For the purpose of making EU financial markets more transparent and efficient, whilst levelling the playing field between different venues, and attracting under the same regulatory framework all forms of OTC trading, MiFID II/MiFIR has introduced a new trading venue category known as ‘organised trading facility’ (“OTF”) for bonds, structured finance products, emission allowances and derivatives.

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MIFID II/MIFIR in pills
Organised Trading Facilities (“OTFs”)
Italy has recently transposed MiFID II into national law and adapted the latter to MiFIR by means of
Legislative Decree no. 129 of 3rd
August 2017 (the “Decree”), published on the Official Gazette no. 198 of
25th
August 2017 and entered into force on the following day, 26th
August. The entry into application of the
new provisions is 3rd
January 2018.
The Decree introduced some relevant changes to the Consolidated Financial Act (“Testo Unico della
Finanza”; namely, Legislative Decree no. 58/1998, as amended) with the primary aim of strengthening investor
protection and increasing the efficiency of financial markets.
With regard to OTFs, besides the relevant provisions of the Decree governing the latter, CONSOB (the
Italian Companies and Stock Exchange Commission) closed on 30st
September 2017 a consultation (whose
key-document is hereinafter referred to as the “Consultation Paper”) aimed at adapting the Markets’
Regulation (no. 16191/2007, as amended) to MiFID II/MiFIR. The new provisions are hence expected to be
issued in the next few weeks.
***
The purpose of this hand-out is to give a brief overview of the main provisions that apply to OTFs,
including those related to organisational requirements, execution of orders, trading process, information
obligations, sanctionary regime, as well as of the rules governing suspension or removal of financial
instruments from trading.
***
1. Definition of “OTF”
OTF has been introduced by MiFID II as a new type of trading venue1
alongside regulated markets
(“RMs2
”) and multilateral trading facilities (“MTFs3
”).
According to the definition provided in the Consolidated Financial Act (as amended by the Decree)4
“OTF” means “a multilateral system which is not an RM or an MTF and in which multiple third-party buying
1
According to Recital 8 of MiFIR: “this new category [OTF] is broadly defined so that now and in the future it should be able to
capture all types of organised execution and arranging of trading which do not correspond to the functionalities or regulatory
specifications of existing venues”.
2
“Regulated market” means a multilateral system operated and/or managed by a market operator, which brings together or facilitates
the bringing together of multiple third-party buying and selling interests in financial instruments – in the system and in accordance
with its non-discretionary rules – in a way that results in a contract, in respect of the financial instruments admitted to trading under its
rules and/or systems, and which is authorised and functions regularly and in accordance with Part III of the Consolidated Financial
Act.
3
“Multilateral trading facility” means a multilateral system, operated by an investment firm or a market operator, which brings together
multiple third-party buying and selling interests in financial instruments – in the system and in accordance with non-discretionary rules
– in a way that results in a contract.
4
See Article 1, paragraph 5-octies, of the Consolidated Financial Act.

2. 2
and selling interests in bonds, structured finance products, emission allowances and derivatives are able to
interact in the system in a way that results in a contract”.
2. Organisational requirements
In order to carry out its activity, an OTF operator5
must, inter alia6
:
(i) establish transparent rules and procedures for fair and orderly trading, as well as objective
criteria for an efficient execution of orders and determining the financial instruments that can
be traded under its systems;
(ii) have arrangements for the sound management of the OTF’s technical operations, including
effective contingency ones to cope with risks of systems’ disruption;
(iii) establish, publish, maintain and implement transparent and non-discriminatory rules, based on
objective criteria, governing access to its facility;
(iv) have arrangements to clearly identify and manage the potential adverse consequences for the
operation of the OTF, or for its users, deriving from any conflicts of interest which may arise
between the OTF itself, its owners or the OTF operator, and the sound functioning of the same
OTF;
(v) clearly inform the OTF’s clients of their respective responsibilities for the settlement of the
transactions executed in the OTF in question;
(vi) have at least three materially active members or users, each of which having the opportunity
to interact with all the others in respect of price formation;
(vii) put in place the necessary arrangements to facilitate the efficient settlement of the transactions
concluded under the OTF; and
(viii) provide sufficient publicly available information to enable OTF’s users to form an investment
judgement, taking into account both the nature of such users and the types of instruments
traded.
3. Execution of orders
As opposed to RMs and MTFs, the execution of orders on an OTF must be carried out on a discretionary
basis. In particular, an OTF operator exercises discretion when deciding7
:
(i) to place or retract an order on the OTF in question; and/or
5
Both investment firms and market operators (namely, persons who manage and/or operate the business of a regulated market and may
be the regulated market itself) can operate an OTF.
6
See Articles 65-bis, 66, paragraph 3, and 67, paragraph 1, of the Consolidated Financial Act. In addition, OTFs, as well as RMs and
MTFs, should lay down transparent and non-discriminatory rules governing access to the systems.
7
See Article 65-quater of the Consolidated Financial Act.

