Reception and transmission of orders in relation to one or more financial instruments (MiFID definitions)

Reception and transmission of orders (RTO) in relation to one or more financial instruments is included in the Section A (Investment services and activities) of the MiFID II Annex I point 1.

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.

MiFID II, Recital 44 The business of reception and transmission of orders should also include bringing 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.

Perimeter Guidance Manual, FCA, Release 50, May 2020 www.handbook.fca.org.uk, p. 9 - 11 Reception and transmission Q13. When might we be receiving and transmitting orders in relation to one or more financial instruments? (A1 and recital 44)? Under the general definition of this service, you only provide the service if you are both receiving and transmitting orders. For example, this would be the case if you transmit subscription or redemption orders received from a client to the operator of a collective investment undertaking or transmit buy or sell orders to agency brokers. This service though is also extended to include arrangements that bring together two or more investors, thereby bringing about a transaction between those investors. This meaning may be relevant, for example, to corporate finance firms. It could include, in our view, negotiating terms for the acquisition or disposal of investments on behalf of a corporate client with a potential buyer or seller, for example as part of a merger or acquisition. You may be providing this service even though, having brought the investors together, the actual offer or acceptance is not communicated through you. The extended meaning of the service only applies if the firm brings together two or more investors. A person issuing new securities, including a collective investment undertaking, should not be considered to be an ‘investor’ for the purpose of this extended meaning. However, an issuer may be an investor for the purpose of the general definition of the service. Accordingly whilst an arrangement whereby a person, on behalf of a client, receives and transmits an order to an issuer will, in our view, amount to reception and transmission, one in which it simply brings together an issuer with a potential source of funding for investment in a company, will not. If you are party to a transaction as agent for your client or commit your client to it, you may be doing more than receiving and transmitting orders and will need to consider whether you are providing the investment service of executing orders on behalf of clients. Q14. We are introducers who merely put clients in touch with other investment firms - are we receiving and transmitting orders? No. If all you do is introduce others to investment firms so that they can provide investment services to those clients, this in itself does not bring about a transaction and so will not amount to receiving and transmitting orders. But if you are a person who does more than merely introduce, for example an introducing broker, you are likely to be receiving orders on behalf of your clients and transmitting these to clearing firms and therefore may fall within the scope of MiFID.

   Documentation    

MiFID II Annex I Section A1

ESMA Consultation Paper on the Opinion on Trading Venue perimeter, ESMA70-156-4978, 28 January 2022

Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20, p. 18, 20

Perimeter Guidance Manual, FCA, Release 50, May 2020 www.handbook.fca.org.uk, p. 9 - 11

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