PERG 13 Annex 2 Annex 2

A1- Reception and transmission of orders in relation to one or more financial instruments

Arranging (bringing about) deals in investments (article 25(1) RAO)

Bidding in emissions auctions (article 24A RAO)2

This was an ISD service.

Generally speaking, only firms with permission to carry on the activity of arranging (bringing about) deals in investments in relation to securities and contractually based investments which are financial instruments can provide the service of reception and transmission. This is because a service must bring about the transaction if it is to amount to reception and transmission of orders.

The activity of arranging (bringing about) deals in investments is wider than A1, so a firm carrying on this regulated activity will not always be receiving and transmitting orders.

See Q12A, 2Q13 and Q14 for further guidance.

A2- Execution of orders on behalf of clients

Dealing in investments as agent (article 21 RAO)

Dealing in investments as principal (article 14 RAO)

Bidding in emissions auctions (article 24A RAO)2

This was an ISD service.

Usually, where a firm executes orders on behalf of clients it will need permission to carry on the activity of dealing in investments as agent. Where a firm executes client orders on a true back-to-back basis or by dealing on own account, it also needs permission to carry on the activity of dealing in investments as principal.

See Q12A and 2Q15 for further guidance.

A3- Dealing on own account

Dealing in investments as principal (article 14 RAO)

Dealing on own account falls within the ISD, but only where a service is provided. Under MiFID, dealing on own account is caught even if no service is provided. Where a firm is dealing on own account, it needs permission to carry on the activity of dealing in investments as principal.

See Q12A and 2Q16 for further guidance.

A4- Portfolio management

Managing investments (article 37 RAO)

Dealing in investments as principal (article 14 RAO)

Dealing in investments as agent (article 21 RAO)

Arranging (bringing about) deals in investments (article 25(1) RAO)

Making arrangement with a view to transactions in investments (article 25(2))

This was an ISD service.

A firm performing the portfolio management service needs a permission to carry on the activity of managing investments.

Firms may also need permission to perform other regulated activities to enable them to give effect to decisions they make as part of their portfolio management (see adjacent column).

See Q6, Q17 and Q43 for further guidance.

A5- Investment advice

Advising on investments (article 53 RAO)

This was an ISD non-core service.

A firm providing investment advice will need permission to carry on the activity of advising on investments.

See Q18 and Q19 for further guidance.

A6- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis

Dealing in investments as principal (article 14 RAO)

Dealing in investments as agent (article 21 RAO)

This corresponds broadly to the service of underwriting and/or placing described in Section A4 of the Annex to ISD.

Where a firm underwrites an issue of financial instruments and holds them on its books before they are sold or offered to third parties, it needs permission to carry on the activity of dealing in investments as principal.

Where an underwriting firm sells the relevant instruments as agent for the issuer and then purchases any remaining instruments as principal, it needs permission to carry on the activity of dealing in investments as agent in relation to its selling activity and of dealing in investments as principal in relation to its purchase of the remaining instruments.

See Q22 for further guidance.

A7- Placing of financial instruments without a firm commitment basis

Dealing in investments as agent (article 21 RAO)

Arranging (bringing about) deals in investments (article 25(1) RAO)

This corresponds in part to the service in Section A4 of the Annex to ISD outlined in the commentary to A6.

Where a firm arranges the placement of financial instruments with another entity, it needs permission to carry on the activity of arranging (bringing about) deals in investments.

Where a firm sells the relevant instruments on behalf of the issuer, it also needs permission to carry on the activity of dealing in investments as agent.

See Q22 for further guidance.

A8- Operation of Multilateral Trading Facilities

Operating a multilateral trading facility (article 25D RAO)

This service replaces the ATS operators regime.

Firms performing this service will need permission to carry on the regulated activity of operating a multilateral trading facility. Broadly speaking, any authorised person who operated an alternative trading system prior to 1 November 2007 was automatically granted permission to operate a multilateral trading facility, unless it notified the FSA to the contrary by 1 October 2007.

Firms will not require permission to carry on any other regulated activities if all they do is operate a multilateral trading facility. If they carry on additional regulated activities, they should ensure that their permission properly reflects this.

See Q24 for further guidance.

2 Note: The activity of bidding in emissions auctions can form part of A1, A2 or A3. In terms of the permission regime, bidding in emissions auctions does not form part of any other regulated activity (see PERG 2.7.7C G) and so a firm must have a separate permission to undertake that activity.

