Another aspect is that Article 20(4) of MiFID II limits the circumstances under which an OTF may connect with other liquidity pools by prohibiting orders placed in an OTF to interact with quotes or orders in a SI or with orders in other OTFs.

 

According to ESMA (Q&As of 03.04.2017), interaction would occur when buying and selling interests would comingle in the same liquidity pool.

 

Accordingly, an SI quote may not be placed on an OTF. Nor can an order originating from another OTF.

 

ESMA highlights that a trading interest in an OTF may not be executed against an opposite order or quote on another execution venue.

 

For a transaction to take place, the two opposite trading interests must be placed with the same execution venue.

 

However, this does not prevent the investment firm or the market operator operating an OTF from retracting the order from the OTF and sending it to another OTF, to an SI, an MTF or a regulated market, where consistent with the investment firm’s or the market operator’s execution policy and exercise of discretion.

 

 

Execution of client orders in an OTF against the proprietary capital of the investment firm or a market operator 

 

 

Investment firm or a market operator operating an OTF is not granted the possibility to execute client orders in an OTF against the proprietary capital of the investment firm or market operator operating the OTF or from any entity that is part of the same corporate group and/or legal person as the investment firm and/or market operator.

 

Investment firm or market operator operating an OTF is, however, allowed to engage in matched principal trading in bonds, structured finance products, emission allowances and certain derivatives (which ones presumably be specified by Member States implementing the Directive) provided the following conditions are met:

 

1. the above financial instruments are not subject to the clearing obligation under EMIR, 

 

2. the client has consented to the process.

 

Investment firm or market operator operating an OTF is also allowed to engage in dealing on own account other than matched principal trading with regard to sovereign debt instruments, for which there is not a liquid market.

 

 

Article 20(3) MiFID II

 

Member States shall permit an investment firm or market operator operating an OTF to engage in dealing on own account other than matched principal trading only with regard to sovereign debt instruments for which there is not a liquid market.

 

Liquidity for the purposes of this provision should be assessed using the criteria stipulated in the 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's RTS 2).

 

ESMA has explained that the Regulation at issue sets out how to determine whether a financial instrument has a liquid market.

 

Although the said Regulation was developed for the sole purpose of further specifying the MiFIR pre-trade and post-trade transparency obligations for trading venues and investment firms, ESMA considers that the methodology and criteria set out therein for assessing whether a sovereign bond has a liquid market are also relevant, and should serve as a reference, for the purpose of Article 20(3) of MiFID II.

 

It seems that investment firm or market operator engaging in matched principle trading in an OTF must be prepared for strict oversight of the competent authority.

 

This is to ensure that such trading does not give rise to conflicts of interest between the investment firm or market operator and its clients.

 

In addition, the investment firm or market operator of an OTF is obliged to provide the competent authority with information explaining its use of matched principal trading.

 

 

Market making in an OTF

 

 

Investment firms or market operator operating an OTF are allowed to engage another investment firm to carry out market making on an OTF on an independent basis.

 

 

Article 20(5) MIFID II

 

Member States shall not prevent an investment firm or a market operator operating an OTF from engaging another investment firm to carry out market making on that OTF on an independent basis.

 

For the purposes of this Article, an investment firm shall not be deemed to be carrying out market making on an OTF on an independent basis if it has close links with the investment firm or market operator operating the OTF.

 

An investment firm shall not be deemed to carry out market making on an OTF on an independent basis if it has close links (as defined under Article 4(1)(35) of MiFID II) with the investment firm or market operator operating the OTF.

 

ESMA recalled that, under Article 18(4) of MiFID II, an investment firm operating an OTF must have arrangements in place to clearly identify and manage the potential adverse consequence for the operation of the OTF and its users of any conflict of interest between the interest of the OTF, the investment firm operating the OTF and the sound functioning of the OTF.

 

More generally, ESMA highlighted that investment firms must maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from adversely affecting the interests of clients.

 

 

CCPs as OTFs?

 

 

central counterparty (CCP) defined in Regulation (EU) No 648/2012 (EMIR) as a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer, do not qualify as the OTF. 

 

 


 

 

 

Collateral impact

 

 

Similarly to MTFs, and unlike regulated markets, positions on an OTF count towards EMIR clearing thresholds.

 

 

EMIR reporting

 

 

EMIR reporting requirement covers all derivatives, hence positions on all trading venues (MTFs, OTFs and regulated markets) and OTC are equally covered.

 

 

REMIT carve-out

 

 

OTFs as new platforms that will appear with the MiFID II date of entry into force will be particularly important for the delineation of the so-called REMIT carve-out, and, hence, also determine in practice the extent of the MiFID II scope.

 

 

Compliance costs and business' perspectives

 

 

On the side of expenses there will be one‑off costs for firms, either existing investment firms or firms new to regulation, who want to run an OTF to vary their permissions or apply to be authorised.

 

Another driver of compliance costs of existing trading systems will be requirements imposed on an OTF, restrictions on own account trading including.

 

Given the legal set-up for OTFs will start with the MiFID II entry into force (3 January 2018), there are currently no practical examples for the functioning OTF business ventures.

 

Some markets intending to apply for an OTF license operate today as so-called non-MTFs (for example EEX).

  

The overall extent, to which platforms will register as OTFs, and the precise quantification of this population can't be, however, predicted with certainty at present.

 

It is expected that with the introduction of OTFs as a new category of trading venue for non-equity instruments, many new trading venue providers that currently operate outside a regulated environment (e.g. dark pools, crossing networks, voice brokerage systems) will emerge (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. 20).

 

For calculating compliance costs, some estimates revolve around 25 impacted venues that would be classified as OTFs (Europe Economics, Data Gathering and Cost Analysis on Draft Technical Standards Relating to the Market Abuse Regulation, 6 February 2015, p. 14).

 

It is generally expected, the creation of the OTF category will likely bring systemic benefits, in particular it should aid the price formation process in bonds and derivatives as well as enhance the resilience of the systems being used for the trading of these instruments.

 

 

 

 

 

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Last Updated on Sunday, 21 May 2017 17:11
 

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