Organized Trading Facility

Swap Execution Facilities Regulation

Guidelines on systems and controls in a highly automated trading environment for trading platforms, investment firms and competent authorities

MiFID II

European Securities and Markets Authority

Transaction reporting of Chi-X centrally cleared CFDs

An Organized Trading Facility (OTF) is any facility or system designed to bring together buying and selling interests or orders related to financial instruments. OTFs were introduced by the European Commission as part of MiFID II and are focused on non-equities such as derivatives and cash bond markets. The original MiFID only covered multi-lateral trading facilities.

OTFs are intended to be similar in scope to a swap execution facility (SEF), a type of entity created by the Dodd-Frank Act in the U.S. The goal of SEFs and OTFs is to bring transparency and structure to OTC derivatives trading. OTF regulatory proposals under MiFID II have stated that OTF operators, usually broker-dealers would be prevented from trading against their own capital. This has led to concerns among such participants that liquidity in such markets would be diminished.

Compliance for the different regulatory frameworks will be enabled through a global rule book that manages the different requirements of that jurisdiction. Thomson Reuters is building a single platform that will cater to both markets.

Crucial differences from SEFs

• Not only swaps can be traded but equities, commodities and other derivative contracts could be traded in OTF.
• OTFs have more flexibility of execution than SEFs. During the initial CESR consultation around trading venue functionality, the Wholesale Market Brokers Association worked actively to demonstrate to policy influencers the importance of discretion and flexibility in arranging liquidity across a variety of execution models in markets that tend to trade episodically.

Effects on banks

When SEFs and OTFs are introduced, the dealer banks will be most affected by the new regulations. In general, banks currently trade in swaps bilaterally on behalf of their clients benefiting from spreads. When swaps become standardized, banks will have to move to a fee-based model.