Multilateral Trading Facilities – Good practice observations and finalised guidance on the MTF Rulebook

An MTF, even though sometimes referred to as ‘male-to-female’, for the purpose of this article means Multilateral Trading Facility. MTFs are non-exchange financial trading venues which are often used as alternatives to traditional stock exchanges.

In 2014 the FCA undertook a thematic review of MTF operators’ rulebooks in which a sample of UK MTFs responded to a questionnaire seeking to assess compliance with those areas of the FCA Handbook Code of Market Conduct in regards to MTFs (“MAR 5”). In December 2014, following the thematic review, the FCA published the Guidance Consultation 14/9 (GC14/9). Overall, respondents were supportive of the guidance and welcomed the FCA’s work to develop an industry understanding of good practice in this area and agreed that an MTF operator should have a clearly labeled rulebook in place. However, some respondents requested further clarification on some points of the guidance, in line with which the FCA has provided responses seeking to clarify their guidance and amend it, where necessary.

Below we have provided a summary of the responses by the FCA and their actions on the key points of the consultation:

Document Library of Supporting Information – Transparency:

The FCA have amended the guidance to enable publication of supporting documents to a closed participant user group only due to respondent’s concern with adopting a full public transparency approach in this area.

Fees and Incentive Schemes:

FCA considers that it is good practice for an MTF to ensure that its fees and incentive schemes are consistent with fair and orderly trading and based on objective criteria.

However, due to some respondents’ concerns in relation to the timing of a transition to transparent MTF fee schedules, the FCA have amended the guidance to remove references to publication of MTF fee schedules at this stage.

However, it should be noted that from 3 January 2017, MiFID II will require that market operators’ fee structures including execution fees, ancillary fees and any rebates are transparent, fair and non-discriminatory and that they do not create incentives to place, modify or cancel orders or to execute transactions in a way which contributes to disorderly trading conditions or market abuse. Draft Regulatory Technical Standard 172 states that a trading venue shall publish its fee structures on its website, including execution fees, ancillary fees and any rebates in one comprehensive document or section. RTS 17 also notes that a trading venue offering packages of services shall ensure that there is sufficient granularity in the fees charged for the different services and that a trading venue shall charge the same price and provide the same conditions to the different types of users who are in the same position in accordance with its published and objective criteria.

MTF Rulebook – Participant Acknowledgement:

MTF are required to obtain explicit acknowledgement during on-boarding processes that participants have read, understood and will abide by the MTF rulebook. In regards to this, the FCA have clarified that it is not their intention that MTFs require separate written acknowledgement of the rulebook outside of the on-boarding process.

The FCA further added that this aspect of the guidance seeks to ensure that an MTF operator’s on-boarding process incorporates and records active acknowledgement by MTF participants that they have read, understood and will abide by the MTF rules, which could be done through explicit reference to the MTF’s rulebook in on-boarding documentation e.g. a user agreement.

Instrument Eligibility Criteria:

Some respondents expressed a number of concerns regarding the operational aspects of providing full instrument lists, as was required in the guidance.

The FCA have amended the guidance to provide more flexibility, and reflect the intended outcome in this area, which is to ensure provision of sufficient information to participants in order that they are able to determine whether a particular instrument is traded on the MTF e.g. via an instrument list or other means such as a system search facility.

Settlement / Finalisation of Transactions:

As a market operator, an MTF has a responsibility under MAR 5.4.1 to “have in place the arrangements necessary to facilitate the efficient settlement of the transactions concluded under its systems.” This responsibility applies to all MTF operators irrespective of market model or prevailing settlement convention e.g. bi-lateral settlement or central clearing and settlement arrangements.

The FCA is not prescriptive in relation to the settlement arrangements an MTF operator should adopt however the MTF operator should assess the appropriateness of the arrangements it has in place to meet MAR 5.4.1.

Settlement arrangements which have been sufficient in previous cases include rules requiring participants to duly settle, provision of timely trade confirmations, established links to third party clearing and settlement providers and rules enabling MTFs to request settlement status data from members to assess non-settling bi-lateral counterparties.

To see the full MTF Rulebook Consultation in line with the finalised guidance on the MTF Rulebook please follow this link.

Should you require any further advice or information in relation to MTFs, Cleveland & Co, your external in-house counsel, are here to help.

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