For instance, where a smaller firm is requesting a quote to execute a low volume trade, it might be less concerned about the risks of exposing its trading interest, and so happier to request quotes from a larger number of market makers or liquidity providers.

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Limiting the number of participants a firm can request quotes from risks restricting the ability of market participants to access liquidity pools, and only sending requests to traditionally larger dealers who they assume might have larger inventories.

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Note, under the EMIR Regulation compliance system, the derivatives' trades on an MTF (physically settled forwards including) are considered OTC derivatives, thus positions on an MTF (similarly to an OTF and unlike regulated markets) count towards EMIR clearing thresholds.

In a non-centrally cleared derivatives market, there may be a need for bilateral master netting agreements to be in place between participants before the MTF can allow their trading interests to interact.

For example, the UK HM Treasure MiFID II Consultation Impact Assessment of March 2015 referred (p. 17) to 74 MTFs in the UK, which was 49% of the total 152 MTFs in Europe.

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OTFs are distinguished from MTFs in that the trading process will involve the use of discretion by the operator, and because the operator of an OTF will owe client facing responsibilities to users of the system, it is necessary that OTFs shall provide further information.

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The fifth sentence of recital 7 of MiFIR clarifies that MTFs (similarly to regulated markets) are not obliged to operate a ‘technical’ system for matching orders and should be able to operate other trading protocols including systems whereby users are able to trade against quotes they request from multiple providers.

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MTFs should not require minimum trading activity to become a member or participant of a trading venue, as this could restrict the access to the MTFs to large members or participants.

This view is based on Article 53(3) of MiFID II, which provides that an entity that is not an investment firm or a credit institution can be a member of a regulated market under certain conditions, this rule being extended to MTFs by Article 19(2) of MiFID II.

- in the case of a voice trading system, the rules and protocols used to determine the matching and execution of trading interests (Article 2(2)(a) - (c) of the said Commission Implementing Regulation 2016/824 of 25 May 2016).

For example, in markets for non-centrally cleared financial instruments MTFs may wish to carry out credit checks, or ensure that a member or participant has appropriate capital to support the positions it intends to take on the MTF.

It has been observed (MiFID II: The new market structure paradigm, Linklaters), pursuant to MiFID II regulated markets, MTFs, and OTFs will be subject to substantially identical pre- and post-trade transparency requirements, calibrated for different types of instruments, and similar organisational and market surveillance provisions.

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b) For financial instruments that are centrally cleared, MTFs should not allow members or participants to require other members or participants to be enabled before they are allowed to trade with each other.

MTF's legal framework is included in MiFID I, but MiFID II changes the regime by prohibiting MTF operators from dealing on own account on their own venue and strengthening the conflict of interest requirements applying to operators of MTFs.

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Exclusion of members of or participants in an MTF from the dealing on own account exemption under Article 2(1)(d) of MiFID II

Characteristic feature of the MTF under MiFID II Directive is that investment firms or market operators operating an MTF are not allowed to execute client orders against proprietary capital, or to engage in matched principal trading.

As a consequence, the reference in Article 53(3) to persons other than investment firms and credit institutions only relates to entities that are exempted from authorisation under Article 2(1), such as insurance companies or collective investment undertakings, as long as their own regulatory framework permits them to do so.

ESMA database of European MTFs published under MiFID I for the purpose of identification of the counterparty to the transaction as regards transaction reporting was a key source for credible data on MTFs' activity in Europe.

Both regulated markets and MTFs execute orders in accordance with non-discretionary rules - an element differentiating them from Organised Trading Facilities (OTFs), which are able to restrict access based on the role and obligations they have in relation to their clients.

The register contains information on the services an MTF provides (i.e. the asset classes of financial instruments traded on the MTF) and entails the unique code (Market Identifier Code - MIC) established by ESMA in accordance with Article 65(6) identifying the MTF for use in reports in accordance with Articles 6, 10 and 26 of MiFIR.

MTFs will also need to be comfortable that potential participants are meeting the regulatory requirements to be a member of an MTF such as having appropriate systems and controls to ensure fair and orderly trading.

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If operating under the reference price waiver, MTFs will be affected by the double volume caps (ITG, MiFID II: Systematic Internalisers and Liquidity Unbundling, p. 2).

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The above stance is supported by the ESMA’s answer to the Question 4 (Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38, Multilateral and bilateral systems, General, updated on 07.07.2017).

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Yes. Article 53(3) of MiFID II provides that an entity that is not an investment firm or a credit institution can be a member of a regulated market under certain conditions, this rule being extended to MTFs by Article 19(2) of MiFID II.

Multilateral trading facility (MTF) pursuant to MiFID II Directive means a multilateral system operated by an investment firm or market operator, which brings together multiple third-party buying and selling interests in financial instruments in the system, in accordance with non-discretionary rules, in a way that results in a contract in accordance with the provisions of Title II of the MiFID II.

Can a person that is not authorised as an investment firm but meets the requirements of Article 53(3) of MiFID II be a member or participant of a regulated market or an MTF?

The eligibility to be a member or participant of an MTF in the EU is not restricted to authorised investment firms only.

This simultaneously restricts the ability of the requestor to access the best pool of liquidity and reduces the likelihood of a smaller dealer receiving requests, despite it having a strong trading interest.

