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REC 2.1 Introduction

REC 2.1.1 G RP

This chapter contains the recognition requirements for UK recognised bodies and sets out guidance on those requirements. (The recognition requirements for overseas recognised bodies are set out in REC 6.)

REC 2.1.2 G RP

These recognition requirements must be satisfied by applicants for recognised body status before recognition is granted and by all UK recognised bodies at all times while they are recognised. The same standards apply both on initial recognition and throughout the period recognised body status is held. The terms UK RIE or UK RCH in the guidance should be taken, therefore, to refer also to an applicant when appropriate.

REC 2.1.3 G RP
  1. (1)

    The paragraphs in the Schedule to the Recognition Requirements Regulations are grouped in this sourcebook in sections which give guidance on the same subject for both UK RIEs and UK RCHs.

  2. (2)

    The table in REC 2.1.4 G indicates in which section each of those paragraphs (and the associated guidance) can be found. The recognition requirement is reproduced at the start of the section.

REC 2.1.4 G RP

Location of recognition requirements and guidance

Recognition Requirements Regulations

Subject

Section in REC 2

Regulation 6

Method of satisfying recognition requirements

2.2

Part I of the Schedule

UK RIE recognition requirements

Paragraph 1

Financial resources

2.3

Paragraph 2

Suitability

2.4

Paragraph 3

Systems and controls

2.5

Paragraph 4(1)

General safeguards for investors

2.6

Paragraph 4(2)(a)

Access to facilities

2.7

Paragraph 4(2)(b)

Proper markets

2.12

Paragraph 4(2)(c)

Availability of relevant information

2.12

Paragraph 4(2)(d)

Settlement

2.8

Paragraph 4(2)(e)

Transaction recording

2.9

Paragraph 4(2)(f)

Financial crime and market abuse

2.10

Paragraph 4(2)(g)

Custody

2.11

Paragraph 4(3)

Definition of relevant information

2.12

Paragraph 6

Promotion and maintenance of standards

2.13

Paragraph 7

Rules and consultation

2.14

Paragraph 8

Discipline

2.15

Paragraph 9

Complaints

2.16

Part II of the Schedule

UK RIE default rules in respect of market contracts

2.17

Part III of the Schedule

UK RCH recognition requirements

Paragraph 16

Financial resources

2.3

Paragraph 17

Suitability

2.4

Paragraph 18

Systems and controls

2.5

Paragraph 19(1)

General safeguards for investors

2.6

Paragraph 19(2)(a)

Access to facilities

2.7

Paragraph 19(2)(b)

Clearing services

2.8

Paragraph 19(2)(c)

Transactions recording

2.9

Paragraph 19(2)(d)

Financial crime and market abuse

2.10

Paragraph 19(2)(e)

Custody

2.11

Paragraph 20

Promotion and maintenance of standards

2.13

Paragraph 21

Rules

2.14

Paragraph 22

Discipline

2.15

Paragraph 23

Complaints

2.16

Part IV of the Schedule

UK RCH default rules in respect of market contracts

2.17

REC 2.2 Method of satisfying the recognition requirements

REC 2.2.1 UK RP

Recognition Requirements Regulations, Regulation 6

(1) In considering whether a [UK recognised body] or applicant satisfiesrecognition requirementsapplying to it under these [Recognition Requirements Regulations], the [FSA] may take into account all relevant circumstances including the constitution of thepersonconcerned and its regulatory provisions and practices within the meaning of section 302(1) of theAct.

(2) Without prejudice to the generality of paragraph (1), a [UK recognised body] or applicant may satisfyrecognition requirements applying to it under these [Recognition Requirements Regulations] by making arrangements for functions to be performed on its behalf by any otherperson.

