MiFID II to drive business off venues and away from Europe

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The Markets in Financial Instruments Directive MiFID is one of the cornerstones of EU financial services law setting out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with. The legislative proposals were the subject of intense political debate between the European Parliament, the Council of the EU, and the Commission.

However, informal agreement between the EU institutions was finally reached in February Entry into application will follow 30 trading off venue after entry into force on 3 January The deadline for responses to the CP and DP has now closed. ESMA is expected to provide advice on the delegated acts to the Commission by the end of and drafts of the technical standards by the middle of Alongside regulated markets RMs and multilateral trading facilities MTFsthis will be a third type of multilateral system in which multiple buying and selling interests can interact in a way that results in contracts.

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 trading off venue 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 Trading off venue 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 trading off venue 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 trading off venue 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 trading off venue 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 trading off venue requirements as to functionality, many of which will be further detailed in regulatory technical standards, including the ability to reject trading off venue 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, trading off venue a number of new requirements relating to both functionality of systems used and formalising the relationship trading off venue trading venues and users. For more information, please see our briefing note on high frequency and algorithmic trading. The new transparency and transaction reporting trading off venue in MiFIR apply to all three types of trading venue, albeit calibrated for different types trading off venue 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 trading off venue 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 trading off venue 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 trading off venue characteristics to create more granular categories than those subject to the clearing requirement under EMIR.

However, to be mandated for trading off venue, the derivatives must also be traded on at least one trading trading off venue and be considered to trading off venue 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 trading off venue certain size. However, ESMA also has trading off venue own initiative power to identify trading off venue of derivatives that should be subject to the trading off venue 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 trading off venue 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 trading off venue 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 trading off venue relevant financial instrument in the EU in the trading off venue 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. CCPs are required to clear financial instruments on trading off venue non-discriminatory and transparent basis regardless of the trading venue on which a transaction is executed, although the CCP may require the trading venue to meet operational and technical requirements.

The CCP may only grant access if a relevant Member Trading off venue competent authority considers that this would not threaten the smooth and orderly functioning of the markets or, in certain cases relating to derivatives, where it would not require an interoperability arrangement.

The CCP can only deny access under certain conditions to be defined in regulatory technical standards, but which will include the anticipated volume of transactions, the number and type of users, arrangements for managing operational risk trading off venue complexity and other factors creating significant risk.

ESMA considered that access should be given wherever it does not give rise to risks that cannot be effectively managed or adequately mitigated and therefore access denial should be considered with the aim of achieving this objective.

However, ESMA does recognise that differences in asset classes may need to be taken into account when considering access. On a similar basis, a trading venue must, on request, provide trade feeds on a non-discriminatory and transparent basis to a CCP that wishes to clear transactions that are concluded on that trading venue. There are also requirements on persons with proprietary rights in benchmarks to ensure that CCPs and trading venues are permitted access to relevant price and data feeds and information on composition, methodology and pricing for the purposes of clearing and trading and licences on a fair, reasonable and non-discriminatory basis.

Access must be given on a reasonable commercial basis and taking into account the price at which access is granted on equivalent terms to other CCPs and trading venues. Different prices can only be charged where objectively justifiable. Non-EU trading venues that are recognised for the purposes of the derivatives trading obligation and non-EU CCPs that are recognised as such under EMIR are permitted to make use of these access rights if the Commission has concluded that the relevant third country provides reciprocal access to its trading and clearing infrastructure to foreign trading venues and CCPs.

There is a similar reciprocity requirement for third country trading venues and CCPs wishing to request a licence and access rights to a benchmark on the same terms as EU infrastructure. In most cases, these will require third country entities to establish a branch and become licensed in the relevant Member States for business with retail and elective professional clients or to register with ESMA for business with per se professional clients and eligible counterparties.

This regime is discussed in trading off venue detail in our briefing on the subject. Use of trading off venue by Norton Rose Fulbright. We use cookies to deliver our online services. Details and instructions on how to disable those cookies are set out at nortonrosefulbright.

By continuing to use this website you agree to our use of our cookies unless you have disabled them. Online services, resources, and tools Technical resources Stay connected. Introduction The Markets in Financial Instruments Directive MiFID is one of the cornerstones of EU financial services law setting out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with.

Market surveillance 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. Algorithmic trading, market trading off venue and trading off venue electronic trading off venue Both trading platforms and investment firms face greater regulation trading off venue 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.

Transparency and transaction reporting 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 trading off venue trading financial instruments admitted to trading on a RM or traded on a MTF trading off venue OTF.