C1- Transferable securities

share (article 76)

debenture (article 77)

alternative debenture (article 77A)1

government and public security (article 78)

warrant (article 79)

certificate representing certain securities (article 80)

unit (article 81)

option (excluding a commodity option and option on a commodity future)

future (excluding a commodity future and a rolling spot forex contract)

contract for differences (excluding a spread bet and a rolling spot forex contract)

spread bet

Transferable securities are securities negotiable on the capital market excluding instruments of payment and include:

(a) shares in companies;

(b) bonds;

(c) depositary receipts;

(d) warrants; and

(e) miscellaneous securitised derivatives.

Transferable securities comprise various categories of derivatives in the permission regime: for example, options (excluding commodity options and options on commodity futures); futures (excluding commodity futures and rolling spot forex contracts); contracts for differences (excluding spread bets and rolling spot forex contracts).

The permission investment categories above, however, are wider than the MiFID definition of transferable securities, as they comprise both securitised and non-securitised instruments. Firms with permissions containing these investment categories will fall outside the article 3 MiFID exemption as transposed in domestic legislation, where they provide investment services in relation to financial instruments which are non-securitised investments (for example, OTC derivatives concluded by a confirmation under an ISDA master agreement).

For further guidance on the article 3 exemption see Q49; for further guidance on transferable securities see Q28.

C2- Money market instruments

debenture (article 77)

alternative debenture (article 77A)1

government and public security (article 78)

certificate representing certain securities (article 80)

The definition in article 4.1(19) MiFID refers to classes of instruments normally dealt in on the money markets.

C3- Units in a collective investment undertaking

unit (article 81)

shares (article 76)

C3 includes units in regulated and unregulated collective investment schemes. This category also includes closed-ended corporate schemes, such as investment trust companies (hence the reference to shares in the adjacent column).

For further guidance, see Q29.

C4- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash

option (excluding a commodity option and an option on a commodity future)

commodity option and option on a commodity future

future (excluding a commodity future and a rolling spot forex contract)

rolling spot forex contract

contract for differences (excluding a spread bet and a rolling spot forex contract)

spread bet

C4 includes the financial instruments in sections B3-6 of the Annex to the ISD and in our view derivatives relating to commodity derivatives, for example options on commodity futures.

For further guidance, see Q30 and Q32.

Note that for the purposes of the permission regime, commodity options and options on commodity futures are treated as a single permission category. (see PERG 2 Annex 2 G Table 2).

C5- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event)

commodity option and option on a commodity future

commodity future

contract for differences (excluding a spread bet and rolling spot forex contract)

C5 instruments are generally contracts for differences. Where a C5 instrument provides for the possibility of physical settlement, it may also be either a commodity future or commodity option, depending on its structure.

For further guidance see Q32 and Q33.

C6- Options, futures, swaps, and any other derivative contracts relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF

commodity option and option on a commodity future

commodity future

contract for differences (excluding spread bet and rolling spot forex contract)

C6 instruments will generally be either commodity futures or commodity options, depending on their structure. Those instruments with a cash settlement option may also be contracts for differences.

For further guidance see Q32 and Q33.

C7- Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls

commodity option and option on a commodity future

commodity future

contract for differences (excluding spread bet and rolling spot forex contract)

C7 is supplemented by Level 2 measures (see article 38 of the MiFID Regulation).

For further guidance see Q32 and Q33.

C8- Derivative instruments for the transfer of credit risk

option (excluding a commodity option and an option on a commodity future)

contract for differences (excluding spread bet and rolling spot forex contract)

spread bet

rolling spot forex contract

C8 derivatives are financial instruments designed to transfer credit risk, often referred to as credit derivatives.

For further guidance see Q31.

C9- Financial contracts for differences

contract for differences (excluding spread bet and rolling spot forex contract)

spread bet

rolling spot forex contract

In our view, C9 derivatives could include those contracts for differences with a financial underlying, for example the FTSE index.

C10- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

option (excluding commodity option and option on a commodity future)

future (excluding a commodity future and a rolling spot forex contract)

contract for differences (excluding spread bet and rolling spot forex contract)

spread bet

emissions auction product2

C10 is supplemented by Level 2 measures (see articles 38 and 39 of the MiFID Regulation) and comprises miscellaneous derivatives.

For further guidance see Q34.

Note:

In our view, the categories of financial instrument in C1 to C10 are not mutually exclusive, so a financial instrument may fall within more than one category. For example, an interest in an investment trust company falls within C1 and C3.