Setting Up Alternate Trading System (ats) In The Difc - 10 Leaves

By Author: Himaja Teki
Total Articles: 21
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Why setup a financial services firm in the DIFC?

DIFC is one of the world’s top eight onshore financial centers and offers a secure and efficient platform for businesses and financial institutions to reach into and out of the emerging markets of the region. The quality and independence of DIFC’s regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in the MENASA region.

DIFC fills the time-zone gap for a global financial centre between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East.

What is an Alternate Trading System?

An ATS is a platform that is more loosely regulated than an exchange. It is used to match large orders mainly from institutional clients, and hence work as broker-dealers rather than exchange houses. They are also referred to as Multilateral Trading Facilities in Europe.

The DFSA recognizes two types of ATS platforms – Multilateral Trading Facilities that operate on non-discretionary ...
... rules, and Organised Trading Facilities that operate on discretionary rules.

MTF operators allow for trading of a wide variety of equity and non-equity securities, including shares, warrants, options, derivatives, futures, CFDs, fund units and crypto assets. Contracts between buyers and sellers are formed according to a set of transparent rules that do not discriminate between members or their clients (non-discretionary basis).

Organised Trading Facilities on the other hand, are facilities where contracts for the exchange of non-equities such as bonds, structured finance products, emission allowances or derivatives are formed, on a discretionary basis. An MTF is usually operated by a regulated investment firm or an operator, whereas an OTF can only be operated by a regulated investment firm.

Why are Alternate Trading Systems of interest in the DIFC?

While the DIFC has provisions for ATS facilities, there are none registered at present. This is set to change however, with the introduction of the DIFC Digital Assets Regime. It is expected that there will be interest from ATS operators to register and get regulated in the centre, primarily to engage in Security Token Offers and secondary trading of crypto assets.

What does DIFC consider to be a token, or a crypto-asset?

The DFSA defines a token as a digital representation of value, rights and obligations that are created, stored and transferred electronically, using distributed ledger technology (DLT) or similar technology.

Generally, crypto-assets depend on cryptography and distributed ledger as part of their perceived or inherent value. They are created, stored and transferred using a DLT application, using:

An address,
a public key corresponding to that address, and
a private key, also corresponding to that address.

What does the DFSA consider to be a Security Token?

In addition, a Security Token is defined as a token that confers rights and obligations that are:

(i) the same as those conferred by a share, debenture or futures contract (Investments); or (ii) substantially similar in nature, purpose or effect, to those conferred by Investments.

In effect, a Security Token is a token that behaves as a security (equity, debenture, convertible, future, option etc.) and is hence considered by the DFSA as a specified investment.

What is a security?

The DFSA has a list of instruments that they consider a security. In general, a transaction is considered a security if a) there is an investment of money, b) there is an expectation of profit, c) the investment of money is in a common enterprise and d) any profit comes from the efforts of a promoter or third party. This is also commonly known as the Howey Test.

How would the DFSA determine whether a particular Security Token is an Investment or not?

The DFSA aims to take a hybrid approach, where they will make their own assessment of whether the proposed token is a Security Token, based on a self-assessment submitted by the applicant.

Can an ATS operator conduct a Security Token Offering (STO)?

Security Tokens can be listed and traded on DFSA-regulated exchanges or Alternate Trading Systems, with both facilities being able to host initial token offerings and secondary trading.

The current admission criteria will also be applied to such Security Tokens, in a way that tokens trading elsewhere will also be tradable in such facilities.

In cases where the ATS is exclusively dedicated to trading only in Security Tokens, it would be labeled a Security Token Market (or Derivative Token Market).

Is direct access allowed in case of DFSA-regulated ATS operators?

Earlier, only persons who met certain criteria were allowed access to DFSA-regulated exchanges, clearing houses and ATS platforms. Direct access models are now allowed under the DIFC Digital Assets Regime.

Accordingly, this article is focused on the requirements for licensing an ATS operator who wishes to allow listing and secondary trading of Security Tokens from the DIFC.

I am Himaja Teki From Bangalore, India. Working as a Content Writer.