On 5 May 2023, the German regulator BaFin issued a press release, informing the public about an update of its circular on so-called multilateral trading facilities (MTF). MTF are multilateral systems, which bring together multiple third-party buying and selling interests in financial instruments in a way that results in a contract. Just like stock exchanges organised as regulated markets, MTF are, therefore, trading venues which match the interest of buyers and sellers in financial instruments. Unlike regulated markets, which must be operated by a licenced market operator, MTF can be operated by investment firms (including credit institutions).
With its updated circular, BaFin has significantly broadened the scope of what constitutes “multilateral systems” and, subsequently, also the requirement to obtain a licence to operate the system as an MTF.
Summary of the changes
With its revised guidance, BaFin adopts positions taken by ESMA in ESMA’s Opinion on the Trading Venue Perimeter, which was published on 2 February 2023 (ESMA70-156-6360).
First, BaFin clarifies that the operation of a multilateral system (note: not MTF) within the meaning of Article 4(1) no. 19 MiFID II requires a licence for the operation of an MTF (unless it an OTF or regulated market). BaFin notes that this view is based on Article 1(7) MiFID II, which requires that all multilateral systems for financial instruments are operated in accordance with Title 2 of MiFID II (i.e. the requirements to operate an MTF or OTF) or Title 3 of MiFID II (i.e. the requirements to operate a regulated market). Insofar, ESMA has stated in its opinion that:
Any multilateral system must request authorisation as a trading venue, regardless of the changes which the system needs to implement to comply with the requirements associated with the operation of a trading venue. Operating in accordance with the multilateral system definition is a sufficient condition to be required to seek authorisation as a trading venue.
In short: Once a system is identified as multilateral, it would need to be authorised as a trading venue.
In addition, BaFin notes that a system already qualifies as multilateral system if two trading interests in financial instruments interact on a platform or system, provided such platform or system is operated by a third-party operator. It is, therefore, not necessary that the actual conclusion of the contract for the purchase or sale of financial instruments takes place on the platform; multilateral systems can also exist where the conclusion takes place bilaterally outside the platform.
The position likewise builds on ESMA’s opinion, in which ESMA has stated that:
The definition of multilateral systems does not require the conclusion of a contract as a condition, but simply that trading interests can interact within the system. Hence, the conclusion of a legally binding contract is not a prerequisite for a firm to be required to request authorisation as a trading venue for the system it operates. Systems where trading interests can interact, where there is confirmation (or pre-arranging) of a transaction or where the essential terms have been (or can be) negotiated (for example price, quantity), would still require authorisation as a trading venue, even if some further contractual details are arranged outside of the system as is the case with many derivative contracts. In such instances it cannot be argued that there is no interaction in between trading interests only because the final terms of the contractual agreement are concluded outside of the system or facility.
The updated BaFin guidance may have a significant impact on operators of bulletin boards and platforms that allow trading interests in financial instruments to interact with each other:
- Bulletin boards remain out of scope provided that they remain a mere information tool, i.e. buying and selling interests are posted without allowing for any interaction between those interests. Insofar, Recital 8 of MiFIR had already set out that an OTF “should not include facilities where there is no genuine trade execution or arranging taking place in the system, such as bulletin boards used for advertising buying and selling interests, other entities aggregating or pooling potential buying or selling interests, (…)”. ESMA recognises this position in its opinion more broadly with respect to multilateral systems. By extension, it seems likely that BaFin would follow the same approach.
- Similarly, general advertising and/or aggregation of trading interests should not qualify the aggregator as a multilateral system.
- However, systems that allow trading interests to interact with each other may qualify as multilateral systems, irrespective of whether the contract is concluded on the platform or not. In this respect, ESMA considers that for such interaction to occur, the system must not only allow the display of the different trading interests but also allow users to react to those trading interests, i.e. it should be possible to act upon those trading interests and match, arrange and/or negotiate essential terms of a transaction (for example instrument, price, quantity) with a view to conclude a transaction in those financial instruments. Moreover, interaction requires, according to ESMA, that the system contains rules concerning the matching, the arranging and/or the negotiations of trading interests.
BaFin’s updated circular does not only have an impact on bulletin boards and similar platforms which have, thus far, taken the view that their operational model does not meet the definition of a “multilateral system”. The revised guidance also makes clear that all multilateral systems must seek authorisation and conform to the relevant frameworks for MTF, OTF or regulated markets. Conversely, the operation of multilateral systems for financial instruments which are not authorised as an MTF, OTF or regulated market, would be prohibited.
- Operators of bulletin boards and comparable platforms should assess whether their system qualifies as a multilateral system and, therefore, would have to be operated as an MTF (or OTF, where relevant). So far, such analysis has frequently been cut short with the confirmation that contracts are not concluded on the platform itself and that it would, therefore, not qualify as an MTF. Under the updated BaFin guidance, this will no longer be sufficient. Operators would rather have to assess whether their platform allows trading interests to interact, irrespective of whether they allow for the conclusion of a contract. In case of doubt, operators may want to seek conformation from BaFin that their system does not qualify as an MTF or OTF, in order to avoid operating a trading venue without the necessary licence from BaFin.
- Moreover, operators of multilateral systems that do not also qualify as an MTF or OTF may need to restructure their platform to conform to relevant framework.