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MiFID II 

Organised Trading Facilities ("OTFs") 

01 December 2011

Impact Red traffic light High impact, extra compliance obligations and systems changes required.

Other areas to consider

Automated trading; Systematic Internalisers; MTFs; Trade reporting.

Current MiFID rules

There are currently no MiFID rules to cover organised trading facilities

FSA rules

There are currently no FSA rules to cover organised trading facilities

Proposed changes

Draft Directive
A
rticles 18, 20, 24, 25, 27, 28, 31, 32, 33, 34, 53, 59, 60
Draft Regulation Recital (7), Article 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 22, 23

The Commission is concerned about evolving market practices and technological developments, and with a view to mitigating harmful regulatory arbitrage, has made the proposals in the draft Directive as described below:

Broad definition of OTF

Introduction of a broad definition of OTF to capture any facility or system that is not an MTF or regulated market, operated by an investment firm or market operator in which multiple third party buying and selling interests in financial instruments are able to interact in the system in a way that results in a contract.  This includes facilities that are bilateral or multilateral, discretionary and non-discretionary. Pure OTC trading and order routing systems are excluded.

An OTF will include broker crossing systems (internal matching systems that execute client orders against each other) and also derivatives trading systems. The operator of the OTF may not execute client orders against its proprietary capital.

Authorisation Requirement

Operating an OTF would be a new licensable activity under MiFID and a request for authorisation as an OTF must include a detailed explanation as to why the system does not correspond to and cannot operate as a regulated market, MTF or systematic internaliser.

General requirements for all OTFs

  • Complete notification and description of the facility or system notified to the competent authority.
  • Competent authority to notify ESMA, which would maintain a complete list of all facilities and publish details of the system on its website.
  • Establish transparent rules for fair and orderly trading and effective criteria for efficient execution of orders.
  • Compliance with the principal investor protection measures relating to informing clients, assessment of suitability/appropriateness, best execution and client order handling.
  • Adoption and publication of clear rules regarding access to the facility or system.
  • Arrangements for the sound management of the technical operations of the facility or system, including establishment of effective contingency arrangements to cope with the risks of disruptions.
  • Effective monitoring of its users and clients to identify market abuse, significant breaches of rules or disorderly trading conditions.
  • Arrangements to ensure algorithmic trading systems do not create disorderly market conditions.
  • Compliance with instructions from the competent authority to suspend or remove a financial instrument from trading.
  • For commodity derivatives, compliance with the position reporting requirements (i.e. weekly report of aggregate positions of traders in emission allowances and commodity derivatives) and application of limits to derivative positions.
  • Arrangements to prevent the execution of client orders in an OTF against the proprietary capital of the firm or market operation of the OTF.
  • Application of pre-trade and post-trade transparency requirements to OTFs (in the same fashion as for RMs/MTFs).
  • Requirement to suspend trading in a financial instrument if another regulated market, MTF or OTF suspends that financial instrument, unless continuing trading can be justified in exceptional circumstances.
    OTFs to be subject to requirements relating to exchange of information and co-operation of trading venues, in particular in relation to disorderly trading conditions or suspension of trading of financial instruments.
  • Obligation to keep data relating to orders received for five years.
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