ESMA Launches Consultation on Platform Definitions

As part of its ongoing work to define what is, and is not, a trading platform requiring registration under MiFIR, the European Securities and Markets Authority (ESMA) has published a consultation paper to gather industry views ahead of the publication of an Opinion that will guide European authorities.

Although the consultation looks across markets, it is particularly important for the FX industry as it could see aggregation and other OEMS (order and execution management system) providers coming “in scope” of MiFID II regulation, meaning registration and increased regulatory costs. Multi-dealer trading platforms that have had to register as an OTF (organised trading facility) have been pushing for a change to the rules, believing that the current landscape benefits aggregation and OEMS providers above their own businesses.

ESMA says that when it examined the OTF landscape as part of a “final” report (another “final” report is due the authority says), it found it impossible to disentangle the definition of OTFs, the concept of multilateral system and the overall trading venue authorisation perimeter, hence the consultation.

Industry participants and other interested parties are being asked to respond to a series of question, starting with whether they agree with the current interpretation of a multilateral trading system? More specifically, ESMA is seeking to build a picture of the relevant characteristics that make up such a system, including those that may not be covered under MiFID II.

Acknowledging the debate in the FX industry for one, ESMA observes that “one source of concern” has been related to technology providers who typically facilitate the communication with, and the access to, various sources of trading interests. “Nevertheless, in some instances the type of arrangements offered might de facto constitute multilateral systems, which would be operating without the proper trading venue authorisation in relation to one or more financial instruments,” the paper states.

The regulator adds that the lack of a homogeneous view of what constitutes a multilateral system in this specific context might trigger issues of regulatory consistency. “This would lead to the creation of an unlevel playing field with respect to EU trading venues which have to comply with the MiFID II regime and the large number of regulatory obligations attached to it,” the paper says, echoing the view of those trading platforms that have had to register.

ESMA stresses, however, that the technology used is not a relevant criterion to exempt providers from the MiFID II regulatory framework. “It is the core business of a trading venue to bring together interests and the mere fact that this activity is conducted through new protocols should not lead to the conclusion that those systems are outside the boundaries of MiFID II,” it states.

Whilst ESMA says it “supports and encourages” new business models and innovative solutions, it is important to ensure that such models and solutions are appropriately regulated to ensure an adequate level of protection for investors and to maintain the resilience of EU markets. “In order not to hamper the development of new solutions, the supervisory approach should take into account proportionality while ensuring a level playing field between all firms operating in the Union,” it says.

The good news for OMS providers is that and ESMA study of the issue has found that they are largely “inward-looking tools” and as such it believes they should not be considered multilateral systems. Equally, when looking at EMS, ESMA says that because these channels do not allow for the interaction of multiple third-party trading interests, these too, should not be considered multilateral trading systems.

Just to confuse the issue a little, the paper does state, however, that where the EMS sends orders for execution directly to specific counterparties instead of trading venues, this “might be considered multilateral in nature and hence in scope of trading venue authorisation”.

The paper also studies the RFQ landscape, noting that platforms in this arena are largely in scope of the regulation, however on single-dealer platforms, which ESMA says are often referred to as RFQ platforms, the waters get a little murkier.

For FX market participants, if FX comes in scope of the rules, the decision as to whether the SDP has to be registered comes down to whether the operator, typically a bank, matches client interest directly. Under some interpretations of internalisation, this means that an internaliser would need to register the platform, however most of the volume internalised by an LP in FX is held as risk on its own books, albeit fleetingly, and therefore would probably not come in scope.

If, however, there is a direct client-to-matching matching ability on the platform, in spite of the vast majority of volume going through the LP’s risk engine, then complexities may arise.

The deadline for responses is 29 April 2022 and ESMA says it plans to publish a final report by the end of Q3 2022.