(3) Where a [ UK recognised body ] or applicant makes arrangements of the kind mentioned in paragraph (2), the arrangements do not affect the responsibility imposed by the Act on the [UK recognised body] or applicant to satisfy recognition requirements applying to it under these [Recognition Requirements Regulations ], but it is in addition a recognition requirement applying to the [UK recognised body] or applicant that the person who performs (or is to perform) the functions is a fit and proper person who is able and willing to perform them.1

Relevant circumstances

REC 2.2.2 G RP

The FSA will usually expect :

  1. (1)

    the constitution, regulatory provisions and practices of the UK recognised body or applicant;

  2. (2)

    the nature (including complexity, diversity and risk) and scale of the UK recognised body's or applicant's business;

  3. (3)

    the size and nature of the market which is supported by the UK recognised body's or applicant's facilities;

  4. (4)

    the nature and status of the types of investor who use the UK recognised body's or applicant's facilities or have an interest in the market supported by the UK recognised body's or applicant's facilities; and

  5. (5)

    the nature and scale of the risks to the regulatory objectives associated with the matters described in (1) to (4);

to be among the relevant circumstances which it will take into account in considering whether a UK recognised body or applicant satisfies the recognition requirements.

Outsourcing

REC 2.2.3 G RP

It is the UK recognised body's responsibility to demonstrate to the FSA that a person who performs a function on behalf of the UK recognised body is fit and proper and able and willing to perform that function. The recognition requirement referred to in Regulation 6(3) applies to the UK recognised body and not to any person who performs any function on its behalf. In this context, for a person to be "fit and proper" does not necessarily imply that he is an authorised person, or qualified to be so, or that the required standard is the same as that required either for authorised persons or recognised bodies.

REC 2.2.4 G RP

If a UK recognised body makes arrangements for functions to be performed on its behalf by persons who are authorised persons or recognised bodies, this does not alter its obligations under Regulation 6.

REC 2.2.5 G RP

If a person who performs a function on behalf of a UK recognised body is himself carrying on a regulated activity in the United Kingdom , he will, unless he is a person to whom the general prohibition does not apply, need to be either an authorised person or an exempt person . The person to whom a function is delegated is not covered by the UK recognised body's exemption.

REC 2.2.6 G RP

In determining whether the UK recognised body meets the recognition requirement in Regulation 6(3), the FSA may have regard to whether that body has ensured that the person who performs that function on its behalf:

  1. (1)

    has sufficient resources to be able to perform the function (after allowing for any other activities);

  2. (2)

    has adequate systems and controls to manage that function and to report on its performance to the UK recognised body;

  3. (3)

    is managed by persons of sufficient skill, competence and integrity;

  4. (4)

    understands the nature of the function it performs on behalf of the UK recognised body and its significance for the UK recognised body's ability to satisfy the recognition requirements and other obligations in or under the Act ; and

  5. (5)

    undertakes to perform that function in such a way as to enable the UK recognised body to continue to satisfy the recognition requirements and other obligations in or under the Act .

REC 2.2.7 G RP

In determining whether a UK recognised body continues to satisfy the recognition requirements where it has made arrangements for any function to be performed on its behalf by any person , the FSA may have regard, in addition to any of the matters described in the appropriate section of this chapter, to the arrangements made to exercise control over the performance of the function, including:

  1. (1)

    the contracts (and other relevant documents) between the UK recognised body and the person who performs the delegated function;

  2. (2)

    the arrangements made to monitor the performance of that function; and

  3. (3)

    the arrangements made to manage conflicts of interest and protect confidential regulatory information.

REC 2.3 Financial resources

REC 2.3.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 1

(1) The [UK RIE] must have financial resources sufficient for the proper performance of its [ relevant functions] as a [UK RIE].

(2) In considering whether this requirement is satisfied, the [FSA] may (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the [UK RIE's] connection with anyperson , and any activity carried on by the [UK RIE], whether or not it is anexempt activity.1

REC 2.3.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 16

(1) The [UK RCH ] must have financial resources sufficient for the proper performance of its [ relevant functions] as a [UK RCH].

(2) In considering whether this requirement is satisfied, the [FSA] may (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the [UK RCH's] connection with anyperson , and any activity carried on by the [ UK RCH ], whether or not it is anexempt activity.1

REC 2.3.3 G RP

In determining whether a UK recognised body has financial resources sufficient for the proper performance of its relevant functions, the FSA may have regard to:

  1. (1)

    the operational and other risks to which the UK recognised body is exposed;

  2. (2)

    if the UK recognised body acts as a central counterparty or otherwise guarantees the performance of transactions in specified investments, the counterparty and market risks to which it is exposed in that capacity;

  3. (3)

    the amount and composition of the UK recognised body's capital;

  4. (4)

    the amount and composition of the UK recognised body's liquid financial assets;

  5. (5)

    the amount and composition of the UK recognised body's other financial resources (such as insurance policies and guarantees, where appropriate);

  6. (6)

    the financial benefits, liabilities, risks and exposures arising from the UK recognised body's connection with any person, including but not limited to, its connection with:

    1. (a)

      any undertaking in the same group as the UK recognised body;

    2. (b)

      any other person with a significant shareholding or stake in the UK recognised body;

    3. (c)

      any other person with whom the UK recognised body has made a significant investment whether in the form of equity, debt, or by means of any guarantee or other form of commitment;

    4. (d)

      any person with whom it has a significant contractual relationship.

