31 一月 2022 Benjamin Maconick - James Morris Financial Regulation

MiFID - ESMA consults on opinion on the trading venue perimeter

On 28 January, ESMA published a consultation paper with proposals aimed at clarifying the MiFID II provisions relating to multilateral systems and the trading venue authorisation perimeter. This consultation paper is a precursor to ESMA issuing an ESMA Opinion with a view to clarifying the MiFID II trading venue perimeter. The consultation follows up on ESMA's final report on the functioning of OTFs under MiFID II (see our earlier briefing note), and further develops several of the ideas discussed by ESMA as part of that consultation process.

As with the previous final report, a focus of this consultation is the treatment of “technology providers". ESMA proposes to give broadly helpful clarity that internal Order Management Systems (OMS) and (some) Execution Management Systems (EMS) should fall outside the trading venue perimeter. However, ESMA suggests that EMS which permit firms to send orders to OTC counterparties (not just to trading venues) may “under certain circumstances" constitute multilateral systems in their own right.

In addition, ESMA analyses the position of RFQ systems. In confirming that a platform which offers an RFQ-to-one trading platform can be a multilateral system, ESMA unhelpfully suggests that systems which only permit one-to-one interactions (or, indeed, where there is only ever one trading counterparty) can still be multilateral systems (and thus require authorisation as a trading venue).

ESMA does seek to draw a distinction between reception and transmission of orders (“RTO") and operation of a multilateral system in the consultation paper itself. However, the draft Opinion itself seems, in places, difficult to reconcile with the idea that a broker conducting RTO is not operating a multilateral system in doing so given the Opinion seeks to draw interactions where there are only two counterparties intermediated and matched in some way by another entity in-scope of the multilateral systems concept.

ESMA also reiterates the position it stated in the Final Report that a system that “pre-arranges" transactions for execution on a trading venue is not itself multilateral, now taking the view that the pre-arranging firm acts as 'an extension of' the trading venue where the transaction is ultimately formalised. Though not replicated in its draft Opinion, ESMA suggests in its commentary that the trading venue on which transactions are ultimately formalised would be obliged, through contractual arrangements, to ensure that all MiFID II rules are complied with (including with respect to non-discriminatory access and fees), which could lead to trading venues seeking to impose additional conditions on members/participants that use their facilities to formalise pre-negotiated transactions.

The paper closes for comment on 29 April 2022, with a view to a final report in Q3 2022. It is likely that technology providers, industry associations and other market participants will want to use the response period to advocate for changes to elements of ESMA's proposals.

Summary

Definition: The paper examines the definition of multilateral systems and the implications of the changes introduced in MiFID II with regards to trading venue authorisation. In several places this involves restating guidance already given by ESMA, e.g. that the multilateral system definition is technology neutral, that any system meeting the multilateral system definition needs to seek authorisation and change its rules as necessary to operate in compliance with the rules applicable to MTFs/OTFs, and that conclusion of a contract under the system's rules is not a required element of the multilateral system definition.
Multiple “third party" buying and selling interests: In considering whether there are “multiple third-party buying and selling interests", ESMA refers to the CJEU's judgment in Robeco and others v AFM (C-658/15) to highlight that the existence of a system operator separate to the trading parties is sufficient to mean that this condition is satisfied. As a consequence, while a systematic internaliser which both operates its own system and enters into trades does not operate a multilateral system, a person who operates a system where all orders are routed to a single (third party) dealer would be multilateral (notwithstanding that all transactions are entered into with a single dealer). The breadth of this statement could be problematic, for example in group contexts (e.g. where one affiliate operates the quoting/order routing system, while another affiliate enters into the resulting transactions).
Meaning of “interaction": ESMA states that “interaction" happens in a system where members are able to react to trading interests, i.e. where it is possible to act on advertised trading interests and match, arrange and/or negotiate on essential terms (being price, quantity) with a view to dealing. Conclusion of a contract is not required. Though recalling guidance previously given, certain of ESMA's statements (e.g. that systems or facilities where there is “confirmation of a trade" would require authorisation as a trading venue) could have significant consequences for existing systems.
The position of technology providers: Consideration is given to the position of “technology providers", meaning (1) communication tools and (2) OMS/EMS providers.
With respect to communication providers, ESMA proposes to provide a narrow definition of a “bulletin board" (in line with its proposals in the Final Report on the functioning of OTFs) to assist in drawing the boundary between systems that require trading venue authorisation and those which do not.
Understanding OMS propositions to be in-ward looking (e.g. as technology to help firms manage the order lifecycle internally), ESMA takes the view that such systems would not be multilateral systems. ESMA proposes the same treatment with respect to EMS that simply manage the submission of orders to trading venues. However, where an EMS also sends orders for execution to specific counterparties, “under certain circumstances" such systems may be multilateral systems in their own right. ESMA suggests that functionality permitting the firm deploying the EMS to send RFQs to multiple counterparties and/or systems where a third-party operator of the EMS influences the operation of the system are more likely to constitute multilateral systems.
RFQ systems: ESMA also considers Request for Quote systems specifically. Applying the principles discussed above deriving from the Robeco case, ESMA explains that in its view any system where the operator is distinct from two or more trading parties will be a multilateral system. Therefore, even if all RFQs/orders are routed to a single counterparty by the operator (referred to as a “multilateral single-dealer platform"), or if the system only allows a client to send a request to one of N dealers, the system will still be multilateral. This view could have significant implications for bilateral chat/messaging services that are used for trading. ESMA does state that general purpose communication systems are out of scope of the multilateral systems concept but this statement is difficult to reconcile with the rest of the opinion, and it is unclear where the line should be drawn between a general purpose communication system and other types of systems that ESMA describes.
Pre-arranged transactions. With respect to pre-arranged transactions ESMA reiterates its thinking from the Final Report, i.e. that firms which pre-arrange transactions for execution on a trading venue do not themselves require authorisation as a multilateral system. This is, however, subject to the provisos that (a) all transactions are formalised on a trading venue (and thus any potential for even a small number of transactions to be formalised OTC would trigger trading venue authorisation) and (b) the transaction benefits from a pre-trade transparency waiver on the trading venue where it will be formalised. In contrast to the previous Final Report where ESMA characterised this arrangement as an outsourcing from the trading venue to the pre-arranging firm, ESMA now explains this relationship as a “delegation of formalisation" from pre-arranging firm to trading venue. In its commentary, however, ESMA does suggest that trading venues would be obliged to ensure (via contractual arrangements) that pre-arranging firms comply with certain MiFID II provisions including with respect to non-discriminatory access and fees.