The Financial Conduct Authority (FCA) has issued new guidance on the trading venue perimeter, which may impact legal and compliance analysis based on ESMA Q&As for MiFID/MiFIR market structure.
Understanding the FCA’s New Guidance
The FCA’s policy statement introduces several clarifications concerning multilateral systems and their application in financial markets. For a system to be classified as a multilateral system, it must fulfil four essential elements simultaneously:
- Characteristics of a Trading System: The arrangement must exhibit the characteristics of a trading system or facility.
- Multiple Third-Party Interests: The system should involve multiple third-party buying and selling interests in MiFID financial instruments, including orders, quotes, and indications of interest.
- Interaction of Trading Interests: Interaction within the trading venue can occur without the execution and settlement of a transaction within the system itself. As long as counter parties exchange relevant information regarding essential transaction terms (e.g., price, quantity, subject matter), it qualifies as interaction.
- Enabling Trading Interests: Systems that enable relevant information input and responses are considered as enabling trading interests to interact within the system.
Distinguishing Multilateral Systems
It’s crucial to differentiate between bilateral and multilateral systems. A system is not classified as bilateral just because two parties negotiate within it. The key determinant is whether the system enables one person to potentially interact with multiple others, excluding the operator.
Indicators of a Trading Venue
The FCA considers various indicators to determine if a firm qualifies as a trading venue. These indicators include:
- Technology Usage: The focus is on the operator’s use of technology to facilitate buyer-seller interaction, rather than the technology itself.
- Transaction-Based Remuneration: Transaction-based remuneration may indicate characteristics of a trading system or facility, while a flat fee does not necessarily imply a multilateral system.
- System Features: Systems designed specifically to enable the interaction of trading interests in financial instruments indicate their classification as a trading system or facility.
Guidance on Specific Business Models
The FCA’s guidance provides clarity on specific business models:
- Single Dealer Platforms: Platforms where a single counter party executes client orders without involving third-party interests are not considered multilateral systems.
- Technology Providers: The guidance differentiates between general purpose communication systems and multilateral systems.
- Voice Brokers: Arranging or executing client orders over the telephone does not constitute a multilateral system unless the voice trading system exhibits system or facility characteristics.
- Internal Crossing by Portfolio Managers: Internal matching systems used to transfer shares or other financial instruments between funds do not meet the definition of a multilateral system.
- Systems for Trade Execution on Regulated Trading Venues: Operating a system solely for the execution of trades on behalf of clients in accordance with their intentions and the rules of the trading venue does not qualify as a multilateral system.
- Crowdfunding Platforms in Primary Market Activity: Crowdfunding platforms that facilitate the matching of funding interests, enabling clients to participate in company fundraisings by purchasing shares or bonds directly from the issuer, are not classified as multilateral systems.
- Bulletin Boards: Bulletin boards are considered within the trading venue perimeter only if trading interests can interact within the system.
Actions to Take for Compliance
Given the guidance’s implementation on 9th October 2023, firms should promptly review their operations and take the following actions:
- Assess Operations: Evaluate whether your firm operates a multilateral system and determine if trading venue authorisation is required.
- Address Mismatches: Decide whether to wind down the business, modify functionalities to align with the revised guidance, or seek trading venue authorisation if there are inconsistencies between activities and permissions.
- Non-Multilateral System Involvement: If your firm is not a multilateral system but engages in trading financial instruments or provides technology supporting trading activity, assess how your arrangements relate to regulated activities.
- Pre-emptive Assessment: Before introducing changes, evaluate if they may cause your arrangements to meet the definition of a multilateral system, triggering the need for trading venue authorisation.
The FCA’s new guidance significantly impacts the trading venue perimeter and firms need to act swiftly to ensure compliance with the enhanced requirements. Assessing operations, addressing mismatches, and understanding the indicators of a trading venue are critical steps to stay compliant and avoid potential penalties. Firms must take this opportunity to review their operations thoroughly and adapt to the new regulatory landscape.