According to their express intention to move as much trading as possible from not regulated to regulated facilities, MiFID II/MiFIR reorganise the infrastructure financial instruments shall be traded on. Any financial instruments trading system shall be “properly regulated and authorised” as either one of the multilateral trading venues described below or as a systematic internaliser.
Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs)
According to MiFID II/MiFIR, a Regulated Market (RM) is a multilateral system that is operated or managed by a market operator and that brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments within the system. In contrast to Organised Trading Facilities (OTFs), RMs must execute transactions on a non-discretionary basis.
RMs provide a form of organised trading functionality very similar to that of Multilateral Trading Facilities (MTFs). However, operating an RM, unlike operating an MTF, is neither an investment activity, nor an investment service under MiFID II/MiFIR. However, requirements on the management eligibility and the operational set-up do not differ from the ones imposed on investment firms or induced by investment activities.
A Multilateral Trading Facility (MTF) is a multilateral system that can be operated by an investment firm or a market operator. Like an RM, it “brings together multiple third-party buying and selling interests in a financial instrument”. Like with RMs, transactions at MTFs may not be executed at their operators’ discretion. Not limited to specific types of instruments, neither RMs nor MTFs may trade on own account and against own capital – all points in which they differ from OTFs.
Organised Trading Facilities (OTFs)
With the Organised Trading Facilities (OTFs) an entirely new category of trading venues for non-equity instruments such as bonds, structured finance products, emissions allowances and derivatives has been introduced. Like the existing Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs) for equity and equity-like instruments, OTFs may not execute orders against proprietary capital (except trading in sovereign bonds).
However, in contrast to RMs and MTFs, OTF operators may perform the execution of orders on a discretionary basis where compliant with pre-trade transparency requirements and unless acting against the interests of their clients – i.e. they have to adhere to the best execution regime. OTFs are free in placing or retracting orders and also with a view to the extent to which client orders will be matched within their system.
Reversely, OTFs may encourage negotiations between clients where they assume a common level of compatible interests between clients. An OTF is neither allowed to be a Systematic Internaliser (SI), nor to connect with one which could otherwise result in OTF orders and SI quotes or orders to interact. Also, it is not allowed for an OTF to connect with another OTF.
Systematic Internalisers (SIs)
Although not a venue in the classic sense of the term, the role of a Systematic Internaliser (SI) and the changes to the regime suggest to discuss it in the venue context.
The original definition was introduced in 2007. Under MiFID I it has however been limited to trading in shares; there was also no quantitative specification as to when trading in certain instruments becomes systemically relevant.
MiFID II/MiFIR define SIs as “investment firms which, on an organised, frequent, systematic and substantial basis, deal on own account when executing client orders outside a regulated market, an MTF or an OTF”.
Most importantly, the substantiality will henceforth be calculated by either an investment firm’s over-the-counter (OTC) trading volume in a specific instrument vs. its total trading volume in this instrument or, alternatively, by an investment firm’s OTC trading volume in a specific instrument vs. the total trading in the European Union in this instrument.
Upon reaching or exceeding specific thresholds that effectuate the SI status, a number of transparency, best execution and reporting obligations will apply. Investment firms have to make public quotes for liquid equity and equity-like instruments which they trade in their capacity as SIs. They have to execute the orders they receive from their clients in relation to financial instruments for which they are SIs at the prices quoted at the time of reception of the order.
Some exceptions may apply concerning trade volume and/or price. SIs must also provide quarterly reports concerning execution quality that include information such as price, date and execution venue, but also specific information such as outage times and number of failed transactions. In addition, they have to provide their competent authorities with reference data relating to those OTC derivatives for which they are SIs.
While subject to stringent regulatory requirements, SIs are not allowed to bring together third-party buying and selling interests in functionally the same way as a trading venue.