Accounting information and standards

REC 2.3.4 G RP

The FSA will usually rely on a UK recognised body's published and internal management accounts and financial projections, provided that those accounts and projections are prepared in accordance with UK, US or international accounting standards.

Counterparty and market risks: principles

REC 2.3.5 G RP

In assessing whether a UK recognised body has sufficient financial resources in relation to counterparty and market risks, the FSA may have regard to:

  1. (1)

    the amount and liquidity of its financial assets and the likely availability of liquid financial resources to the UK recognised body during periods of major market turbulence or other periods of major stress for the financial system; and

  2. (2)

    the nature and scale of the UK recognised body's exposures to counterparty and market risks and, where relevant, the counterparties to which it is exposed.

Operational and other risks: principles

REC 2.3.6 G RP

In assessing whether a UK recognised body has sufficient financial resources in relation to operational and other risks, the FSA may have regard to the extent to which, after allowing for the financial resources necessary to cover counterparty and market risks, the UK recognised body's financial resources are sufficient and sufficiently liquid:

  1. (1)

    to enable the UK recognised body to continue carrying on properly the regulated activities that it expects to carry on; and

  2. (2)

    to ensure that it would be able to complete an orderly closure or transfer of its exempt activities without being prevented from doing so by insolvency or lack of available funds.

Operational and other risks: standard approach

REC 2.3.7 G RP

The FSA considers that a UK recognised body which (after allowing for the financial resources necessary to cover counterparty and market risks) has at any time:

  1. (1)

    liquid financial assets amounting to at least six months' operating costs; and

  2. (2)

    net capital of at least this amount;

will, at that time, have sufficient financial resources to meet the recognition requirement unless there are special circumstances indicating otherwise.

REC 2.3.8 G
  1. (1)

    In this standard approach, the FSA assumes liquid financial assets are needed to cover the costs that would be incurred during an orderly run down of the UK recognised body's business as such, while continuing to satisfy all the recognition requirements and complying with any other obligations under the Act (including the obligations to pay periodic fees to the FSA under REC 7).

  2. (2)

    The calculation of operating costs may exclude non-cash costs (costs that do not involve an outflow of funds) and variable costs of the UK recognised body'sexempt activities that would not be incurred if no exempt activities were performed. Fixed costs should be included in the assessment of operating costs. The FSA would normally expect the capital equal to the amount of liquid financial assets to be in the form of equity.

Operational and other risks: alternative approaches

REC 2.3.9 G RP

The FSA recognises that UK recognised bodies may wish to satisfy the recognition requirements in different ways. The FSA does not prescribe any particular approach to calculating financial resources or to assessing their adequacy. It is willing to discuss with each UK recognised body the most appropriate way for it to meet the recognition requirement and each UK recognised body will need to be able to show the FSA that its financial resources are at all times sufficient to meet the recognition requirement.

REC 2.4 Suitability

REC 2.4.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 2

(1) The [UK RIE] must be a fit and properpersonto perform the [ relevant functions ] of a [ UK RIE ].

(2) In considering whether this requirement is satisfied, the [FSA] may (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the [UK RIE's] connection with anyperson.1

REC 2.4.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 17

(1) The [UK RCH] must be a fit and properpersonto perform the [relevant functions] of a [UK RCH].

