Pros and cons of registering as an Organised Trading Facility

To OTF or not to OTF; that is the question facing financial institutions across Europe as we head towards full implementation of MiFID II. Hatstand Green Paper - Organised Trading Facilities

What is an OTF?

An Organised Trading Facility is a multilateral system in which multiple third-party buying and selling of bonds, structured finance products, emission allowances or derivatives take place. If it’s already a regulated market (RM) or a multilateral trading facility (MTF) then it cannot be an OTF.

Only financial institutions with clients and not members can operate an OTF. Know Your Customer checks are required when onboarded and they must follow Best Execution rules, which means orders could have to be routed to other venues if they offer better quality of execution.

Any FI currently operating a trading platform where third parties can trade bonds, structured finance products, emission allowances or derivatives should consider the possibility of registering as an OTF. But what are the pros and cons of doing this?

Advantages

  • Ability to execute third parties’ trades on your platform.
  • Potential to expand own client base when your OTF offers better execution terms than other execution venues.
  • Ability to execute negotiated trade and ‘large-in-scale’ trades in your own environment.

Disadvantages

  • Obligation to generate Market Data and Pre- and Post-Trade transparency reports.
  • Operating as both a trading venue and a financial institution has governance and best practice issues. 

Both options come with costs and the potential for fresh revenue streams. Read our new paper to learn more about what the obligations for the two alternatives entail.

If you would like to read more, download our Green Paper: 
Organised Trading Facilities: A Cost-Benefit Framework.