The provision of RTO entails the communication of an investment firm (or its agents) with a client, with the aim of obtaining client’s instructions in relation to transactions involving particular or specific financial instruments (orders), the reception and the subsequent transmission of such orders to another investment firm, which is authorised to execute the client order.
Reception and transmission of orders represents the basis for providing other investment services (ESMA Consultation Paper of 28 January 2022 on the Opinion on Trading Venue perimeter (ESMA70-156-4978)).
In most Members States, an authorisation to exercise reception and transmission of orders (MiFID A1) is mandatory for the execution of orders (MiFID A2), but there are exceptions.
Transmission of orders triggers a EUR 125 000 initial capital requirement under CRD IV (European Banking Authority (EBA) in the Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20 (p. 18, 20)).
Only an initial capital requirement is applicable to firms that solely receive and transmit orders and/or give investment advice and therefore do not hold client money and securities.
These investment services and activities are seen as having relatively low prudential risk because the investment firm has no access to the funds or securities belonging to its clients (the aforementioned EBA Report, p. 90).
Bringing together two or more investors - extended meaning of the RTO
The above ESMA Consultation Paper of 28 January 2022 refers to Recital 44 of MiFID II which extends the meaning of RTO including arrangements that bring together two or more investors, thereby bringing about a transaction between those investors.
According to the ESMA, a person issuing new securities, including a collective investment undertaking, should not be considered an ‘investor’ for the purpose of RTO.
Also, the recital “should be interpreted to include brokering of transactions with one or more financial instruments for the acquisition or disposal of investments on behalf of a client with a potential buyer or seller, regardless of whether the actual offer or acceptance is communicated through the firm that brought the investors together.
Conversely, investment firms interposing themselves on a matched principal trading, for example, between investors in a similar way as a trading venue are excluded from the extended meaning of Recital 44”.
Distinction between RTO and the operation of a trading venue
ESMA Consultation Paper of 28 January 2022 argues that with respect to the MiFID II investment services and activities, a clear distinction should be made between RTO and the operation of a trading venue.
More specifically, multilateral systems should not be authorised as RTO but as trading venues.
In particular, systems broadcasting trading interests to multiple clients with those clients being able to interact, within the system or through the software, with those trading interests, are likely to constitute a multilateral system in the MiFID II sense.
MiFID II Annex I Section A1
Perimeter Guidance Manual, FCA, Release 50, May 2020 www.handbook.fca.org.uk, p. 9 - 11