(2) In considering whether this requirement is satisfied, the [FSA] may (without prejudice to the generality of regulation 6(1)) take into account all the circumstances including the [UK RCH's] connection with anyperson.1

REC 2.4.3 G RP

In determining whether a UK recognised body is a fit and proper person, the FSA may have regard to any relevant factor including, but not limited to:

  1. (1)

    the commitment shown by the UK recognised body'sgoverning body to satisfying the recognition requirements and to complying with other obligations in or under the Act;

  2. (2)

    its arrangements, policies and resources for fulfilling its obligations under the Act in relation to its activities as a UK recognised body;

  3. (3)

    the extent to which its constitution and organisation provide for effective governance;

  1. (4)

    the arrangements made to ensure that its governing body has effective oversight of the UK recognised body'srelevant functions;

  2. (5)

    the access which its regulatory department has to the governing body;

  3. (6)

    the size and composition of its governing body, including:

    1. (a)

      the number of members of the governing body who represent members of the UK recognised body or other persons and the types of person whom they represent;

    2. (b)

      the number and responsibilities of any members of the governing body with executive roles within the UK recognised body; and

    3. (c)

      the number of independent members of the governing body;

  4. (7)

    the structure and organisation of its governing body, including any distribution of responsibilities among its members and committees;

  5. (8)

    the integrity and competence of its governing body and key individuals;

  6. (9)

    breaches of any relevant law, regulation or code of practice by the UK recognised body or its key individuals;

  7. (10)

    its arrangements for ensuring that it employs individuals who are honest and demonstrate high standards of integrity;

  8. (11)

    the effectiveness of its arrangements to control conflicts of interest (see also REC 2.5); and

  9. (12)

    the independence of its regulatory department from its commercial and marketing departments.

REC 2.4.4 G RP

In determining whether a UK recognised body is a fit and proper person, the FSA may have regard to its connections with:

  1. (1)

    any undertaking in the same group;

  2. (2)

    any owner or part-owner of the UK recognised body;

  3. (3)

    any person who has the right to appoint or remove members of the governing body or other key individuals;

  4. (4)

    any person who is able in practice to appoint or remove members of the governing body or other key individuals;

  5. (5)

    any person in accordance with whose instructions the governing body or any key individual is accustomed to act; and

  6. (6)

    any key individual in relation to the UK recognised body .

REC 2.4.5 G RP

In assessing whether its connection with any person could affect whether a UK recognised body is a fit and proper person, the FSA may have regard to:

  1. (1)

    the reputation and standing of that other person, including his standing with any relevant UK or overseas regulator;

  2. (2)

    breaches of any law or regulation by that other person;

  3. (3)

    the roles of any of the UK recognised body's key individuals who have a position within organisations under the control or influence of that other person, including their responsibilities in that organisation and the extent and type of their access to its senior management or governing body;

  4. (4)

    the extent to which the UK recognised body operates as a distinct entity notwithstanding its connection with that other person;

  5. (5)

    the extent to which the UK recognised body'sgoverning body is responsible for its day-to-day management and operations;

but nothing in this paragraph should be taken to imply any restriction on the ability of a UK recognised body to outsource any function to any person in a manner consistent with Regulation 6 of the Recognition Requirements Regulations.

REC 2.5 Systems and controls

REC 2.5.1 UK RP

Schedule to the Recognition Requirements Regulations, paragraph 3

(1)

The [UK RIE] must ensure that the systems and controls used in the performance of its [relevant functions] are adequate, and appropriate for the scale and nature of its business.

(2)

Sub-paragraph (1) applies in particular to systems and controls concerning -

(a)

the transmission of information;

(b)

the assessment and management of risks to the performance of the [UK RIE'srelevant functions];

(c)

the effecting and monitoring of transactions on the [UK RIE];

(d)

the operation of the arrangements mentioned in paragraph 4(2)(d); and

(e)

(where relevant) the safeguarding and administration of assets belonging to users of the [UK RIE's] facilities.1

REC 2.5.2 UK

Schedule to the Recognition Requirements Regulations, paragraph 18

(1)

The [UK RCH] must ensure that the systems and controls used in the performance of its [relevant functions] are adequate, and appropriate for the scale and nature of its business.

