We welcome this opportunity to comment on a review of the TV perimeter, and support ESMA’s objective of clarifying when systems and facilities qualify as multilateral.
We believe that the proposed definition of multilateral systems is problematic as it risks bringing into scope some OMS and EMS tools which are utilized by investment managers to facilitate order and execution flow. Fundamentally, these systems are not designed to aggregate third-party bilateral indications or allow multilateral interactions. A distinguishing feature of a multilateral system is that it allows multiple banks to quote at the same time. With the OMS and EMS used by asset managers, the use-cases are limited to receiving market data to assist with best execution or sending a request directly to a single broker.
Definition of Multilateral System
The 4 criteria associated with a multilateral system should in theory exclude OMS and EMS, but as we describe below, we can see how all 4 criteria could be considered as fulfilled for some OMS/EMS utilized by some asset managers depending on broader definitions of ‘third-party’, system/facility and interaction between trading parties. In addition, ESMA’s proposed definition of which systems should be considered ‘multilateral’ does not sufficiently differentiate between bilateral systems and multilateral systems and could therefore capture a number of EMS/OMS systems. It could also capture buy-side systems that have been developed to connect directly to counterparties of their choosing.
Certain Buy side participants have developed their own technology to execute with liquidity providers (e.g., SIs) directly. This is done with appropriate transparency and ultimately leads to a better and more efficient outcomes for the end investor. In effect, these systems would stop being a viable option under the ESMA’s opinion. In addition, a dealer’s ability to offer direct execution services to their clients will also be affected.
Forcing all these systems, that do not conduct trading, to become authorised as trading venues under MiFID II and subjecting them to complex and costly regulatory requirements would likely prevent them from existing in their current form and limit their ability to grow while reinforcing the monopolistic position of the already well-established trading venues. This would limit competition in the market, stifle innovation and will ultimately lead to increased costs for end-investors (as operational/regulatory costs are directly or indirectly passed along).
With respect to EMS, there should be a distinction between the ‘pass-thru’ and the ‘governance’ of a trade. The EMS is not making a decision to execute. That decision is taken by the trader at the investment management firm, the EMS is only a decision support tool. The investment firm ultimately controls the rules and parameters for execution, again disqualifying the EMS itself as a trading venue. Once the EMS makes available the best trading options, the actual trade will be executed on an MTF or SI. Again, what sets the OMS/EMS apart is that they provide an alert to execute, but the actual execution occurs away from the OMS/EMS on a separate protocol.
Therefore, for a system to be deemed multilateral, there should be a system operator (or organiser) that:
- Is a provider of the trading protocol; and
- Has provisions governing the execution protocol
- Has full control of rules (business and software); and
- Has visibility over the data; and
- Provides the trade execution timestamp (which indicates where the trade is matched and executed); and
- Oversees the facilitation of negotiation or the crossing of orders which is the concept used for OTFs in MiFID2 Article 20(6).
If OMS and EMS are allowed to fall in scope of the trading venue authorization, we would see an unlevel playing field emerge whereby only the larger asset managers would have the resources to build internal systems. Smaller investment managers would be forced to restrict their use of third-party systems which today provide necessary functions like facilitating order flows on large trades to mitigate against information leaks.