Global commodities broker Marex Spectron has announced that it has received approval on its application from the UK’s Financial Conduct Authority (FCA) to operate an Organised Trading Facility (OTF) under MIFID II from January 3, 2018.
MiFID II introduces a new category of trading venue called OTFs. An OTF is a multilateral system that is not a Regulated Market (RM) or Multilateral trading facility (MTF). Within an OTF, multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives are able to interact in a way that results in a contract.
Equities are not permitted to be traded through an OTF.
The introduction of OTFs means that many transactions currently categorised as off-venue will come within a multilateral trading environment. This should increase overall market transparency, reduce the prevalence of opaque market models and products, and increase the quality of price discovery, investor protection and liquidity.
OTFs are an important addition to the EU market infrastructure, and will help market participants to meet MiFID II’s platform trading obligation for derivatives. Where ESMA deems that a derivative instrument subject to the clearing obligation is sufficiently liquid for the trading obligation to apply, OTFs will provide an additional venue type on which to trade those instruments.
European regulators also expect that instruments not subject to the trading obligation will be traded through OTFs, for example via market making schemes. A key difference between OTFs and MTFs is the ability and requirements on an OTF to use discretion when matching buying and selling interests, provided the use of discretion is in line with fair and orderly trading and with best execution obligations to clients. This helps to provide liquidity and price transparency in asset classes that have traditionally been less liquid.
This should help facilitate competition in these markets, where execution has traditionally been between large market participants, dealing in large sizes. Bringing over the counter (OTC) contracts on venue should bring better price transparency.
The requirements that apply to OTFs and their transactions are generally the same as the requirements for MTFs. This is because MTFs and OTFs are similar multilateral systems that bring together third-party buying and selling interests in financial instruments in a way that results in a contract.
As with MTFs, OTFs must establish clear rules and processes around trading. For example, an OTF operator must establish transparent rules and procedures for fair and orderly trading, and publish rules about which instruments can be traded on their venue. They must also establish and publish clear and non-discriminatory access rules, be able to suspend instruments from trading, and maintain resilient systems to facilitate continuity of trading under stressed conditions.
OTFs are also subject to the same transparency requirements as RMs and MTFs. Pre- and post-trade transparency both apply to any order or transaction executed through the systems or under the rules of an OTF. According to the new pre-trade transparency regime, OTF operators will have to publish the details of current bids and offers and the depth of trading interests of those prices. To comply with post-trade transparency rules, OTF operators will have to make public the details of transactions as close to real time as is technically possible.
OTFs are also required to establish and maintain effective arrangements and procedures to enable the regular monitoring of compliance by the members. OTFs must monitor the transactions undertaken by their members using the venue’s systems to identify breaches of the rules, disorderly trading conditions or conduct that may involve market abuse. They are obliged to do so continuously and to take action if they identify such activity.