MiFID II and the Regulation of Multilateral Trading in OTC Derivatives: Is the OTF Fit for Purpose?

This article examines the challenges and design flaws in the implementation of the organized trading facility (OTF) under the European Union’s Markets in Financial Instruments Directive II (MiFID II), which was intended to create a regulated multilateral trading venue for over-the-counter (OTC) derivatives. It argues that the OTF framework, shaped by competing interests between incumbent regulated markets and dealer banks, inadequately reflects the unique features of OTC derivatives markets, resulting in limited trading activity within OTFs and continued reliance on unregulated or bilateral trading. Key barriers include restrictions on interactions between OTFs and systematic internalizers (SIs), prohibitions on fee structure differentiation, and a vague regulatory perimeter that has allowed market participants to operate outside the OTF framework. The article suggests that reforms—such as relaxing OTF–SI and OTF–OTF interaction restrictions, allowing bespoke fee arrangements, and clarifying the regulatory scope—are necessary to enhance transparency, liquidity, and market efficiency in European wholesale derivatives trading.