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Setting the Institutional and Regulatory Framework for Trading Platforms: Does the MiFID definition of OTF make sense?

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  • Valiante, Diego

Abstract

As discussions around the revision of MiFID are heating up, this paper tries to set a new regulatory and institutional framework for multilateral and bilateral execution mechanisms of complex financial instruments, such as OTC derivatives and fixed income products. The author argues that the current MiFID framework is equipped to capture a great deal of multilateral derivatives and fixed income trading, but the Directive fails to provide a complete definition of bilateral execution mechanisms and has narrowed it to mainly own account trading (ex: systematic internalisers). A key proposal of this paper is to consider own account trading, agency trades (discretionary matching) and principal trading as pure bilateral execution services to be classified under a broader definition of systematic internaliser (with revised obligations), subject then to the application of conduct of business rules (e.g. conflicts of interests management procedures) and a best execution regime. MTF would then be adapted to explicitly state that multilateral systems are not just those bringing together multiple interests from third parties, but those systems bringing together interests through ‘non-discretionary’ services, vis-à-vis membership, admission of products to trading, and matching of interests. Finally, despite the claim that OTF and SEF would be equivalent categories, US and EU regulators are defining diverging regulations for these venues. There are at least four important areas in which the SEF definitions do not match the proposed EU rules for OTFs.

Suggested Citation

  • Valiante, Diego, 2012. "Setting the Institutional and Regulatory Framework for Trading Platforms: Does the MiFID definition of OTF make sense?," ECMI Papers 6811, Centre for European Policy Studies.
    • Handle: RePEc:eps:ecmiwp:6811
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    File URL: https://www.ceps.eu/system/files/ECMI%20RR8%20DV%20MiFID%20OTF.pdf
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    References listed on IDEAS

    as
    1. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    2. Valiante, Diego, 2010. "Shaping Reforms and Business Models for the OTC Derivatives Market: Quo vadis?," ECMI Papers 3093, Centre for European Policy Studies.
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