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MiFID II - Organised Trading Facility (OTF)

MiFID II will bring about important changes in the market structure of European capital markets.MiFID II introduces a new category trading venue: the Organised Trading Facility (OTF).

Various types of trading venues already existed under MiFID I. These were the regulated market, the MTF and an investment firm with systematic internalisation (SI). However, in practice, many transactions are concluded outside of these trading venues, often on alternative trading systems. Alternative trading systems are organised execution venues that have not yet been regulated. As a result, there is little transparency with regard to the transactions that take place on these trading venues. Moreover, it cannot be verified whether the order was executed in the client's interest.

New requirements

The OTF is intended level the playing field between the various venues for the execution of orders. For instance, a number of requirements that now apply to trading on a regulated market or an MTF will also apply to trading on an OTF. These are, for example, rules regarding:

  • fair and orderly trading
  • execution of orders
  • pre- and post-trade transparency
  • admission of financial instruments
  • admission of members to these venues.

Transactions in shares cannot be executed on an OTF.

Most important characteristics

The definition of OTF is intentionally broad, so that it can contain as many (future) forms of organised execution of transactions as possible. The OTF is a multilateral trading venue in which third party buying and selling interests in bonds, derivatives or structured products are able to interact in the system in a way which results in a contract. The operator of an OTF must have a licence and must comply with the requirements that apply to an investment firm.

The means that the operator must comply with certain rules regarding providing information, the best-execution obligation, and rules regarding the order execution for clients. The above obligations are related to the discretionary power that an operator of an OTF has with regard to the execution of transactions. This operator can decide whether it places an order in the OTF system or takes an order out of the system.

Difference between OTF and other trading venues

A characteristic difference between an OTF, on the one hand, and an MTF or regulated market, on the other hand, is that the latter executes orders in a non-discretionary manner, whereas the operator of an OTF can exercise discretion. This is the main reason why the duty of care and best-execution obligations apply to the operator of an OTF. These obligations do not apply to an MTF or regulated market with regard to its members.

Another difference is that transactions in shares are not allowed to take place on an OTF.

Because an OTF qualifies as a trading venue, the operator must be neutral. Therefore, an order may, in principle, not be executed for the own account of the operator of an OTF. When an investment firm wishes to execute orders of its clients for its own account (in a systematic manner), that is then only possible via systematic internalisation.

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