EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.4.3.1:5.II.4.3.1 Interpretation 1: the case of Robeco versus AFM – excluding price formation from the RM (and MTF)-definition

EU Equity pre- and post-trade transparency regulation (LBF vol. 21) 2021/5.II.4.3.1

5.II.4.3.1 Interpretation 1: the case of Robeco versus AFM – excluding price formation from the RM (and MTF)-definition

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

The European Court needed to decide under MiFID I whether a system called EFS (European Fund Services) qualified as an RM.1 Euronext developed EFS for trading investment funds that were open-end. The investment fund manager of EFS was Robeco. Important here was that price formation took place outside EFS (by means of so-called forward pricing). The Netherlands Authority for the Financial Markets (AFM) argued that EFS was an RM. Robeco disagreed. A main element of discussion concerned the term ‘multilateral’ in the RM-definition. The European Court followed the conclusion of Attorney General Campos-Sanchez.2 Campos-Sanchez as follows:

‘The criteria for determining whether a platform for trading in financial instruments is multilateral may therefore be summarised as: a) the participation of multiple investors in buying and selling financial instruments, and b) the existence of a riskless counterparty (the operator), interpose between the different investors to ensure the proper function of the system (…). The fact that Euronext intervenes in the system as an operator which does not act on own account or expose proprietary capital to risks also shows that EFSs is a multilateral system (…).’3

In addition:

‘The referring court and the Robeco funds have referred to other elements which in their view, characterise RMs. These are specifically: a) the price formation mechanism in used in the trading system; b) the primary nature of the system; and c) whether or not a risk of market abuse exists (…). I shall state now that none of those elements are provided for in the definition of RM in Article 4(1)(14) of MiFID I and nor do I believe that they are implicit in that definition, from which it follows that they should not be taken into account when establishing whether or not a platform like EFS is an RM.’4

In sum, the European Court considered two elements to be relevant for when trading is multilateral, namely: (a) the participation of multiple investors in buying and selling financial instruments, (b) the existence of a riskless counterparty (i.e. not trading on own account or exposes proprietary capital to risk) to interpose between the multiple investors. The European Court did not consider price formation to be an element of the MiFID I-definition for RMs. Since MTFs and RMs represent the same organised trading functionality,5 the case of the European Court was also relevant for the MiFID I-definition of MTFs.6

An application of the case of the European Court under MiFID II would mean that an internal matching system in equity instruments would be required to authorise as an MTF where: (1) the operator of the internal matching system is a riskless counterparty, which (2) facilitates the participation of multiple investors in buying and selling equity instruments. Price formation, that is – the activity of buyers and sellers agreeing on prices for transactions,7 would under this interpretation be of no relevance for the meaning of ‘on a multilateral basis’.

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