Viewpoint: Knowing the boundaries

TransFICC team.

Interview with Tim Whipman, head of business development at TransFICC

In February this year ESMA published its Opinion on the Trading Venue Perimeter, which provides guidance on when systems should be considered multilateral systems and seek authorisation as trading venues. Tim Whipman, head of business development at TransFICC, was asked for his take on ESMA’s Opinion and to highlight some of the most important considerations for technology providers, the buy-side and sell-side.

What difference could it make to a trader, whether they are trading OTC or on a venue under the new ESMA ruling?

It is important for traders to understand where their trading interactions and executions are taking place. Some trading platforms or systems may need to be reclassified as trading venues under the new ESMA Guidance published in February this year. If platforms meet ESMA’s 4-point criteria of an MTF, they will need to recover regulatory costs of system and control requirements. This may increase transaction costs for traders using these systems.

ESMA has emphasised some case-by-case analysis, but where are there clear lines of distinction?

The Final Report has certainly clarified the landscape for certain market participants. Technology Providers, such as TransFICC or firms acting as Bulletin Boards/Market Data Service companies, where products do not meet the MiFID II definitions required of multilateral systems, do not need to seek authorisation as a trading venue.

Similarly, ESMA states that “OMSs that are designed to automate the order submission system, to structure the order flow, and work as an inward-looking tool that helps companies to easily follow up the lifecycle of orders are not intended and should not be considered multilateral systems.”

For the sell-side, Single Dealer Platforms where banks deal on their own account as an SI, have also been given the all-clear to be considered bilateral, so long as banks operate the system themselves and set the rules of engagement.

But for others, notably some EMSs where there are complex workflows, there is still a grey area and case by case assessments may be required by NCAs. However, an EMS would not be considered as a multilateral system if it is acting purely as a software vendor and does not embed any rules governing the interaction of trading interests.

When building a desktop system as a Technology Provider, what effect would these distinctions have?

It is important to understand the role you are playing in developing a desktop system. Technology Providers who simply offer the provision of IT capabilities to investment firms looking to outsource specialist functions do not require trading venue authorisation.

ESMA are keen to point out that they view systems as technology neutral, hence the type of technology used or whether it is automated or non-automated does not determine the distinction between systems. It is how the system functions that determines its status as a multilateral system or not, and not how a system classifies itself.

How does the relationship between rules development and implementation need to be handled?

When building a desktop system, a clear distinction must be made on two issues. Firstly, are the rules and parameters of how trading interests interact determined by investment firms/venues or by the Technology Provider? Secondly, once the system is implemented, is it the investment firm that operates the system or the Technology Provider? In both cases, the latter would classify as a multilateral system.

In multilateral systems, the rules must contain elements that concern the matching, arranging and/or negotiation of trading interests. Rules in this context should not include the technical standard of message construction and/or the protocols which govern the technical exchange of messages.

Is the development of the system more of a partnership as a result of these rules?

It could be dangerous to consider the development of a system as a partnership. Clear lines and distinctions between a firm’s responsibilities and operations is the best option. ESMA point out that “a multilateral system does not have to be one single (IT) system but can be constituted of a combination of systems, rules and/or arrangements, which together meet the four criteria of a multilateral system”. A partnership or combination of systems may inadvertently fall into this category.

Looking forward are there any risks for users/developers and how can these be managed?

The clarity provided in ESMA’s Final Opinion does reduce regulatory risks for many firms, particularly if they are included in the “specific cases” covered by the guidance.

That said, in some areas there is a risk that the guidance is interpreted differently or incorrectly for certain use cases, notably complex EMSs.

To manage any regulatory risk surrounding trading venue regulation, NCAs can conduct case-by-case assessments and offer judgement based on ESMA’s guidance on general principles. 

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