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ESMA’s recent consultation provides clarity on what constitutes a multilateral trading venue in an attempt to level the playing field. While we wait for the final opinion it’s worth assessing whether your systems or facilities are in scope.
Over the past year, the European Securities and Markets Authority has made attempts to sharpen the grey scale of the trading venue perimeter. ESMA has published reports and opinions to all investment firms, with a particular focus on investment firms and market operators that are subject to MiFID II and MiFIR.
In April 2021, ESMA published a final report on the functioning of Organised Trading Facilities – or OTFs. The aim of the report was to clarify the MIFID II provisions related to OTFs and wider multilateral systems. Ultimately, it seeks to level the playing field between all EU firms, simplifying for market participants and overall, ensuring efficient EU market structures.
ESMA committed to publishing an opinion clarifying the definition of multilateral systems and providing guidance on when systems should be considered as multilateral systems and, in consequence, apply for authorisation as trading venues. True to their word, they delivered.
On 28 January ESMA issued a consultation paper on its opinion on the trading venue perimeter providing clarity on the following areas:
The four defining pillars of a multilateral system
The consultation paper provides detailed guidance on what, in ESMA’s view, are the key considerations in assessing whether a system or facility can be classified as multilateral. These are outlined as four ‘pillars’:
- It is a system or facility
- There are multiple third-party buying and selling interests
- Those trading interests need to be able to interact
- Trading interests need to be in financial instrument.
The consequences of changes brought to trading venue authorisation under MiFID II
ESMA gives a pointed opinion that all multilateral systems must be authorised as trading venues. Firms will need to review their systems to see if they meet the criteria set out by ESMA to determine if they fall within scope of requiring trading venue authorisation.
Tricky cases to determine whether a trading venue authorisation is required
Considering the numerous interpretations to which the trading venue perimeter is currently subject, it is difficult to determine whether a trading venue authorisation is required. Firms currently using Order Management Systems (OMS), Electronic Management Systems (EMS) and Request For Quote (RFQ) systems will need to consider if these systems can be considered a multilateral system, and therefore, be required to be authorised as trading venues.
ESMA is seeking feedback from participants and market operators in the securities markets, on its analysis of what defines a multilateral system. The deadline for comments is 29 April 2022.
Heading towards a fairer market
Two weeks before ESMA published its consultation, we also saw action from the FCA to “level the playing field”. The UK regulator announced last month that it is launching two market studies to investigate access to wholesale data. These are based on concerns that limited competition may increase costs and have an impact on the types of assets that investment managers buy and sell.
These developments appear to be symptomatic of a broader regulatory agenda. No longer content to sit on the side-lines, the regulators are taking steps to generate a ‘healthier’ market which is more fair and competitive. It is unlikely this will be the last development we see as part of this trend.
How Bovill Newgate can help
Our dedicated Capital Markets team advises clients across the sector on their approach to the changing regulatory environment. If you would like to understand more about what the ESMA consultation paper impacts means for your firm, get in touch
