MAR 5A.3 Specific requirements for OTFs

1A firm must:

1. (1)

   execute orders on a discretionary basis in accordance with MAR 5A.3.2R;

2. (2)

   unless permitted in MAR 5A.3.5R, not execute any client orders against its proprietary capital or the proprietary capital of any entity that is part of the same group or legal person as the firm; and

3. (3)

   ensure that the operation of an OTF and of a systematic internaliser does not take place within the same legal entity, and that the OTF does not connect with another OTF or with a systematic internaliser in a way which enables orders in the different OTFs or systematic internaliser to interact.

[Note: article 20(1) to (4) and 20(6) of MiFID]

The discretion which the firm must exercise in executing a client order must be either, or both, of the following:

1. (1)

   the first discretion is whether to place or retract an order on the OTF;

2. (2)

   the second discretion is whether to match a specific client order with other orders available on the OTF at a given time, provided the exercise of such discretion is in compliance with specific instructions received from the client and in accordance with the firm’s obligations under article 27 of MiFID.

[Note: article 20(6) of MiFID]

A firm must not engage in:

1. (1)

   matched principal trading on an OTF operated by it except in bonds, structured finance products, emission allowances and derivatives which have not been declared subject to the clearing obligation in accordance with article 5 of EMIR, and where the client has consented; or

2. (2)

   dealing on own account on an OTF operated by it, excluding matched principal trading, except in sovereign debt instruments for which there is not a liquid market.

[Note: article 20(2) and (3) of MiFID]

For the purposes of MAR 5A.3.5R(2), a “liquid market” means a market for a financial instrument or a class of financial instruments, where there are ready and willing buyers and sellers on a continuous basis, assessed in accordance with the following criteria, taking into consideration the specific market structures of the particular financial instrument or of the particular class of financial instruments:

1. (1)

   the average frequency and size of transactions over a range of market conditions, having regard to the nature and life cycle of products within the class of financial instrument;

2. (2)

   the number and type of market participants, including the ratio of market participants to traded instruments in a particular product; and

3. (3)

   the average size of spreads, where available.

[Note: article 4(1)(25) of MiFID]

A firm engaging in matched principal trading in accordance with MAR 5A.3.5R(1) must establish arrangements to ensure compliance with the definition of matched principal trading.

[Note: article 20(1) and (7) of MiFID]

A firm must comply with the obligations under the following provisions of MiFID, in the course of operating an OTF:

1. (1)

   articles 16(2), 16(3) (first subparagraph), 16(4), 16(5), 16(6), 16(7), 16(8), 16(9), and 16(10);

2. (2)

   articles 24(1), (3), (4), (5), (9), (10) and (11);

3. (3)

   articles 25(3) (except to the extent that article 25(4) applies), 25(5), and 25(6) (to the extent applicable);

4. (4)

   article 27; and

5. (5)

   article 28.

[Note: article 20(8) of MiFID. The above MiFID provisions are transposed as follows in the FCA Handbook:

1. (1) SYSC 6.1.1, SYSC 10.1.7, SYSC 4.1.6, SYSC 8.1.1, SYSC 4.1.1(1), SYSC 4.1.1(3), SYSC 9.1.1A, SYSC 10A, CASS 6.2.1 and CASS 7.12.1;

2. (2) COBS 2.1.1, COBS 4.2.1, COBS 4.3.1, COBS 2.2A.2, COBS 2.2A.3, COBS 2.3A.5, SYSC 19F.1.2 and COBS 6.1ZA.162;

3. (3) COBS 10A.2.1, COBS 10A.2.2, COBS 10A.3.1, COBS 10A.3.2, COBS 10A.4.1, COBS 8A, COBS 16A.2.1 and COBS 9A.3.2;

4. (4) COBS 11.2A; and

5. (5) COBS 11.3.]

A firm must:

1. (1)

   in respect of an OTF operated by it, or such a facility it proposes to operate, provide to the FCA a detailed explanation of:

   1. (a)

      why the OTF does not correspond to, and cannot operate as, an MTF, a regulated market or a systematic internaliser;

   2. (b)

      how discretion will be exercised in executing client orders; and

   3. (c)

      its use of matched principal trading; and

2. (2)

   supply the information in (1) to the FCA in writing, by electronic mail to an address for the usual supervisory contact of the firm at the FCA, and obtain an electronic confirmation of receipt.

[Note: article 20(7) of MiFID]