Chapter 1 - Exchanges, MTFs, OTFs and Systematic Internalisers Flashcards
What is a RIE?
Recognised Investment Exchange
What FCA criteria does a firm have to meet to become a RIE?
- Fit and Proper
- Sufficient financial resource
- Ability to share information with the FCA
- Maintain high standards of integrity, fair dealing
- Record, monitor and enforce compliance rules
- Enforce disciplinary actions
What are 4 disciplinary actions that an exchange could take against its members?
- Reprimand
- Fine
- Suspension
- Expulsion of member or trading representative
What is an MTF?
Multilateral Trading Facility - multiple investors are brought together to trade financial instruments ‘off exchange’. The MTF platform is operated by an investment firm or market operator.
Which piece of regulation introduced MTFs?
MiFID - replaced rules that required trades to be executed at local exchanges.
What are systematic internalisers?
Market makers - investment firms who match ‘buy’ and ‘sell’ orders from clients in-house rather than sending orders to a central exchange. e.g. Credit Suisse and UBS.
Under MiFID how many asset classes can a firm act as an SI for?
1
What are the transparency requirements of an SI?
They have to show the price of a trade beforehand and report trade information.
What are the features of a Recognised Investment Exchange?
- Formal market
- High entry standards
- listed companies must meeting listing and disclosure requirements.
What are the benefits of an RIE?
- Quality of business raising capital
- Investor confidence is maintained
- Maintains a pool of capital
What are the features of a MTF?
- No listing process
- Cannot change regulatory status of a security
- Price of orders to be available pre trade
- Real time publishing of trades
- Prices and charges are to be applied consistently across all members
What are the benefits of a MTF?
- Greater competition between trading venues
- Higher trading speeds - high frequency trading
- Lower cost based
- Trading incentives relating to trade volumes
What are the features of a Systematic Internaliser?
- Executes orders against own book
- Mini exchange subject to pre and post trade transparency requirements.
What are the benefits of a SI?
- Lower trading costs
- Faster trading speeds
What is an OTF?
Organised Trading Facility
Which regulation introduced OTFs?
MiFID 2
What cannot be traded on an OTF?
Equities
What is the difference between an OTF and MTF?
An OTF has discretion when matching buying and selling interests.
How do transparency requirements apply to OTFs?
They apply in the same way as MTFs - pre and post trade transparency is a requirement with current bids and offers published with real time publication of trades.
What must OTFs ensure in regards to client orders?
That they are not executed against the propriety capital of:
- the firm or any entity that is part of the firm’s legal group.
What is the exception to the rule that client orders cannot be posted against their propriety capital?
When illiquid sovereign debt is traded.
Under what circumstances can matched principal trading be conducted on an OTF?
When it has been agreed by both clients and any derivatives trades that are not subject to EMIR clearing obligations.
Can the same legal entity operate both an OTF and SI?
No
Can trades between two OTFs interact?
No
