ESMA_QA_2414
Status: ✅ Answer Published
Link to ESMA Q&A tool: https://www.esma.europa.eu/publications-data/questions-answers/2414
Regulatory Context
Regulation : MICA
Level 1 Regulation: MiCA
Level 2 Regulation: No information available
Level 3 Regulation: No information available
Topic: Crypto-Asset Service Provider (CASP)
Subject Matter: MiCAR CASP - Best Possible Outcome for the Client
Question
Submission Date: 25 January 2025
There is a practice in the crypto-asset industry when dealing with client orders which involves the following scenario: i) a crypto-asset service provider (CASP) providing the service of execution of orders (CASP-broker) receives client orders; ii) this CASP-broker systematically executes the orders received on behalf of the clients with another entity of the group as counterparty (the “group entity B”) instead of executing such orders on the group’s trading platform for crypto-assets; iii) group entity B then immediately places an offsetting order to hedge its exposure on the group’s trading platform for crypto-assets. In this scenario, the price offered to the client by group entity B (through the CASP-broker) is in excess of the top of book price achievable on the order book of the trading platform for crypto-assets to reflect a “guaranteed price” offered to the customer for a limited period, for example 30 - 60 seconds. Group entity B then enters an order on the group’s trading platform on the same side as the customer order would have been had it been executed directly on the group’s trading platform. However, the price is not really guaranteed: if during the execution of group entity B’s order on the group’s trading platform, the price moves in favour of the client order, group entity B trades at that more favourable price but fills the client’s order at the agreed “guaranteed price”. But, if during the execution of group entity B’s order, the price moves against the client order, the client’s order will be filled by group entity B only if the price movement doesn’t exceed the spread applied by group entity B when quoting the “guaranteed price”. Otherwise the order of the client will be cancelled. In such scenarios, the client pays: (i) to the CASP-broker: a fully disclosed commission for the “execution of their order”, and (ii) to group entity B: a spread which is priced in to the “guaranteed price” quoted by group entity B. Is this scenario compliant with MiCA?
ESMA Answer
Answer Date: 19-06-2025
No. In the scenario described above, the CASP-broker in contact with the client has the obligation to act honestly, fairly and professionally in the best interests of its clients when dealing with client orders (in accordance with Article 66 of MiCA). This obligation applies when such CASP chooses how to deal with client orders and whether such orders should be directly executed on or outside of a trading platform for crypto-assets or routed to another broker. In this scenario, there seems to be no advantage for the client to have its order executed via group entity B rather than directly on the trading platform of the group. This is because the supposedly “guaranteed price” is not guaranteed and the order may not be executed if the market moves against the client order and group entity B would suffer a loss, if it was executing the order. As such, the client is paying an additional spread without any benefit compared to having the order executed directly on the trading platform. Therefore, the CASP-broker would be in violation of Article 66 of MiCA. There are also indications that, at group level and at the level of the CASP-broker, conflicts of interests are not being properly identified, prevented and managed in accordance with Article 72 of MiCA. As a reminder, where CASPs provide the crypto-asset services of execution of orders for crypto-assets on behalf of client, they owe their clients best execution (in accordance with Article 78 of MiCA). Where CASPs provide reception and transmission of order services, they owe their clients prompt and proper handling of their orders (in accordance with Article 80 of MiCA). In addition, when choosing which crypto-asset service to provide to their clients, CASPs should also act honestly, fairly and professionally in the best interests of their clients (in accordance with Article 66 of MiCA) and should not let conflicting interests of the CASPs or other entities of its group influence their decision (in accordance with Article 72 of MiCA).
This document was automatically extracted from the ESMA EMIR Q&A database.