3. Multilateral Trading Facilities (MTFs)
Who should read this chapter?
This chapter is relevant for RIEs and authorised firms that operate, or may seek to operate, a MTF.
It may also be of interest to direct and indirect users of MTFs such as investment banks, interdealer brokers, HFTs, and investment managers.
In this chapter, we consult on the changes introduced by MiFID II that will affect MTF operators. We present proposals for Handbook changes in MAR 5 to implement articles 18, 19, 31 and 32 of the recast MiFID which deal with the trading processes of MTFs, compliance with their rules and trading suspensions.
The changes introduced by MiFID II aim to align requirements of MTFs with those of RMs. MiFID II will subject RMs and MTFs that operate businesses of a similar size to equivalent organisational requirements and similar regulatory oversight. The changes aim to ensure fair and orderly trading, efficient execution of orders, and require published and non-discriminatory rules. MTF operators will be required to have specific arrangements in place to identify and manage conflicts of interest, with systems to recognise and mitigate risks to operations, and soundly manage the technical operation of the system.
MiFID II will also expand the scope on algorithmic trading systems and controls, which are covered in more detail in Chapter 8. MiFID II also introduces changes to pre- and post-trade transparency arrangements, which are covered in Chapter 6.
Multilateral Trading Facilities
The requirements that MiFID II introduces for investment firms operating an MTF expand the current MiFID regime described in the FCA’s Handbook in MAR 5. The requirements for MTFs have been aligned to those of RMs, so that an investment firm operating an MTF will be required to have systems and controls in place to ensure that the performance of its activities are adequate, effective and appropriate.
There are proposed revisions to MAR 5.3.1 which may impact the rules, procedures and arrangements of an MTF. These include new requirements for rules on access to the MTF to be publicly available and non-discriminatory as well as being based on objective criteria; to have arrangements to ensure their systems function appropriately; to establish contingency plans to cope with any disruption; and must have arrangements in place to manage any conflicts of interest.
There is a proposed new section, MAR 5.3.1A dealing with the functioning of an MTF. This includes provisions on having at least three active members or users; risk management requirements; an obligation to have adequate financial resources; an obligation to publish data on execution quality; and a restriction on the operator engaging in proprietary trading. We propose guidance to make clear that the restriction on proprietary trading does not prevent an operator from executing orders against its proprietary capital or engaging in matched principal trading outside the MTF it operates.
Another new section, MAR 5.6A, sets new obligations on trading suspensions. A firm operating an MTF will have to comply with the rules on the suspension or removal of financial instruments set out in MiFID II. Firms will have to make public any decision and notify us.
In relation to RIE-operated MTFs (rather than MTFs operated by investment firms) the Treasury has consulted on amending the RRRs to insert new paragraphs 12-14 to the Schedule (see chapter 2, footnote 7) to reflect MiFID II requirements relevant to MTF operators. We propose including these in REC 2.16A.
While RIEs are required to comply with the requirements in the RRRs, rather than the rules set out in MAR5, an RIE operating an MTF should still have regard to the Guidance set out in MAR 5.
Q4: Do you agree with our approach to implementing the MTF requirements in MAR 5? If not, please give reasons why