Security token market is gaining more and more traction. In order to develop a functional security token industry in Europe, it’s vital to have liquidity and secondary trading platforms. Below, we’re going to give an overview of legal requirements if you’d like to open a trading platform for the security tokens. In order to build a trading platform for security tokens, you need to obtain the MTF license. MTF is a specific type of Investment Firm. Multilateral Trading Facility (MTF) is 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. These are basically alternative trading platforms to exchanges. The MTF concept is similar to the Alternative Trading Systems (ATS) widely developed in the United States.
Below, we’ll bring out some requirements on a high-level for such Investment Firms. The requirements are not comprehensive, and to apply for the MTF license please consult with a lawyer. The requirements are addressed to all Investment Firms under MiFID II. MiFID II is a legislative framework instituted by the European Union to regulate financial markets in the block. We’ve adjusted, simplified and updated a research carried out by the World Bank on Investment Firm requirements.
Let’s dig in and read about some of the requirements that MTF Investment Firms have to comply with.
1. An investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents.
2. An investment firm shall maintain and operate effective organizational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest from adversely affecting the interests of its clients.
3. An investment firm shall take reasonable steps to ensure continuity and regularity in the performance of investment services and activities. To this end the investment firm shall employ appropriate and proportionate systems, resources and procedures.
4. An investment firm shall ensure, when relying on a third party for the performance of operational functions which are critical for the provision of continuous and satisfactory service to clients and the performance of investment activities on a continuous and satisfactory basis, that it takes reasonable steps to avoid undue additional operational risk. Outsourcing of important operational functions may not be undertaken in such a way as to impair materially the quality of its internal control and the ability of the supervisor to monitor the firm’s compliance with all obligations. An investment firm shall have sound administrative and accounting procedures, internal control mechanisms, effective procedures for risk assessment, and effective control and safeguard arrangements for information processing systems.
5. An investment firm shall arrange for records to be kept of all services and transactions undertaken by it which shall be sufficient to enable the competent authority to monitor compliance with the requirements, and in particular to ascertain that the investment firm has complied with all obligations with respect to clients or potential clients.
6. An investment firm shall, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard clients’ ownership rights, especially in the event of the investment firm’s insolvency, and to prevent the use of a client’s instruments on own account except with the client’s express consent.
7. An investment firm shall, when holding funds belonging to clients, make adequate arrangements to safeguard the clients’ rights and, except in the case of credit institutions, prevent the use of client funds for its own account.
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