On 2 February 2023, the European Securities and Markets Authority (ESMA) published its long-awaited Opinion on the Trading Venue Perimeter. Publication of the opinion follows a public consultation that ESMA held early last year, and stems from ESMA’s commitment to provide guidance on the definition of multilateral systems and, specifically, when systems should be considered as multilateral and authorised as trading venues.
By way of background, the market structure framework as set out by Directive 2014/65/EU on markets in financial instruments (MiFID II) provides for three types of trading venue: regulated markets, multilateral trading systems (MTFs) and organised trading facilities (OTFs). The objective of the framework is to ensure that all systems falling within the definition of a “multilateral system” (meaning “any system or facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system”) are duly authorised as of the said three categories of trading venues. That said, in light of the varying market interpretations and inconsistent application of the trading venue framework, and lack of clear directions of what indeed should constitute a multilateral system triggering the authorisation requirement, ESMA has decided to issue its opinion on the trading venue perimeter.
In its final opinion, addressed to Member State competent authorities (NCAs), ESMA sets out further guidance on each limb of the definition of “multilateral system”, i.e. that:
(a) it is a system or facility; and
(b) there are multiple third-party buying and selling interests; and
(c) those trading interests are able to interact; and
(d) trading interests need to be in financial instruments.
In addition, ESMA provides guidance on three specific cases where it has been noted that the dividing line was more difficult to draw, namely:
(a) Technology providers: ESMA clarifies that the technology platform would not normally be subject to authorisation as a multilateral trading system and are considered to be a bulletin board type system if it has the following characteristics: (1) the system consists of an interface that only aggregates and broadcasts buying and selling interests in financial instruments; (2) the system does not allow for the communication or negotiation between advertising parties, including any notification of any potential match between buying and selling interests in the system, and does not impose the mandatory use of tools of affiliated companies; (3) it is not possible to execute or to bring together buying and selling interests in the system.
(b) Request-for-quote (RFQ) systems: ESMA clarifies that RFQ systems should be considered multilateral and that these require authorisation as a trading venue. If a system allows (or requires) the client to request a quote from only one dealer the system would still be considered as multilateral. On the other hand, a bilateral system includes the case of a single-dealer platform that allows different clients to interact with only one counterparty, that also operates the system and deals on own account. However, where a similar system is operated by a third-party, who sets the rules of how trading interests interact and brings together trading interests without trading on own account, it must be considered as multilateral.
(c) Systems that pre-arrange transactions: ESMA considers that the activity of pre-arranging a transaction in a multilateral way is only possible without authorisation as a trading venue where the following conditions are met: (1) all transactions arranged through the investment firm’s system or facility have to be formalised on a trading venue; (2) the transaction benefits from a pre-trade transparency waiver in the trading venue where it will be formalised.
In terms of the next steps, NCAs will need to ensure that firms assess their systems against ESMA’s opinion, including whether they are operating under the appropriate authorisation. To this end, ESMA expects NCAs to require firms to take appropriate action, including further discussions with the respective NCA if needed, in order to swiftly apply for authorisation as a trading venue where appropriate.