On 22nd September 2022 the UK Financial Conduct Authority (“FCA”) published its consultation paper on new guidance on the trading venue perimeter. Building on the HM Treasury’s Wholesale Markets Review (“WMR”), the primary objective of the draft guidance in CP22/18 is to provide greater clarity as to when an entity needs to seek permissions to operate a trading venue. This is because many respondents to the WMR felt the trading venue framework issued by the second Markets in Financial Instruments Directive II (“MiFID II”) package does not make sufficient distinction between bi-lateral and multilateral trading. Consequently, this has resulted in divergent approaches with competition implications. For example, some entities have self-assessed that their activities fall outside the regulatory perimeter, even though they may exhibit characteristics of a multilateral system. 

The purpose of this article is to summarise the contents of CP22/18 and its implications for entities, particularly those involved in the creation of communications and trading technology.  

Is the FCA proposing changes to the existing legal definition of a multilateral system? 

No. Consistent with the WMR, the FCA is not proposing a new legal definition of a multilateral system. Instead, the FCA is proposing new guidance that will be incorporated into its Perimeter Guidance Manual (“PERG”) and associated Q&As. Once adopted, the European Securities and Markets Authority’s (“ESMA”) Q&As covering the trading venue perimeter (7, 10, 11, and 12 in section 5) will no longer inform the FCA’s supervisory efforts. 

In brief, what is the FCA clarifying will not constitute a multilateral system?

As currently drafted, the new guidance will clarify that the following types of activities will not constitute a multilateral system that will require authorisation as a trading venue:

• primary market platforms operated by investment based crowdfunding firms (because these support the interaction of funding rather than trading interests); 
• voice brokerage activities where these are limited to arranging or executing client orders without:
  • broadcasting trading interests to other users across a platform; 
  • combining or integrating with other execution models, for example, electronic order books;
• bulletin boards because these merely advertise interests but do not allow them to interact, resulting in a transaction in financial instruments, for example to: “match”, “respond”, “negotiate”, “accept terms”, “conclude” or “commit”;
• systems that interface with the block trading systems offered by a trading venue, for example ICE Block; and
• internal crossing systems used by portfolio managers. 

What does the FCA perceive to be “characteristic” of a multilateral system?

Proposed revisions to part 13 of PERG stipulate four key characteristics of a multilateral system:

1. it is a facility that resembles a trading system: it has features that specifically accommodate trading interests; the operator’s remuneration is linked to the interaction of trading interests;  target users are interested in using, or actually use, the system for trading purposes and the operator calibrates the conditions for accessing the system accordingly; and the operator monitors activities and/or provides information to users that is specifically related to the trading of financial instruments; 
2. it supports multiple third party (user) buying and selling trading interests such as quotes, orders and indications of interest (“IOIs”), irrespective of whether users first conduct bilateral negotiations with one another;  
3. it allows those trading interests to interact, i.e. information is exchanged about transactions in financial instruments ( for example: price, quantity). However, it is not essential that execution and take place within the system; and
4. those trading interests relate to financial instruments. For example, unregulated spot foreign exchange trading would not be in scope. 

I don’t think my entity is operating a multilateral system. Is there anything else we should consider? 

Yes. Your entity should consider if its activities fall within the regulatory perimeter in other ways. 

For example, if your entity only makes arrangements on behalf of financially sophisticated actors (eligible counterparties or per se professional clients) with a view to transactions in investments then it is likely to require authorisation from the FCA as a service company pursuant to Article 25 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the “RAO”). 

Similarly, if your entity offers certain post-trade services these may require electronic money or payment services registrations in certain situations. 

What are the potential implications of CP22/18 for existing entities? 

If an existing entity is: 

• not a regulated market; and 
• currently does not have permissions to operate an organised trading facility (“OTF”) or multilateral trading facility (“MTF”) 

then it should review its activities against the FCA’s guidance in PERG 13 very carefully. If activities resemble those outlined in PERG 13 there is a strong possibility that the entity will require Part 4 permission from the FCA. A failure to obtain permissions where they are required would put an entity at risk of breaching the general prohibition (section 19 of the Financial Services and Markets Act 2000, “FSMA”), something which could have severe consequences.   

An entity may identify that some of its activities potentially cross into the regulatory perimeter, but may not want to incur the costs (application to the FCA, meeting regulatory capital requirements, maintaining compliance resources) and operational burdens (reporting market data, MiFIR transaction reporting (certain cases) and conducting surveillance to detect potential market abuse) associated with obtaining permissions to operate a trading venue. In this case, the entity should consider winding down those activities and/or making certain changes to their systems as soon as practicable. 

An entity may be confident that it does not operate a multilateral system. Still, the entity should consider whether it might require authorisation or registration for any activities that are financial in nature. 

What happens next?

Interested parties have until 11th November 2022 to submit the responses to CP22/18. 

The FCA is planning to issue its finalised draft guidance and policy statement in Q2, 2023. 

How C&G can help

C&G can help entities perform a review of their arrangements to assess if they constitute a multilateral system and whether they hold the appropriate regulatory permissions. If this is of interest to your organisation, please contact us for a free one hour telephone consultation. 

References

2022. CP22/18: Guidance on the trading venue perimeter. Financial Conduct Authority. Available at: https://www.fca.org.uk/publications/consultation-papers/cp22-18-guidance-trading-venue-perimeter (last accessed 27th September 2022).
2023. Wholesale Markets Review: Consultation Response. HM Treasury. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1057897/Wholesale_Markets_Review_Consultation_Response.pdf (last accessed 27th September 2022).