(2)

This requirement applies in particular to systems and controls concerning-

(a)

the transmission of information;

(b)

the assessment and management of risks to the performance of the [UK RCH'srelevant functions];

(c)

the operation of the arrangements mentioned in paragraph 19(2)(b); and

(c)

(where relevant) the safeguarding and administration of assets belonging to users of the [UK RCH's] facilities.1

REC 2.5.3 G RP

In assessing whether the systems and controls used by a UK recognised body in the performance of its relevant functions are adequate and appropriate for the scale and nature of its business, the FSA may have regard to the UK recognised body's:

  1. (1)

    arrangements for managing, controlling and carrying out its relevant functions, including:

    1. (a)

      the distribution of duties and responsibilities among its key individuals and the departments of the UK recognised body responsible for performing its relevant functions;

    2. (b)

      the staffing and resources of the departments of the UK recognised body responsible for performing its relevant functions;

    3. (c)

      the arrangements made to enable key individuals to supervise the departments for which they are responsible;

    4. (d)

      the arrangements for appointing and supervising the performance of key individuals (and their departments); and

    5. (e)

      the arrangements by which the governing body is able to keep the allocation of responsibilities between, and the appointment, supervision and remuneration of, key individuals under review;

  2. (2)

    arrangements for the management of conflicts of interest;

  3. (3)

    arrangements for internal and external audit; and

  4. (4)

    information technology systems.

REC 2.5.4 G RP

The following paragraphs set out other matters to which the FSA may have regard in assessing the systems and controls used for the transmission of information, risk management, the effecting and monitoring of transactions, the operation of settlement arrangements (the matters covered in paragraphs 4(2)(d) and 19(2)(b) of the Schedule to the Recognition Requirements Regulations) and the safeguarding and administration of assets .

Information transmission

REC 2.5.5 G RP

In assessing a UK recognised body's systems and controls for the transmission of information, the FSA may also have regard to the extent to which these systems and controls ensure that information is transmitted promptly and accurately:

  1. (1)

    within the UK recognised body itself;

  2. (2)

    to members; and

  3. (3)

    (where appropriate) to other market participants or other relevant persons.

Risk management

REC 2.5.6 G RP

In assessing a UK recognised body's systems and controls for assessing and managing risk, the FSA may also have regard to the extent to which these systems and controls enable the UK recognised body to:

  1. (1)

    identify all the general, operational, legal and market risks wherever they arise in its activities;

  2. (2)

    measure and control the different types of risk;

  3. (3)

    allocate responsibility for risk management to persons with appropriate knowledge and expertise; and

  4. (4)

    provide sufficient, reliable information to key individuals and, where relevant, the governing body of the UK recognised body.

REC 2.5.7 G

Where the UK recognised body assumes significant counterparty risk (for example, by acting as a central counterparty), the FSA may also have regard to:

  1. (1)

    the position of the risk management department within the UK recognised body, including its access to the governing body and its relationship with the commercial or marketing departments of the UK recognised body;

  2. (2)

    the frequency with which all exposures and risks incurred by the UK recognised body are monitored against risk or exposure limits or other appropriate control parameters;

  3. (3)

    the frequency with which risk or exposure limits (or other control parameters) are reviewed;

  4. (4)

    the reliability of the arrangements for monitoring and assessing intra-day movements in exposures and risks;

  5. (5)

    the robustness of the arrangements for calculating, collecting and holding margin payments and the allocation of losses; and

  6. (6)

    the arrangements for stress testing of the adequacy of the UK recognised body's financial resources to cover its exposures which may arise, for example, with substantial movements in market values or counterparty defaults.

Effecting and monitoring of transactions and operation of settlement arrangements

REC 2.5.8 G RP

In assessing a UK RIE's systems and controls for the effecting and monitoring of transactions, and the systems and controls used by a UK recognised body for the operation of settlement arrangements, the FSA may have regard to the totality of the arrangements and processes through which a transaction is effected, cleared and settled, including:

  1. (1)

    a UK RIE's arrangements under which orders are received and matched, and its arrangements for trade and transaction reporting, and (if relevant) for transmission to a settlement system or clearing house;

  2. (2)

    a UK recognised body's arrangements under which clearing and settlement instructions arising from a transaction are entered into its systems to the point at which any rights or liabilities arising from that transaction are discharged; and

  3. (3)

    the arrangements made by the UK recognised body for monitoring and reviewing the operation of these systems and controls.

Safeguarding and administration of assets

REC 2.5.9 G RP

In assessing a UK recognised body's systems and controls for the safeguarding and administration of assets belonging to users of its facilities, the FSA may have regard to the totality of the arrangements and processes by which the UK recognised body:

  1. (1)

    records the assets held and the identity of the owners of (and other persons with relevant rights over) those assets;

  2. (2)

    records any instructions given in relation to those assets;

  3. (3)

    records the carrying out of those instructions;

  4. (4)

    records any movements in those assets (or any corporate actions or other events in relation to those assets); and

  5. (5)

    reconciles its records of assets held with the records of any custodian or sub-custodian used to hold these assets, and with the records of beneficial or legal ownership of those assets.

