AFS OTF & MTF
AFS Group subsidiaries holds both the OTF (Organized Trading Facility) and the MTF (Multilateral Trading Facility) licenses required under MiFID II legislation. Both trading venues are regulated by the AFM, the Dutch financial services regulator.
On the 3rd of January 2018, as the first in the Netherlands, AFS Interest BV received its license to operate as an Organized Trading Facility (OTF) under MiFID II.
Being able to operate as an OTF allows AFS to have an evaluable role in realizing the main objectives under MiFID II. Specifically, to offer greater investor protection and increase transparency into several asset classes.
AFS OTF is the first-of-its-kind in the Dutch Market and operates as a discretionary voice/chat trading system. This allows investment firms to execute various financial instruments on-venue. Additionally, AFS OTF will be regulated by AFM and must comply with certain rules regarding information exchange, the best-execution obligation, order execution for clients, and fulfilling pre and post-trade transparency requirements. The reporting and publishing requirements will be satisfied by AFS’ use of Euronext APA and ARM.
On the 5th of November 2019, AFS E-Venues BV received its license to operate as an Multilateral Trading Facility (MTF) under MiFID II.
A MTF is a type of trading venue where financial instruments are exchanged. Professional and eligible counter parties like corporates and mid-size enterprises, asset managers, brokers, banks, market makers and hedge funds can connect to a MTFs directly – becoming ‘members’ – while retail traders can access the markets on offer via a third-party provider of their choosing. MTFs are described as ‘multilateral’ because they have multiple members and users that are capable of interacting with each other to set prices.
AFS MTF operates under the European Union’s (EU’s) Markets in Financial Instruments Directive II (MiFID II), which stipulates that financial instruments traded via an MTF must be exchanged on a ‘non-discretionary basis’. This means that contracts between buyers and sellers must be formed according to a set of transparent rules that do not discriminate between members or their clients.
As an example, these rules could be based on the time and price at which orders and quotes are entered into the system. MTFs are not permitted to execute client orders against their own capital or engage in matched principal trading – they are simply a venue where buyers and sellers are paired so that a contract can be.
Differences OTF and MTF
The main difference between OTFs and MTFs is that the former can only offer non-equities, whereas MTFs can offer equities and non-equities. Additionally, orders executed on an OTF are carried out on a discretionary basis, unlike MTFs where buyers and sellers must be matched according to non-discretionary rules. OTFs are also allowed to engage in matched principal trading on instruments that aren’t subject to the clearing obligation set out in the European Market Infrastructure Regulation (EMIR), provided they have client consent to do so. OTFs are authorised to deal bonds against proprietary capital and on their own account, with this regulation reflecting the fact that the sovereign debt markets are often illiquid.