3. 3
(ii) not to match a specific client order with other orders available in the system, provided it is in
compliance with specific instructions received from a client, as well as with best execution’s
obligations.
For the system that crosses clients’ orders, an OTF operator may decide if, when and how much of two
or more orders it wants to match within such system. Without prejudice to the above requirements, an OTF
operator may also facilitate negotiations between clients in order to bring together two or more potentially
compatible trading interests in a transaction8
.
Consequently, transactions concluded on an OTF are subject to investors’ protection rules under MiFID
II, such as those on information, suitability and appropriateness, best execution and client order handling9
.
In addition, any market operator authorised to operate an OTF should comply with the provisions
regarding conditions and procedures for authorisation of investment firms10
.
4. Trading process and information obligations for OTF operators
OTF operators must establish arrangements preventing execution of clients’ orders against their
proprietary capital or from any entity that is part of the same corporate group or legal person as the OTF in
question11
.
However, OTF operators are allowed – subject to client’s consent12
– to engage in matched principal
trading13
in bonds, structured finance products, emission allowances, and derivatives that have not been
declared subject to the clearing obligation under Article 5 of Regulation no. 648/2012/EU of 4th
July 201214
.
OTF operators may also deal on own account other than matched principal trading only with regard
to illiquid sovereign debt instruments.
As far as information obligations are concerned, OTF operators must provide CONSOB with
information explaining their use of matched principal trading. CONSOB will monitor OTF operators’
engagement in matched principle trading to ensure that the latter complies with the definition and that it does
not give rise to conflicts of interest between the OTF operator at issue and its clients.
8
Moreover, pursuant to Article 65-quater, paragraph 2, of the Consolidated Financial Act, an OTF operator cannot operate as a
systematic internaliser. In addition, an OTF must neither connect with a systematic internaliser in a way which enables orders in an
OTF and orders or quotes in a systematic internaliser to interact nor connect with another OTF in a way which enables orders in
different OTFs to interact.
9
Conversely, transactions concluded under the rules governing a MTF (i) between the latter’s members or participants, or (ii) between
the MTF itself and its members or participants in relation to the use of the MTF are not subject to investors’ protection rules. However,
the members of or participants in a MTF must comply with such obligations with respect to their clients when, acting on behalf of the
latter, they execute their orders through the systems of an MTF.
10
See Recital 9 of MiFIR.
11
See Article 65-quater, paragraph 4, of the Consolidated Financial Act.
12
See Article 65-quinquies, paragraph 1, of the Consolidated Financial Act.
13
Matched principal trading means a transaction where the facilitator interposes itself between the buyer and seller to the transaction
in such a way that it is never exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously
and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed
commission, fee or charge for the transaction
14
European Market Infrastructure Regulation (“EMIR”).

