• COBS 8. COBS 8. ADDITIONAL RULES: OPERATING AN MTF OR OTF

    • COBS 8.1 COBS 8.1 Application and interpretation

      • COBS 8.1.1

        This chapter applies to an Authorised Person which Operates a Multilateral Trading Facility ("MTF") or an Organised Trading Facility ("OTF").

    • COBS 8.2 COBS 8.2 Rules Applicable to MTF and OTF Operators — General

      • COBS 8.2.1 COBS 8.2.1

        In addition to the general requirements applicable to Authorised Persons in COBS, GEN and elsewhere in the Rules, an Authorised Person carrying on the Regulated Activity of Operating an MTF (an "MTF Operator") must comply with the following requirements applicable to a Recognised Body or Recognised Investment Exchange set out in the MIR rulebook, reading references to Recognised Bodies or Recognised Investment Exchanges in the relevant rules as if they were references to the MTF:

        (a) MIR 2.6 (Operational systems and controls);
        (b) MIR 2.7.1 and 2.7.2 (Transaction recording);
        (c) MIR 2.8 (Membership criteria and access);
        (d) MIR 2.9 (Financial crime and market abuse);
        (e) MIR 2.11 (Rules and consultation);
        (f) MIR 3.3 (Fair and orderly trading);
        (g) MIR 3.7 (Public disclosure);
        (h) MIR 3.8 (Settlement and Clearing facilitation services);
        (i) MIR 3.10 (Default Rules).

        • Guidance

          In assessing whether an MTF Operator complies with the requirements set out above, the Regulator will take into account the general principle that users of an MTF anticipate less comprehensive regulatory protections.

      • COBS 8.2.2 COBS 8.2.2

        An MTF that admits to trading Securities that are offered by way of an Exempt Offer under MKT Rule 4.3.1(13) shall ensure that it has effective systems and controls in place to:

        (a) admit only Securities of such Exempt Offers that are made on its own platform;
        (b) identify those Persons to whom the Exempt Offer was made;
        (c) restrict trading of the Securities, to no more than 200 Persons who are not Professional Clients or Market Counterparties;
        (d) comply with MIR Rule 3.9.1 (Admission to trading), as applicable in relation to the relevant Securities; and
        (e) allow users of its market to obtain Inside Information, including any Offer documents pursuant to MKT Rule 4.3.5 relevant to the Securities.

        • Guidance

          MKT Rule 4.3.1(13) provides for the specific circumstance where an Exempt Offer can be directed to no more than 200 Persons who do not qualify as Professional Clients or Market Counterparties, where the Securities are to be admitted to trading on a MTF. An Issuer seeking admission to trading of its Securities on an MTF in accordance with MKT Rule 4.3.1(13) may also, pursuant to MKT Rule 4.3.3, utilise an Exempt Offer that relies on one or more of the circumstances within MKT Rule 4.3.1, with the exception of MKT Rule 4.3.1(2). For example, an Issuer may make a simultaneous Exempt Offer to 200 Persons under MKT Rule 4.3.1(13), and an unlimited number of Professional Clients under MKT Rule 4.3.1(1).

    • COBS 8.3 COBS 8.3 Rules Applicable to MTF and OTF Operators — Transparency

      • COBS 8.3.1

        (a) An MTF Operator or OTF Operator must disclose to its members and the public as appropriate, on a continuous basis during normal trading, the following information relating to trading of Investments on its MTF or OTF:
        (i) the current bid and offer prices and volume;
        (ii) the depth of trading interest shown at the prices and volumes advertised through its systems for the Investments; and
        (iii) any other information relating to Investments which would promote transparency relating to trading.
        (b) The Regulator may waive or modify the disclosure requirement in Rule 8.3.1 in relation to certain transactions where the order size is predetermined, exceeds a preset and published threshold level and the details of the exemption are made available to an MTF Operator or OTF Operator's members and the public.
        (c) In assessing whether an exemption from pre-trade disclosure should be allowed, the Regulator will take into account factors such as:
        (i) the level of order threshold compared with normal market size for the Investment;
        (ii) the impact such an exemption would have on price discovery, fragmentation, fairness and overall market quality;
        (iii) whether there is sufficient transparency relating to trades executed without pre-trade disclosure (as a result of orders executed on execution platforms without pre-trade transparency), whether or not they are entered in transparent markets;
        (iv) whether the MTF Operator or OTF Operator supports transparent orders by giving priority to transparent orders over dark orders, for example, by executing such orders at the same price as transparent orders; and
        (v) whether there is adequate disclosure of details relating to dark orders available to members and other participants on the Facility to enable them to understand the manner in which their orders will be handled and executed on the Facility.
        (d) When making disclosure, an MTF Operator or OTF Operator must adopt a technical mechanism by which the public can differentiate between transactions that have been transacted in the central order book and transactions that have been reported to the Facility as off-order book transactions. Any transactions that have been cancelled pursuant to its rules must also be identifiable.
        (e) An MTF Operator or OTF Operator must use appropriate mechanisms to enable pre-trade information to be made available to the public in an easy to access and uninterrupted manner at least during business hours. An MTF Operator or OTF Operator may charge a reasonable fee for the information which it makes available to the public.
        Amended on (3 February, 2020).

