What’s captured when? FCA guidance on trading venue perimeter

11 Jul 2023 . 3 min read

Last week the FCA [1] published their long awaited guidance on the trading venue perimeter, which will come into force on 9 October 2023. The guidance is largely in line with the original consultation paper from September last year, and similar to the approach set out by ESMA [2] in their guidance published in February of this year.

This is a topic that technology vendors, the sell side and the buy side are all watching carefully, given the interest in streamlining manual workflows and implementing Order Management Systems (OMS).

The context is that changes in technology and market structure have enabled new service providers to emerge, however with this has come uncertainty around regulatory guidance on what does and does not constitute a trading venue. Regulated trading venues of course come with higher governance requirements and costs.

The FCA’s aim is to encourage innovation while also promoting competition and high standards. And for the market more broadly, objectives include digitising manual workflow, creating better data capture and improving transparency, particularly where instruments/size/protocols are not supported on trading venues currently.

There are the bookends where handling is already very clear – on the one side recognised trading venues like Bloomberg or Tradeweb, which are registered MTFs [3] and inside the trading venue perimeter. Then on the other end there are Single Dealer Platforms (SDP), such as NatWest’s own Agile Markets, that are purely a bilateral platform between a counterparty and a single liquidity provider. These are explicitly agreed in the guidance as outside the perimeter and are not trading venues.

Then we have the difficult bit in the middle – various technology platforms often referred to as Order Management Systems (OMS) or Execution Management Systems (EMS). These platforms have not generally registered as trading venues before, but do they now need to re-evaluate?

This is where the guidance was hoped to help, but both the FCA and ESMA have hedged their bets a bit here – they have said if the platform is a “multilateral system” then it is inside the venue perimeter, otherwise not. And what constitutes a multilateral system? They have a handy four-point test (it is the same list for FCA & ESMA), and if you answer yes to all four questions then you are inside the club. The guidance paper goes into more extensive detail on what each of the 4 tests means, but the summary from the FCA paper is:

Q24C. What is a multilateral system?

A multilateral system is a system or facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system (see article 2(1)(11) UK MiFIR).

A multilateral system, for these purposes, comprises each of the following main elements:

it has the characteristics of a trading system or facility;
it comprises multiple third-party buying and selling trading interests;
it allows trading interests to interact in the system; and
those trading interests are in financial instruments.

If the EMS/OMS is just interfacing with regulated Trading Venues to obtain quotes/execute orders, then that is fine. But if the platform is obtaining a series of quotes from multiple third-party liquidity providers, presenting them to the client, then executing an order off the back of either manual or automated decision making on platform, then that is beginning to look like a multilateral system in its own right. There are other factors as well like the charging basis… if the platform has a flat licence fee rather than a per transaction fee (aka brokerage), that might gravitate towards it not being a trading venue, however the guidance does say that is not, on its own, conclusive.

So where does this leave the market? One of the emerging trends in trade execution is the move to greater automation… market participants want better, faster, STP [4] execution. The worry is that if the obligations on technology providers are too onerous then it will stifle innovation – the published guidance has not entirely laid that concern to rest, and certainly leaves those providers with some careful analysis to do in the near term. With the guidance in UK coming into force on 9 October, there is not much time left to register as a regulated trading venue if that’s what’s required.

FCA Financial Conduct Authority
ESMA European Securities & Markets Authority
MTF Multilateral trading facility
STP Straight-through processing

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

What’s captured when? FCA guidance on trading venue perimeter

Q24C. What is a multilateral system?

Related articles