There are three types of trading venue under MiFID II: Regulated Markets, Multilateral Trading Facilities and Organised Trading Facilities. MiFID II introduced a definition of multilateral system[1], still relevant in the UK, which is common to all types of trading venue and requires that all multilateral systems operate in accordance with Title II or Title III of MiFID II (as appropriate to the type of trading venue)[2]. In practice this means that the whether a system or facility is considered to be multilateral will dictate whether that system or facility is in the regulatory perimeter for authorisation.

On 22 September 2022 the FCA published a Consultation Paper (CP22/18) on the perimeter of the definition of trading venue. The Consultation Paper was published in response to the Wholesale Markets Review Consultation Response[3] which recognised that there is a need for greater clarity on the types of firms which need authorisation as a trading venue. The FCA Consultation Paper focuses on the four main elements of a multilateral system proposing guidance on each of these and how they apply to specific types of arrangements. Prior to the UK’s withdrawal from the EU the FCA said that firms should continue to have regard to the EU non-legislative material, such as opinions and Q&As. In respect of the trading venue perimeter, the FCA propose that certain ESMA Q&As dealing with the trading venue perimeter (Q&As 7, 10, 11 and 12 in section 5) should not form part of the FCA supervisory expectations following issuance of the FCA’s final guidance.

On the EU side, ESMA published a Consultation Paper on its opinion on the trading venue perimeter in January 2022. This initiative follows ESMA’s earlier publications, notably on the functioning of Organised Trading Facilities and ESMA’s commitment to deliver clarifying guidance as to when a system should be considered a multilateral system and as such, to seek authorisation as a trading venue. Following the consultation period, which concluded at the end of April 2022, publication of ESMA’s final opinion is still pending.

This note looks at the key points arising from the FCA paper and highlights where any differences may exist in the FCA’s and ESMA’s opinions as understood to date.

Element of a multilateral system (MS) Proposed guidance to be issued by FCA FCA examples of what might be in/out Potential differences between the FCA’s stance in the Consultation Paper and ESMA’s opinion
Characteristics of a system or facility General purpose communication systems, such as chat rooms are not MS.

Even if the operator of a general purpose communication system is not operating a MS, a person using the system to operate a trading system or facility may be operating a MS if the other elements of the definition are met.

If the system has features specifically designed to enable the interaction of trading interests it will be a MS. Of relevance is: the role the operator plays in determining who can access the system and under what conditions, the monitoring and performance of the system and users’ behaviour, the types of financial instruments and the reporting of information to members.

Other considerations include: the target users, the actual use of the system, relevant restrictions on how the system may be used, whether the system is designed to enable trading of any kind, how the operator is remunerated and whether this is linked to the interaction of trading interests.

A firm may operate more than one piece of technology, therefore a system designed as a general communication system but which is part of a facility that is operated for the purposes of arranging transactions, taken together, would be a trading venue if the other conditions were met.

Voice broking may or may not comprise the operation of a MS. Merely broking a transaction over the phone does not constitute a MS. However, a firm that operates a platform where trading interests are broadcast to other users and then engages in voice broking to enable negotiations between parties would be a trading venue.

Voice broking used in conjunction with other modes of execution such as electronic order books may also be a MS.  

No differences
Multiple third-party buying and selling trading interests Focus is on users of a system rather than the operator of the system.

Whether the system is designed to enable interaction at the point of entry is key. Whether two persons negotiate within the system between themselves is not relevant.

Internal crossing of trading interests by portfolio managers is not considered to be a MS because there is only one user, the portfolio manager, and therefore there is no interaction of multiple third-party trading interests in the system. ESMA’s paper distinguishes between single-dealer request for quote (RFQ) systems in which the system operator is the counterparty and single-dealer RFQ systems where the operator is not the counterparty. ESMA concludes the former scenario is a bilateral system because there is no interaction possible between the initiator of the request with anyone other than the operator counterparty. In contrast, ESMA states that a non-counterparty operator is a third-party to the transaction counterparties and as such concludes that single-dealer RFQ systems where the operator is not the counterparty are multilateral systems and are required to seek authorisation as a trading venue.

The FCA confirms that systems operated for the purposes only of blocking trades onto a trading venue should not be considered as operating a multilateral system. In contrast, ESMA is of the view that the activity of pre-arranging transactions in a multilateral way is only possible without authorisation as a trading venue when i) all transactions arranged through the system or facility have to be formalised on a trading venue; and ii) the transaction benefits from a pre-trade transparency waiver on the trading venue where it will be formalised.

Interaction in the system Interaction takes the form of exchange of information. If the system enables information to be inputted and then responded to it would be deemed to allow interaction.

‘Interaction’ includes where systems match trading interests or where users are able to respond to other users.

There does not need to be execution and settlement for there to be ‘interaction’.

Crowd funding platforms in which the business funding interests of a firm raising capital are matched with those of investors does not amount to a MS.

A crowd funding platform which permits investors to interact within the platform, for example a secondary market, would be a MS.

Bulletin boards which merely advertise trading interests and do not allow interaction in the system are not MS. Any matching of trading interests or allowing users to respond to other users, commit to or enter into contracts for the sale/purchase, are MS.  

ESMA states that bulletin board type systems cannot allow for the communication or negotiation between advertising parties, including any notification of any potential match between buying and selling interest in the system and cannot impose the mandatory use of tools of affiliated companies to permit communication or negotiation between advertising parties. Further there must be no possibility of execution or the bringing together of buying and selling interests in the system. In contrast, the FCA states that bulletin board operators can provide contact details of other users to be used outside of the system; make available template documentation for use by users (but it should not complete the documentation in any way), and it can also require users to use this template documentation, and provide post-trade services, without being considered as a MS.
Financial instruments The interaction of trading interests must be in financial instruments. Systems allowing interaction of FX spot contracts is not a trading venue because FX spot contracts are not financial instruments. No differences

What should market participants do in light of the CP?

We suggest that any functionalities operated by markets participants be reviewed in light of the proposed guidance to assess whether the FCA or ESMA might consider such functionality to be a multilateral system in the UK or EU and consequently require it to be authorised accordingly. The FCA is seeking views on the proposals by 11 November 2022 and aims to publish a policy statement in Q2 2023. In the EU, ESMA’s opinion on the trading venue perimeter is expected to be published in late Q3/ early Q4 2022.

[1] Art 4(19) MiFID II defines a multilateral system as “any system or facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system”

[2] Art 1(7) MiFID II

[3] Published in March 2022 by HM Treasury