      • COBS 8.3.2

        MTF Operator or OTF Operator must disclose the price, volume and time of the transactions executed in respect of Investments to the public as close to real-time as is technically possible on reasonable commercial terms and on a non-discretionary basis. An MTF Operator or OTF Operator must use adequate mechanisms to enable post-trade information to be made available to the public in an easy to access and uninterrupted manner at least during business hours. An MTF Operator or OTF Operator may charge a reasonable fee for the information which it makes available to the public.

    • COBS 8.4 COBS 8.4 Rules Applicable to MTF and OTF Operators and rules on Liquidity providers

      • COBS 8.4.1

        An MTF Operator or OTF Operator must not introduce a liquidity incentive scheme unless

        (a) participation of such a scheme is limited to members or any other Persons where:
        (i) the MTF Operator or OTF Operator has undertaken due diligence to ensure that the Person is of sufficient good repute and has adequate competencies and organisational arrangements; and
        (ii) the Person has agreed in writing to comply with the MTF Operator or OTF Operator's operating rules so far as those rules are applicable to that Person's activities; and
        (b) the MTF Operator or OTF Operator has obtained the prior approval of the Regulator.

      • COBS 8.4.2

        For the purposes of this section, a "liquidity incentive scheme" means an arrangement designed to provide liquidity to the market in relation to Investments traded on the MTF or OTF.

      • COBS 8.4.3

        Where an MTF Operator or OTF Operator proposes to introduce or amend a liquidity incentive scheme, it must lodge with the Regulator, at least ten days before the date by which it expects to obtain the Regulator approval, a statement setting out:

        (a) the details of the relevant scheme, including benefits to the MTF or OTF and members arising from that scheme; and
        (b) the date on which the scheme is intended to become operative.

      • COBS 8.4.4

        The Regulator must within ten days of receiving the notification referred to in 8.4.3, approve a proposed liquidity incentive scheme unless it has reasonable grounds to believe that the introduction of the scheme would be detrimental to the MTF or OTF or to markets in general. Where the Regulator does not approve the proposed liquidity incentive scheme, it must notify the MTF Operator or OTF Operator of its objections to the introduction of the proposed liquidity incentive scheme, and its reasons for that decision.

      • COBS 8.4.5

        An MTF Operator or OTF Operator must sufficiently prior to launch, to enable any interested parties to participate in it, announce the introduction of the liquidity incentive scheme, specify the date on which the scheme becomes operative and the contracts to which it relates.

      • COBS 8.4.6 [Deleted]

        Amended on (3 February, 2020).

    • COBS 8.5 COBS 8.5 Rules Applicable to MTF Operators

      • COBS 8.5.1

        The following rules shall not apply to MTF Operators in respect of transactions concluded under the rules governing an MTF between its members or participants or between the MTF and its members or participants in relation to the use of the MTF, except that members of or participants in the MTF shall comply with such obligations with respect to their Clients when, acting on behalf of their Clients, they execute their orders through the systems of an MTF as stated in the following provisions:

        (a) Rule 3.4 (Suitability);
        (b) Rule 6.5 (Best Execution);
        (c) Rule 6.7 (Aggregation and Allocation); and
        (d) Rule 12 (Key Information and Client Agreement).

      • COBS 8.5.2

        MTF Operators may not execute Client orders against proprietary capital, or engage in matched principal trading.

    • COBS 8.6 COBS 8.6 Rules Applicable to OTF Operators

      • COBS 8.6.1

        An OTF Operator may engage in matched principal trading in bonds, structured finance products, and other derivatives specified by the Regulator only where the Client has consented to the process.

      • COBS 8.6.2

        An OTF Operator shall not use matched principal trading to execute Client orders in an OTF in derivatives pertaining to a class of derivatives that has been declared subject to the Clearing obligation in accordance with the Regulations.

      • COBS 8.6.3

        OTF Operators may engage in dealing on own account other than matched principal trading only with regard to sovereign debt instruments for which there is not a liquid market.

      • COBS 8.6.4

        OTF Operators may engage another Authorised Person to carry out market making on that OTF on an independent basis, provided that such other Authorised Person does not have Close Links with the OTF Operator.

      • COBS 8.6.5

        Execution of orders on an OTF must be carried out on a discretionary basis.

      • COBS 8.6.6

        An OTF Operator shall exercise discretion only in the following circumstances:

        (a) when deciding to place or retract an order on the OTF they operate; and/or
        (b) when deciding not to match a specific Client order with other orders available in the systems at a given time, provided it is in compliance with specific instructions received from a Client and with its "best execution" obligations in accordance with these Rules.

      • COBS 8.6.7

        With a system that crosses Client orders, the OTF Operator may decide if, when and how much of two or more orders it wants to match within the system. With regard to a system that arranges transactions in non-equities, the OTF Operator may facilitate negotiation between Clients so as to bring together two or more potentially compatible trading interests in a transaction.

      • COBS 8.6.8

        OTF Operators shall, on request, provide the Regulator with a detailed explanation why the system does not correspond to and cannot operate as a Recognised Investment Exchange or MTF, a detailed description as to how discretion will be exercised, in particular when an order to the OTF may be retracted and when and how two or more Client orders will be matched within the OTF. In addition, the OTF Operator shall provide the Regulator with information explaining its use of matched principal trading.

      • COBS 8.6.9

        OTF Operators must also comply with the requirements relating to financial crime and market abuse, and fair and orderly trading in MIR 2.9 and MIR 3.3 respectively.