An organised trading facility (OTF) is one of the three types of trading venue recognised in European Union and United Kingdom financial markets law. It is a multilateral system, other than a regulated market or a multilateral trading facility, in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives can interact in a way that results in contracts. Shares and other equity instruments cannot be traded on an OTF.
The category was introduced by MiFID II and has existed since that legislation took effect in January 2018. Its distinguishing feature is that the operator carries out orders on a discretionary basis, which the other two venue types may not do. It was designed to bring broker-operated trading systems, especially those run by interdealer brokers using voice and hybrid methods, within the rules that apply to venues.
Why the category was created
Before 2018, a large volume of trading in bonds and OTC derivatives was arranged through broker systems that fell outside the definitions of an exchange or multilateral trading facility. These systems brought many buyers and sellers together but were regulated only as brokerage, without the transparency, access and surveillance obligations of venues. After the financial crisis of 2007 to 2009, the G20 countries agreed that standardised derivatives should be traded on exchanges or electronic platforms where appropriate.
European legislators wanted to capture organised trading without forcing it into a model built for equity order books. Markets for bonds and derivatives are less liquid, trade in larger sizes and often depend on an intermediary who knows which clients might take the other side. The OTF was the result: a venue with venue obligations, but one in which the operator's judgement plays a part.
How discretion works
The operator of an OTF may exercise discretion at two points. It may decide whether to place an order on the facility or to retract it, and it may decide not to match a particular client order with other orders available in the system at a given time, provided this is consistent with the client's instructions and with the operator's duty of best execution. A broker working a large derivatives order might, for instance, choose which counterparties to approach and when, to avoid moving the price against the client.
Because discretion exposes clients to the operator's judgement, the operator owes investor protection duties to users of the venue that operators of other venue types do not owe in respect of trades on their systems. These include conduct of business rules, best execution and client order handling rules.
Restrictions on the operator
To limit conflicts of interest, the law restricts what the operator may do on its own venue:
- No proprietary trading. The operator may not execute client orders against its own capital or that of a group company. The one exception is dealing in sovereign debt instruments for which there is no liquid market.
- Limited matched principal trading. The operator may stand between a buyer and a seller in simultaneous back-to-back trades only with the client's consent, and not at all in derivatives that are subject to the clearing obligation.
- No combination with internalisation. The same legal entity may not operate an OTF and act as a systematic internaliser, and an OTF may not connect to such a firm or to another OTF in a way that lets their orders interact.
- Independent market makers. Another investment firm may make markets on the venue, provided it has no close links with the operator.
In most other respects an OTF is regulated like the other venue types. Operating one is an investment service requiring authorisation. The operator must publish quotes and the details of completed trades under the pre-trade and post-trade transparency regime, subject to waivers and deferrals for large or illiquid transactions. It must have systems to ensure orderly trading, monitor for abuse through market surveillance, keep order records and submit data to regulators as part of trade reporting. It must also be able to explain to its regulator why the system does not qualify as a regulated market or multilateral trading facility, and how discretion is used.
An OTF counts as a trading venue for the purposes of the derivatives trading obligation, under which certain standardised interest rate swaps and index credit default swaps must be traded on a venue rather than bilaterally.
Comparison and market use
The regulated market, such as a stock exchange, and the multilateral trading facility both match orders under fixed rules and may trade any instrument. The OTF trades only non-equity instruments and allows discretion. A systematic internaliser is not a venue: it deals bilaterally against its own book. The closest counterpart in the United States is the swap execution facility created by the Dodd-Frank Act, although that category does not rest on operator discretion in the same way.
In practice most authorised OTFs are run by interdealer brokers and cover rates, credit, foreign exchange derivatives, energy and commodity products. Many use a request for quote or voice-assisted protocol. The number of OTFs is small compared with multilateral trading facilities, and some physically settled wholesale energy contracts traded on OTFs have received specific treatment under the definition of financial instruments.