Introduction of multilateral trading system dubai
Operating an OTF will be an investment service so a person wishing to do so will need to be licensed as an investment firm. There are two different levels of discretion for the operator of an OTF: The operator of an OTF that arranges transactions in non-equities may facilitate negotiation between clients so as to bring together two or more potentially compatible trading interests. As a result of this discretion, the operator of an OTF will owe certain conduct of business duties to its clients including acting in accordance with their best interests, appropriateness, best execution and order handling.
Please see our briefing on conduct of business requirements for more information on these subjects. The concept of an OTF does not include facilities where there is no genuine trade execution or arranging taking place in the system, such as bulletin boards, aggregation engines, electronic post-trade confirmation or portfolio compression arrangements.
However, there is an exception with regard to sovereign debt instruments for which there is no liquid market. Unlike the operator of a RM or MTF, an OTF operator is also permitted to engage in matched principal trading in bonds, structured finance products, emission allowances and derivatives that are not subject to the clearing obligation pursuant to EMIR provided the client consents to the process.
An OTF will also not be permitted to connect with another OTF to enable interaction of orders between the two systems. It will be permissible for an OTF to engage market makers but any such investment firms must not have close links with the OTF operator. For example, they must all have transparent rules and procedures for fair and orderly trading and objective criteria for the efficient execution of orders, as well as transparent rules for determining which instruments can be traded and transparent, non-discriminatory and objective membership criteria.
There are also new requirements relating to fee structures, which must be transparent, fair and non-discriminatory, and not create incentives that contribute to disorderly trading or market abuse. All types of trading venue will be subject to enhanced and identical surveillance requirements with monitoring for compliance with their rules and monitoring of orders, cancellations and transactions undertaken in order to identify breaches, disorderly trading and market abuse.
They will have to inform their home Member State competent authority of any such concerns. All trading venues will be required to have in place effective systems, procedures and arrangements to ensure their systems are resilient and have sufficient capacity to ensure orderly trading under severe stress, and have effective business continuity arrangements.
There are also numerous requirements as to functionality, many of which will be further detailed in regulatory technical standards, including the ability to reject orders that exceed thresholds or are erroneous, halt or constrain orders and cancel, vary and correct transactions. There are also requirements as to tick sizes for certain instruments and synchronisation of business clocks.
Both trading platforms and investment firms face greater regulation in relation to algorithmic trading, market making and direct electronic access, with a number of new requirements relating to both functionality of systems used and formalising the relationship between trading venues and users.
For more information, please see our briefing note on high frequency and algorithmic trading. The new transparency and transaction reporting obligations in MiFIR apply to all three types of trading venue, albeit calibrated for different types of instrument and different types of trading, and to investment firms when trading financial instruments admitted to trading on a RM or traded on a MTF or OTF.
The transaction reporting requirements will also be extended to financial instruments traded on an OTF or whose value depends on such an instrument. For more information, please see our briefing note on these subjects. MiFIR will implement the G20 commitment that was not included in EMIR, to mandate the trading of standardised derivatives on exchanges and electronic platforms by requiring certain derivatives to be traded on a RM, MTF or OTF or certain trading venues in third countries that have been considered equivalent for that purpose and reciprocate by recognising EU trading venues.
The obligation departs from the normal scope of MiFID II and MiFIR and applies to financial and non-financial counterparties that are subject to the clearing obligation in EMIR, as well as third country entities that would be subject to it if they were established in the EU and either trade with in-scope EU entities or other third country entities where their transactions could have a direct, substantial and foreseeable effect within the EU or it is appropriate to prevent evasion of MiFIR.
Regulatory technical standards will be developed to determine which derivatives will be subject to this trading obligation.
It appears that the starting point will be those derivatives that are mandated for clearing under EMIR, however, ESMA may specify additional characteristics to create more granular categories than those subject to the clearing requirement under EMIR.
However, to be mandated for trading, the derivatives must also be traded on at least one trading venue and be considered to be sufficiently liquid, taking into account the average frequency and size of trades over a range of market conditions, the number and type of active market participants and the average size of spreads.
ESMA must also consider the likely impact of listing a derivative on its liquidity and the commercial activity of end users, and may determine that a particular derivative is only sufficiently liquid in transactions below a certain size.
However, ESMA also has an own initiative power to identify classes of derivatives that should be subject to the trading obligation but which no central counterparty CCP has been authorised to clear or which are not admitted to trading on a trading venue. Investment firms will be required to trade shares that are admitted to trading on a RM or traded on a trading venue on a RM, MTF or SI or a third country trading venue that has been assessed as equivalent for these purposes.
An investment firm that operates an internal matching system which executes client orders in shares, depositary receipts, exchange traded funds, certificates and other similar financial instruments on a multilateral basis must be licensed to operate an MTF.
An SI is a firm which deals on own account when executing client orders outside a trading venue. The definition of an SI has been updated to reflect the introduction of OTFs, as well as to provide that a SI must deal on a substantial, as well as an organised, frequent and systematic basis.
In the CP, ESMA proposes that the frequency criteria is met if the number of OTC transactions executed by the SI in liquid instruments is, during the most recent calendar quarter, greater than a particular percentage of the total number of transactions in the relevant financial instrument in the EU in the same period.
MiFIR also permits investment firms to opt into the SI regime where the quantitative thresholds are not met, provided it complies in full with all the requirements. Information on the pre-trade transparency requirements applicable to SIs is set out in our briefing note on transparency and transaction reporting.
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