Organised Trading Facility

An Organised Trading Facility (OTF) is a type of trading venue introduced under the European Union's Markets in Financial Instruments Directive II (MiFID II), which came into effect on January 3, 2018. The OTF category was established to enhance transparency and oversight in the trading of non-equity instruments, such as bonds, structured finance products, derivatives, and emission allowances.
== Definition and Characteristics ==
An OTF is defined as a multilateral system, other than a regulated market (RM) or a multilateral trading facility (MTF), in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances, or derivatives are able to interact in a way that results in a contract. Unlike RMs and MTFs, OTFs have more flexibility in how they execute orders, including the ability to engage in matched principal trading and dealing on own account under certain conditions.
== Regulatory Framework ==
=== MiFID II Requirements ===
Under MiFID II, OTFs are subject to stringent regulatory requirements designed to ensure fair and transparent trading practices. These include:
# Pre- and Post-Trade Transparency: OTFs must disclose trade data both before and after transactions to ensure market transparency.
# Best Execution: OTFs are required to take all sufficient steps to obtain the best possible result for their clients when executing orders.
# Conflict of Interest Management: OTFs must have measures in place to manage and mitigate conflicts of interest.
# Operational Resilience: OTFs must maintain robust systems and controls to ensure the orderly functioning of their trading platforms.
=== Role of the Operator ===
The operator of an OTF has significant discretion in how orders are executed, which can include voice trading, electronic trading, or a combination of both. The operator must ensure that the trading process is fair, orderly, and transparent, adhering to the regulatory standards set forth by MiFID II.
== Differences from Other Trading Venues ==
# Regulated Markets (RMs): RMs are traditional exchanges where securities are listed and traded. They are subject to the highest level of regulatory scrutiny.
# Multilateral Trading Facilities (MTFs): MTFs are platforms that bring together multiple third-party buying and selling interests in financial instruments but do not have the same level of discretion in order execution as OTFs.
# Systematic Internalisers (SIs): SIs are investment firms that deal on their own account by executing client orders outside of RMs, MTFs, or OTFs.
== Market Impact ==
The introduction of OTFs under MiFID II has increased the regulatory oversight of non-equity trading, aiming to reduce systemic risk and improve market integrity. OTFs provide a regulated environment for trading complex financial instruments, thereby enhancing investor protection and market transparency.
== Examples of OTFs ==
Several financial institutions and trading platforms have established OTFs to comply with MiFID II requirements. These include traditional financial institutions as well as specialized trading venues focusing on derivatives and other non-equity instruments.
*Tradeweb
== References ==
Category:Trading Platforms
Category:MiFID II
Category:MTFs
Category:Electronic Trading
Category:Voice Trading