CP22/18: Guidance on the Trading Venue Perimeter

CP22/18 was published by the FCA on 22 September 2022 and is part of the Wholesale Markets Review with HM Treasury to strengthen the UK’s position in global wholesale markets. It comes after the need to provide greater clarity on the types of firms which need to be authorised as a trading venue. With the changing definitions of multilateral systems and the rapid evolution of technology, it has been challenging to distinguish certain types of arrangements and systems from trading venues.

Regulated trading venues are organised markets where transferable securities can be bought and sold. Under UK MiFIR, there are three types of regulated trading venues: Regulated markets (RMs), Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs). RMs and MTFs are multilateral systems which operate in accordance with non-discretionary rules bringing together multiple third-party buying and selling interests in financial instruments in a way that results in a contract. An OTF is a trading venue that is neither a RM or MTF and in which the operator can use discretion to bring out transactions. As a result of the ambiguity about the definition of a multilateral system, the FCA has found it challenging to distinguish clearly between unregulated communications arrangements and authorised firms that arrange deals in investments and trading venues.

Therefore, the FCA is proposing new guidance in the Perimeter Guidance Manual (PERG) of the Handbook as well as Questions and Answers on the general application of the general guidance to iron out any uncertainty in the guidance which has resulted in firms taking different approaches to the permissions they require

At this stage the FCA is not making proposals on whether regulatory obligations for trading venues can be made more proportionate for smaller firms. They are using the opportunity to seek views from firms and stakeholders about specific aspects of the OTF and MTF regimes which are seen as the greatest barriers to entry to the market for smaller firms. The specific questions in this area are:

  • Which regulatory requirements applicable to MTFs and OTFs are most likely to create barriers to entry to the trading venue market for smaller firms?
  • Does the existing service company regime already address concerns regarding these barriers to entry?
  • Based on which criteria should firms be potentially subject to a more scalable set of requirements?

The consultation applies to and will be of interest to:

  • trading venues
  • service companies
  • investment-based crowdfunding platforms operating in primary and/ or secondary markets
  • interdealer brokers
  • broker-dealers
  • portfolio managers
  • technology firms offering platforms and systems for trading
  • firms providing communications systems or bulletin board services
  • appointed representatives providing or using communications systems or bulletin board services, and their principals
  • trade associations
  • law firms
  • issuers
  • investors

The proposed guidance covers:

  • Investment-based crowdfunding firms operating primary market platforms – a crowdfunding platform in which the business finding interests of an issuer of shares, debentures or alternative debentures are matched with those of investors does not constitute a multilateral system.
  • Bulletin boards – the guidance clarifies the demarcation between multilateral systems and bulletin boards.
  • Technology providers – the guidance draws a distinction between general purpose communications systems and multilateral systems.
  • Voice brokers – arranging or executing client orders over the telephone without operating a trading system or facility does not amount to a multilateral system
  • Portfolio manager operating internal matching systems – the execution of trading interests by a portfolio manager does not amount to a multilateral system.
  • Blocking onto trading venues – a firm that operates a system for the purpose only of blocking trades onto a trading venue consistent with the intentions of the parties to the underlying transactions to trade on a trading venue would not amount to the operation of a multilateral system.

The FCA notes that where a firm does not operate a multilateral system, it will not require authorisation as a trading venue, nevertheless, firms must consider how its arrangements relate to the permissions in the Regulated Activities Order. Some firms can choose to be authorised as service companies depending on the activity undertaken and the client type. Additionally, the FCA is proposing to update the definition of a service company in the Glossary Terms so that it refers to the current client categorisation terminology.

It should be noted that this is a first round Consultation Paper, and the final version is subject to change based on feedback received by the FCA in relation to the proposed changes. The Policy Statement is due to be published in the second quarter of 2023.

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