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The purpose of this paper is to provide a theoretical framework for the legal classification of trading venues in financial markets. Currently, there is no clear definition of when a trading platform should be classified as multilateral or bilateral. This paper builds a theoretical framework that will allow regulators to define the border (with its regulatory implications) between multilateral and bilateral trading venues.

The approach used for this paper focuses on looking at the different trading models available in financial markets and analyzing their key features in order to bring up recurrent aspects that have helped to build the theoretical framework.

Multilateral trading facilities would not only be systems bringing together multiple interests from third parties, but those systems bringing together multiple interests with “no discretion” (ex ante rules) vis‐à‐vis membership, admission of products to trading, and matching of interests. All trading venues that do not meet these three key requirements will be falling under the bilateral trading classification, which implies the application of fiduciary duties, such as conflicts of interest rules and best execution. The paper then advances a proposal to solve the legal classification issue in the revision of the Markets in Financial Instruments Directive in Europe (MiFID). In effect, despite the claim that the Organised Trading Facility (EU) and the Swap Execution Facility (USA) would be equivalent categories, EU and US regulators, respectively, have taken divergent paths on how these venues will ultimately look.

The value of the paper is in its ability to provide a theoretical framework to something that has not been assessed in these terms previously. Today, only the SEC is trying, for the first time, to have a definition of when a RFQ model can be defined “multilateral”. This topic has been rarely discussed before in financial regulation, while it is extensively discussed in market microstructure (but on the market structure implications, rather than its regulatory and policy implications).

The purpose of this paper is to assess the impact of the impact of the single currency on the institutional design of the banking union, through evidence on the financial integration process.

Data analysis uses multiple sources of data on key drivers of financial fragmentation. The paper starts from a snapshot the status of financial integration and then identifies the main components of this trend.

Evidence shows that financial integration in the euro area between 2010 and 2014 retrenched at a quicker pace than outside the monetary union. Home bias persisted. Under market pressures, governments compete on funding costs by supporting “their” banks with massive state aids, which distorts the playing field and feed the risk-aversion loop. This situation intensifies frictions in credit markets, thus hampering the transmission of monetary policies and, potentially, economic growth. Taking stock of developments in the euro area, this paper discusses the theoretical framework of a banking union in a single currency area with decentralised fiscal policy sovereignty. It concludes that, when a crisis looms over, a common fiscal backstop can reduce pressures of financial fragmentation, driven by governments’ moral hazard and banks’ home bias.

Additional research is required to deepen the empirical analysis, with econometric modelling, on the links between governments’ implicit guarantees and banks’ home bias. This is an initial data analysis.

Under market pressure, governments in a single currency area tend to be overprotective (more than countries with full monetary sovereignty) towards their own banking system and so trigger financial fragmentation (enhancing banks’ home bias). To revert that, a common fiscal backstop is an essential element of the institutional design. The paper shows empirical evidence and theory, as well as it identifies underlying market failures. It links the single currency to the institutional design of a banking union. This important dimension is brought into a coherent framework.