Derivatives 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.

Shares and equity like instruments 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 trading off venue these purposes. Within the Trading off venue CCPs are required to clear financial instruments on a non-discriminatory and transparent basis regardless of the trading venue on which a transaction is executed, although the CCP may require the trading venue to meet operational and technical requirements.

Third countries Non-EU trading venues that are recognised for the purposes of the derivatives trading obligation and non-EU CCPs that are recognised as such under EMIR are permitted to make use of these access rights if the Commission has concluded that the relevant third country provides reciprocal access trading off venue its trading and clearing infrastructure to foreign trading venues and CCPs.

Roberto Cristofolini Paris Casablanca. Gijs van Leeuwen Amsterdam. Piotr Julian Strawa Warsaw. Subscribe and stay up to date with the latest legal news, information and events

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A multilateral trading facility MTF is a European regulatory term for a self-regulated financial trading venue. These are alternatives to the traditional stock exchanges where a market is made in securities, typically using electronic systems. The concept was introduced within the Markets in Financial Instruments Directive MiFID , [1] a European Directive designed to harmonise retail investors protection and allow investment firms to provide services throughout the EU.

Article 4 15 of MiFID describes MTF as multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments — in the system and in accordance with non-discretionary rules — in a way that results in a contract. The term 'non-discretionary rules' means that the investment firm operating an MTF has no discretion as to how interests may interact.

Interests are brought together by forming a contract and the execution takes place under the system's rules or by means of the system's protocols or internal operating procedures. The MTF can be operated by a market operator or an investment firm whereas the operation of a regulated market is not considered an investment service and is carried out exclusively by market operators that are authorised to do so.

The United States equivalent is an alternative trading system. The rules for operating exchanges varied from country to country, with some exchanges granted exclusivity over certain services for that country's market. Consequently, European share trading tended to be conducted on one specific venue, like the Euronext Paris market for French securities or the LSE for United Kingdom securities.

Permission to run any of the three types of service was required from an appropriate regulator, with the existing exchanges registering as regulated markets. MTFs are a kind of "exchange lite" [2] because they provide similar or competing trading services and have similar structures, like rulebooks and market surveillance departments.

Market operators are also arbiters for securities. Companies wishing to list upon a regulated market undergo a listing process and pay fees; this allows the operator to ensure that only appropriate securities are available for trading. This may involve requirements about the number of shares that are available, standards around how the accounts of the company are maintained or strict rules about how news is released to the market.

Whether or not a security has been "admitted to trading on a regulated market" is a key concept within MiFID, and is fundamental in how the rules apply to trading in the security. MTFs do not have a standard listing process and cannot change the regulatory status of a security. New entrant MTFs have had a considerable impact on European share-trading.

MiFID enabled trading venues to compete with one another. The legacy exchanges largely chose to keep to their existing business models and scope, but new entrant MTFs have made a significant impact.

Chi-X Europe , the largest MTF by volume, [4] is also the largest trading venue in Europe according to some statistics. This is part of a process known as fragmentation , where liquidity for one security is no-longer concentrated on one exchange but across multiple venues.

This in turn forced traders to make use of more sophisticated trading strategies such as smart order routing. These all made the new venues highly attractive and to take market share. In turn, existing venues were forced to discount heavily, [6] significantly impacting revenues. Although they have forced significant adjustments within the equity trading markets, the MTFs themselves have had limited success. Most investment banks run an internal crossing system.

These systems cross clients' orders against one another, or fill the orders directly off the bank's book. Nomura said its decision was for "commercial purposes". Goldman Sachs has also announced that it will launch an MTF. The exact regulatory status of broker crossing systems is a matter of debate and controversy.

It is expected to be an area of future regulatory intervention. From Wikipedia, the free encyclopedia. Official Journal of the European Union. Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock. Authorised capital Issued shares Shares outstanding Treasury stock. Electronic communication network List of stock exchanges Trading hours Multilateral trading facility Over-the-counter.

Alpha Arbitrage pricing theory Beta Bid—ask spread Book value Capital asset pricing model Capital market line Dividend discount model Dividend yield Earnings per share Earnings yield Net asset value Security characteristic line Security market line T-model. Algorithmic trading Buy and hold Contrarian investing Day trading Dollar cost averaging Efficient-market hypothesis Fundamental analysis Growth stock Market timing Modern portfolio theory Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory Random walk hypothesis Sector rotation Style investing Swing trading Technical analysis Trend following Value investing.

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