What’s captured when? FCA guidance on trading venue perimeter

This is a topic that technology vendors, the sell side and the buy side are all watching carefully, given the interest in streamlining manual workflows and implementing Order Management Systems (OMS). 

The context is that changes in technology and market structure have enabled new service providers to emerge, however with this has come uncertainty around regulatory guidance on what does and does not constitute a trading venue. Regulated trading venues of course come with higher governance requirements and costs. 

The FCA’s aim is to encourage innovation while also promoting competition and high standards. And for the market more broadly, objectives include digitising manual workflow, creating better data capture and improving transparency, particularly where instruments/size/protocols are not supported on trading venues currently.

There are the bookends where handling is already very clear – on the one side recognised trading venues like Bloomberg or Tradeweb, which are registered MTFs [3] and inside the trading venue perimeter. Then on the other end there are Single Dealer Platforms (SDP), such as NatWest’s own Agile Markets, that are purely a bilateral platform between a counterparty and a single liquidity provider. These are explicitly agreed in the guidance as outside the perimeter and are not trading venues.

Then we have the difficult bit in the middle – various technology platforms often referred to as Order Management Systems (OMS) or Execution Management Systems (EMS). These platforms have not generally registered as trading venues before, but do they now need to re-evaluate? 

This is where the guidance was hoped to help, but both the FCA and ESMA have hedged their bets a bit here – they have said if the platform is a “multilateral system” then it is inside the venue perimeter, otherwise not. And what constitutes a multilateral system? They have a handy four-point test (it is the same list for FCA & ESMA), and if you answer yes to all four questions then you are inside the club. The guidance paper goes into more extensive detail on what each of the 4 tests means, but the summary from the FCA paper is: 

Q24C. What is a multilateral system?

A multilateral system is a system or facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system (see article 2(1)(11) UK MiFIR).

A multilateral system, for these purposes, comprises each of the following main elements:

  • it has the characteristics of a trading system or facility;
  • it comprises multiple third-party buying and selling trading interests;
  • it allows trading interests to interact in the system; and
  • those trading interests are in financial instruments.

If the EMS/OMS is just interfacing with regulated Trading Venues to obtain quotes/execute orders, then that is fine. But if the platform is obtaining a series of quotes from multiple third-party liquidity providers, presenting them to the client, then executing an order off the back of either manual or automated decision making on platform, then that is beginning to look like a multilateral system in its own right. There are other factors as well like the charging basis… if the platform has a flat licence fee rather than a per transaction fee (aka brokerage), that might gravitate towards it not being a trading venue, however the guidance does say that is not, on its own, conclusive.

So where does this leave the market? One of the emerging trends in trade execution is the move to greater automation… market participants want better, faster, STP [4] execution. The worry is that if the obligations on technology providers are too onerous then it will stifle innovation – the published guidance has not entirely laid that concern to rest, and certainly leaves those providers with some careful analysis to do in the near term. With the guidance in UK coming into force on 9 October, there is not much time left to register as a regulated trading venue if that’s what’s required.

  1. FCA Financial Conduct Authority
  2. ESMA European Securities & Markets Authority
  3. MTF Multilateral trading facility
  4. STP Straight-through processing

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