A multilateral trading facility (MTF) is a European regulatory term for a self-regulated financial trading venue. These are the alternatives to the traditional stock exchanges where a market is made in securities, typically using electronic systems. The concept was introduced within the Markets in Financial Instruments Directive (MiFID), a European Directive designed to harmonise retail investors protection and allow investment firms to provide services throughout the EU.
MiFID describes MTF as a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments – in the system and in accordance with non-discretionary rules – in a way that results in a contract. The term 'non-discretionary rules' means that the investment firm operating an MTF has no discretion as to how interests may interact. Interests are brought together by forming a contract and the execution takes place under the system's rules or by means of the system's protocols or internal operating procedures.
The MTF can be operated by a market operator or an investment firm whereas the operation of a regulated market is not considered an investment service and is carried out exclusively by market operators that are authorised to do so. The United States equivalent is an alternative trading system (ATS).
Regulated markets and MTFs vs. OTFs - comparison
A common feature of all trading venues, namely regulated markets, MTFs, and OTFs, is the requirement to lay down transparent and non-discriminatory rules governing access to the facility.
However, while regulated markets and MTFs are subject to similar requirements regarding whom they may admit as members or participants, OTFs are able to determine and restrict access based inter alia on the role and obligations which they have in relation to their clients.
In this regard, OTF may specify parameters governing the system such as minimum latency provided this is done in an open and transparent manner and does not involve discrimination by the platform operator.
OTFs follow similar organisational requirements to MTFs, however, OTFs have a number of distinct features:
- OTFs may only trade in bonds, structured finance products, derivatives and emission allowance (non-equity instruments);
- there are less stringent limitations to the type of activities that the operator of the OTF may undertake both in relation to matched principal trading and trading on own account (additional restrictions apply as an OTF and a systematic internaliser (SI) cannot be operated by the same legal entity);
- as opposed to regulated markets and MTFs governed by non-discretionary rules, the OTF operator must play an active role in bringing about transactions on its platform and exercise discretion either when deciding to place or retract an order on the OTF and/or when deciding not to match potential matching orders available in the system;
- as opposed to regulated markets and MTFs that have members or participants, OTFs have clients (as a consequence, transactions concluded on OTFs have to comply with client-facing rules, including best execution rules, regardless whether the OTF is operated by an investment firm or a market operator);
- wholesale energy products that must be physically settled do not qualify as financial instruments when traded on an OTF.