Derivatives trading venue OTCX has been registered as a multilateral trading facility (MTF) in the UK, in the week that the UK’s Financial Conduct Authority (FCA) put its rules on the trading venue perimeter into effect.
OTCX operates an independent multi-dealer request for quote (RFQ) platform to support trading of over-the-counter (OTC) derivatives for investors and dealers, with automation of smaller trades and higher touch trading for larger orders. At the time of writing it is not registered as an MTF on the register of the European Securities and Markets Authority (ESMA).
The new rules, which came into force on Monday 9 October, determine that platforms which facilitate trading can be considered a trading venue, and therefore need to be regulated, if they fit the definition of a multilateral system based on four criteria:
• It has the characteristics of a trading system or facility;
• It comprises multiple third-party buying and selling trading interests;
• It allows trading interests to interact in the system;
• And those trading interests are in MiFID financial instruments.
The reason for the rules has been the perceived encroachment by some software firms into the multilateral facilitation of trading.
Similar rules in Europe have taken the form of guidance issued by ESMA in February 2023, regarding the Markets in Financial Instruments Directive (MiFID II), which as a directive requires transposition into local European markets by national competent authorities.
The rules are not without controversy. OTC markets such as corporate bond trading typically support electronic trading which is conducted bilaterally between two parties, with market operators only providing the routing of requests for quote, rather than firm orders.
In listed markets, firm orders are matched by a venue according to its own rules. By systematising the matching of queries – which can be subject to change and negotiation – in addition to the existing systematising of firm orders, some firms have argued it will be more difficult for efficient electronic communication to support pre-trade identification of counterparties.
“The regulation is very broad strokes,” said Andy Mahoney, managing director at FlexTrade, speaking at the TradeTech FX conference in Paris on 14 September 2023. “It’s basically saying, If you electronically communicate RFQ responses together and put them in a stack, whether you do it in Excel or Notepad, you’re collating quotes and you need to have a rule book around that. It’s very wide ranging. We’re still consulting with a number of legal firms on this. To my mind, it’s an attack on people’s ability to just harvest quotes and put them in a single place and it’s really stifling efficiency, stifling innovation.”
©Markets Media Europe 2023
