MiFID II - Organised Trading Facility (OTF)

MiFID II will bring about important changes in the market structure of European capital markets.

MiFID II presents a new category trading venue: the Organised Trading Facility (OTF). The OTF is an organised trading facility for bonds, structured financial instruments, emission rights, and derivatives. The OTF results from the objective to make European capital markets more transparent and efficient, and to level the playing field between various venues for multilateral transaction services. Further requirements and characteristics of an OTF are described below.

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 and a MTF or a regulated market is that the latter brings together buying and selling interests in accordance with non-discretionary rules. The operator of an OTF does have a degree of discretion in deciding whether to place or withdraw an order on its OTF and in deciding not to match a client order with other orders available in the systems of the OTF.

The investment company that operates an OTF must, among other things, also comply with the best execution obligations in article 4:90a and 4:90b of the Financial Supervision Act (Wft). The best execution obligation does not apply for an MTF or a regulated market vis-à-vis its members.

In addition, an OTF can only carry out transactions in bonds, structured financing products, emission rights and specific derivative financial instruments. In contrast, MTFs and regulated markets may also carry out transactions in shares and other equity instruments.

A fourth distinction is that an OTF has to take measures to prevent it from acting on its own account. However, it is permitted to trade on its own account in illiquid government bonds. For the other instruments that may be traded via an OTF, the OTF may only trade on its own account insofar as matched principal trading is concerned.

Matched principal trading means that the OTF interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risks throughout the execution of the transaction. Both sides of the transaction are executed simultaneously and the transaction is concluded at a price that does not result in a profit or loss for the facilitator, other than a previously disclosed commission, fee or charge for the transaction. An OTF may use matched principal trading only if the client has consented to this.

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