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The operation of MTFs is not explicitly considered in CRD IV and the specific risks of such activities are not addressed.

A firm can be an MTF operator whether or not it performs any other MiFID investment service or activity (FCA, The Perimeter Guidance Manual, Chapter 13, Guidance on the scope of MiFID and CRD IV, p. 16).

Moreover, the current requirements under MiFID I, which are limited to shares traded on regulated markets, will be extended to cover other equity-like instruments such as depositary receipts and exchange-traded funds, as well as non-equity instruments including bonds, structured finance products, emission allowances, and derivatives, in each case including actionable indications of interest.

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It is noteworthy, pursuant to Article 2(2)(d) of Commission Implementing Regulation (EU) 2016/824 of 25 May 2016 (laying down implementing technical standards with regard to the content and format of the description of the functioning of multilateral trading facilities and organised trading facilities and the notification to the European Securities and Markets Authority according to Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments) a relevant operator has an obligation to provide its national competent authority with a detailed description of the functioning of its trading system specifying, in particular, "a description explaining how the trading system satisfies each element of the definition of an MTF."

MiFID II provisions governing how MTFs should operate draw on the regime covering regulated markets, however, with slightly different obligations. They require that MTFs have:

MTFs and OTFs must have at least three materially active members or users, each having the opportunity to interact with all the others in respect to price formation (Article 18(7) MiFID II).

The said definitions exclude bilateral systems where an investment firm enters into every trade on own account, even as a riskless counterparty interposed between the buyer and seller.

However, pursuant to Article 2(1)(d) (ii) of MiFID II, when a person dealing on own account in financial instruments other than commodity derivatives or emission allowances or derivatives thereof and not providing any other investment services or performing any other investment activities in such instruments is also a member of or a participant in a regulated market or an MTF, it falls under the scope of MiFID II, and should accordingly be authorised as an investment firm unless:

EMIR reporting requirement covers all derivatives, hence positions on all trading venues (MTFs, OTFs and regulated markets alike) and OTC derivatives are equally covered.

On the side of benefits, members or participants of MTFs should be at reduced risk of losing out as a result of an MTF operator favouring their own interests over those of a member or participant Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015, CP15/43, p. 57).

MiFIR undelines that the definitions of regulated market and multilateral trading facility (MTF) represent effectively the same organised trading functionality.

Article 18(3) of MiFID II requires that investment firms and market operators operating an MTF establish, publish and maintain and implement transparent and non-discriminatory rules, based on objective criteria, governing access to its facility.

However, in centrally cleared markets, enablement mechanisms whereby existing members or participants of an MTF can decide whether their trading interests may interact with a new participant’s trading interest are considered discriminatory and an attempt to limit competition.

- it is a non-financial entity which executes transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of that non-financial entity or its group.

However, the members of or participants in the MTF must comply with the obligations provided for in the provisions of the said articles with respect to their clients when, acting on behalf of their clients, they execute their orders through the systems of an MTF.

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MTFs may however require members or participants to enter into, and maintain, an agreement with a clearing member as a condition for access when trading is centrally cleared.

By default, therefore, the full CRD IV capital requirements apply, despite not being tailored to the specific risks of these types of investment firms (European Banking Authority in the Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20 (p. 20)).

In a request for quote (RFQ) protocol, a MTF should not impose limits on the number of participants that a firm can request a quote from.

The inability of the operator of an MTF to trade on own account in their own MTF could raise the costs of trading on MTFs by requiring alternative arrangements to be put in place, including where operators of MTFs have been acting as a riskless principal to settle trades.

The following articles of the MiFID II Directive are not applicable to the transactions concluded under the rules governing the MTF between its members or participants or between the MTF and its members or participants in relation to the use of the MTF:

Another element common to regulated markets and MTFs is their comprehensive - when it comes to financial instruments' categories - scope of application. This needs to be accounted for when compared to OTFs, where equity trading is excluded.

The register contains data related to the European Union and European Economic Area (EEA) / European Free Trade Association (EFTA) States.

- in the case of an electronic or hybrid trading system, the nature of any algorithm or program used to determine the matching and execution of trading interests;

ESMA considers that this provision should be read in conjunction with the requirements of Article 2(1). Under this provision, a person falling under any of the categories listed in Article 2(1) would not have to be authorised as an investment firm.

Dealing on own account exemption under Article 2(1)(d) of MiFID II does not apply to persons who are a member of or a participant in an MTF except for non-financial entities who execute transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups.

Given the protections afforded to non-clearing members under MiFIR and EMIR, as well as the rules on straight through processing (STP), an MTF should not require all its members or participants to be direct clearing members of a CCP.

The brief overview of the non-exhaustive list of arrangements which are considered non-objective and discriminatory has been given by the EU financial market watchdog in the Questions and Answers on MiFID II and MiFIR market structures topics of 7 July 2017 (ESMA70-872942901-38).

Whilst a firm requesting a quote may, in compliance with Article 28 of MiFID II, want to limit the number of participants it requests quotes from in order to minimise the risk of unduly exposing its trading interest, which could result in it obtaining a worse price, this should not be mandated by the MTF.