ESMA_QA_1633
Status: ✅ Answer Published
Link to ESMA Q&A tool: https://www.esma.europa.eu/publications-data/questions-answers/1633
Regulatory Context
Regulation : MIF2
Level 1 Regulation: Markets in Financial Instruments Directive II (MiFID II) Directive 2014/65/EU- Secondary Markets
Level 2 Regulation: No information available
Level 3 Regulation: No information available
Topic: Multilateral and bilateral systems
Subject Matter: MTF operator being a member/participant of its own MTF
Question
Submission Date: 31 January 2017
Can an MTF operator be a member/participant of its own MTF?
ESMA Answer
Answer Date: 31-01-2017
[ESMA 70-872942901-38 MiFID II MiFIR market structures Q&A, Q&A 5.1] Whether an MTF operator may become a member of its own MTF requires the application of two different MiFID II articles. Article 19 of MiFID II does not prevent an investment firm operating an MTF to be a member of its own MTF. However, Article 19(5) prohibits investments firms and market operators operating an MTF to execute client orders against proprietary capital, or to engage in matched principal trading. As a consequence, the investment firm could only operate on its own MTF through pure agency trading. Article 18(4) also requires the operator of an MTF to have arrangements to identify clearly and manage the potential adverse consequences for the operation of the MTF or for its members or participants, of any conflict of interests between the MTF, their owners or the investment firm and market operator operating an MTF and its sound functioning. Appropriate management of conflict of interest is all the more important to ensure the effective implementation of Article 31 of MiFID II, which requires investment firms and market operators operating an MTF to monitor the compliance of its members and participants with the rules of the MTF and with other legal obligations. Therefore, unless otherwise demonstrated by adequate and effective internal arrangements and procedures, ESMA is of the view that the potential conflicts of interest that may arise as a result of this would only be managed effectively by means of operating the MTF and the membership through different legal entities. To ensure that having two separate legal entities serves a meaningful purpose, ESMA is of the view that the two investment firms should have arrangements in place that prevent information sharing on each other’s activities. This would include for instance having distinct management and operational teams and physical separation of activities. Similarly, whereas some elements of the IT infrastructure could be shared, execution systems would be expected to be segregated and safeguards to be put in place to prevent information leakage across the two entities. Outsourcing from one legal entity to the other should only take place where the arrangements meet a similar test. The arrangements described above shall be without prejudice to the ability of the MTF to monitor its participants for compliance with market rules and other legal obligations and also without prejudice to the MiFID II provisions on identification and management of conflicts of interest to be met by each of the two investment firms.
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