4. 4
Moreover, OTF operators – either when they apply for an authorisation to operate an OTF or on ad
hoc basis – must provide CONSOB with15
:
(i) a detailed explanation why the OTF in question does not correspond to and cannot operate as
a regulated market, MTF, or systematic internaliser; and
(ii) a detailed description as to how they will exercise discretion, in particular when they might
retract a client order to the OTF, and when and how two or more client orders will be matched
within the OTF itself.
5. Suspension and removal of financial instruments from trading
An OTF operator16
may suspend or remove from trading17
a financial instrument that no longer
complies with the OTF’s rules, unless such a measure would be likely to cause significant damage to investors’
interests or the orderly functioning of the market18
. Save made for CONSOB’s power to suspend or remove a
financial instrument from trading, or demand the OTF (or MTF) operator to do so19
.
A trading venue that suspends or removes a financial instrument from trading must also suspend or
remove derivatives that relate or are referenced to that financial instrument, where necessary to support the
objectives of its suspension or removal. In particular, pursuant to Commission Delegated Regulation no.
2017/569/EU of 24th
May 201620
, an OTF or a MTF operator must suspend or remove a derivative referred to
in points 4 to 10 of Section C of Annex I of MiFID II from trading where that derivative is related or referenced
to only one financial instrument.
Moreover, the OTF operator must make public its decision on such suspension or removal, and
communicate, without delay, the relevant decisions to CONSOB.
Finally, in order to address potential risks arising from the multitude of trading venues that operate
across EU, when a trading venue suspends or removes a financial instrument or derivative from trading, RMs,
MTFs, OTFs, which trade the same financial instrument or related derivatives in the same or in different
Member States, may also be required by the competent authority to suspend or remove that financial instrument
or derivative from trading, where the suspension or removal is due to suspected, inter alia, market abuse,
except where they could cause significant damage to the investors’ interests or the orderly functioning of the
market.
15
See Article 21-ter of the Consultation Paper.
16
The same applies to RM and MTF operators.
17
See Article 66-ter of the Consolidated Financial Act.
18
The circumstances constituting significant damage to investors' interests and the orderly functioning of the market are set forth in
Article 80 of Commission Delegated Regulation no. 2017/565/EU of 25th
April 2016.
19
See Article 66-quater of the Consolidated Financial Act.
20
See Article 1 thereof.

5. 5
6. ESMA’s Q&As of 3rd
April 2017 on MiFID II and MiFIR market structures topics
ESMA has recently published on its website some Q&As aimed at clarifying the type of arrangements
that qualify as an OTF. On the basis thereof, any entity should seek authorisation to operate an OTF where the
three following conditions are met:
(i) trading is conducted on a multilateral basis;
(ii) trading arrangements in place have the characteristics of a system; and
(iii) execution of orders takes place on a discretionary basis.
In particular, ESMA has clarified the steps to be taken by an OTF operator in order to ensure that the
execution of orders is carried out on a discretionary basis, whilst guaranteeing compliance with the best
execution principle, as follows:
(i) the exercise of discretion can usefully be split into:
(a) order discretion, which refers to the judgement exercised by an OTF operator (i)
whether to place an order at all on the OTF, (ii) whether to place the whole order or
just a portion of it on the OTF, and (iii) when to do so. Likewise, an OTF operator is
expected to make a judgement as to whether and when an order should be retracted
from the OTF; and
(b) execution discretion, which refers to the judgement exercised by the OTF operator as
to if, when, and how much of two matching orders in the system should be matched;
(ii) with regard to best execution’s obligations, an OTF operator should, in the same way as other
firms that execute clients’ orders, have an execution policy setting out the various execution
venues, including its own OTF, that it will be considering when receiving a client order and
explain in which circumstances an execution venue would prevail over the others. The
execution policy must also set out in details the areas in which the investment firm intends to
exercise discretion and the basis on which the latter will be exercised.
7. Sanctions for infringements
According to the Consolidated Financial Act21
, unless the fact constitutes a criminal offence, a
pecuniary sanction ranging from EUR 30K to EUR 5M (or up to ten per cent of the amount invoiced when the
latter exceeds EUR 5M) applies to market operators, which breach the relevant provisions regarding, inter
alia, (i) organisational requirements and functioning of RMs, MTFs and OTFs, (ii) admission, suspension and
removal of financial instruments form trading, and (iii) access to trading venues.
***
Should you need any further information on the above, please do not hesitate to contact us.
Giovanni Carotenuto – gcarotenuto@carotenutolex.com
Milvia Scurti – mscurti@carotenutolex.com
21
See Article 190.3 thereof.