On October 3, the European Securities and Markets Authority (ESMA) updated its questions and answers on market structures topics (Q&A) under the revised Markets in Financial Instruments Directive (MiFID II) and the accompanying Markets in Financial Instruments Regulation. The updated ESMA Q&A addresses several open questions regarding the provision and receipt of direct electronic access (DEA) services. In the first instance, ESMA responded to a question regarding the best execution obligations owed by the operator of an organized trading facility (OTF) when third-party brokers provide DEA to the OTF. ESMA restated that OTF operators owe best execution obligations to their clients trading on the OTF and should follow their best execution policy when executing client orders. ESMA also noted that the OTF operator’s clients (the brokers using the OTF) owe best execution obligations to their underlying clients, and that a DEA order from such an underlying client to a broker using the OTF could be considered a client-specific instruction, in which case the order could qualify for a carve-out from the MiFID II best execution regime applicable to the broker.
Additionally, ESMA answered a question regarding the scope of the obligation on DEA providers to undertake suitability checks and controls with respect to their DEA clients. ESMA confirmed that the obligations that apply to DEA providers under MiFID II extend to cover clients that are not investment firms authorized under MiFID II, and further stated that all clients with access to a European trading venue through several layers of intermediaries (known as “sub-delegated” DEA) must be subject to the relevant controls and suitability checks in MiFID II and the relevant regulatory technical standards.
The updated ESMA Q&A is available here.