Management of conflicts of interest

REC 2.5.10 G RP

A conflict of interest arises in a situation where a person with responsibility to act in the interests of one person may be influenced in his action by an interest or association of his own, whether personal or business or employment related. Conflicts of interest can arise both for the employees of UK recognised bodies and for the members (or other persons) who may be involved in the decision-making process, for example where they belong to committees or to the governing body. Conflicts of interest may also arise for the UK recognised body itself as a result of its connection with another person.

REC 2.5.11 G RP

The FSA recognises that a UK recognised body has legitimate interests of its own and that its general business policy may properly be influenced by other persons (such as its owners). Such a connection does not necessarily imply the existence of a conflict of interest nor is it necessary to exclude individuals closely connected with other persons (for example, those responsible for the stewardship of the owner's interests) from all decision-making processes in a UK recognised body. However, there may be decisions, primarily regulatory decisions, from which it may be appropriate to exclude an individual in certain circumstances where an interest, position or connection of his conflicts with the interest of the recognised body.

REC 2.5.12 G RP

REC 2.5.13 G to REC 2.5.16 G set out the factors to which the FSA may have regard in assessing a UK recognised body's systems and controls for managing conflicts of interest.

REC 2.5.13 G RP

The FSA may have regard to the arrangements a UK recognised body makes to structure itself and to allocate responsibility for decisions so that it can continue to take proper regulatory decisions notwithstanding any conflicts of interest, including:

  1. (1)

    the size and composition of the governing body and relevant committees;

  2. (2)

    the roles and responsibilities of key individuals, especially where they also have responsibilities in other organisations;

  3. (3)

    the arrangements for transferring decisions or responsibilities to alternates in individual cases; and

  4. (4)

    the arrangements made to ensure that individuals who may have a permanent conflict of interest in certain circumstances are excluded from the process of taking decisions (or receiving information) about matters in which that conflict of interest would be relevant.

REC 2.5.14 G RP

The FSA may also have regard to the systems and controls intended to ensure that confidential information is only used for proper purposes. Where relevant, recognised bodies will have to comply with section 348 (Restrictions on disclosure of confidential information by the FSA etc.) and regulations made under section 349 (Exemptions from section 348) of the Act.

REC 2.5.15 G RP

The FSA may also have regard to the contracts of employment, staff rules, letters of appointment for members of the governing body, members of relevant committees and other key individuals and other guidance given to individuals on handling conflicts of interest. Guidance to individuals may need to cover:

  1. (1)

    the need for prompt disclosure of a conflict of interest to enable others, who are not affected by the conflict, to assist in deciding how it should be managed;

  2. (2)

    the circumstances in which a general disclosure of conflicts of interest in advance of any particular instance in which a conflict of interest arises may be sufficient;

  3. (3)

    the circumstances in which a general advance disclosure may not be adequate;

  4. (4)

    the circumstances in which it would be appropriate for a conflicted individual to withdraw from involvement in the matter concerned, without disclosing the interest; and

  5. (5)

    the circumstances in which safeguards in addition to disclosure would be required, such as the withdrawal of the individual from the decision-taking process, or from access to relevant information.

REC 2.5.16 G RP

The FSA may also have regard to the arrangements made:

  1. (1)

    for enforcing rules or other provisions applicable to staff and other persons involved in regulatory decisions; and

  2. (2)

    to keep records of disclosures of conflicts of interest and the steps taken to handle them.

Internal and external audit

REC 2.5.17 G RP

A UK recognised body's arrangements for internal and external audit will be an important part of its systems and controls. In assessing the adequacy of these arrangements, the FSA may have regard to:

  1. (1)

    the size, composition and terms of reference of any audit committee of the UK recognised body'sgoverning body;

  2. (2)

    the frequency and scope of external audit;

  3. (3)

    the provision and scope of internal audit;

  4. (4)

    the staffing and resources of the UK recognised body's internal audit department;

  5. (5)

    the internal audit department's access to the UK recognised body's records and other relevant information; and

  6. (6)

    the position, responsibilities and reporting lines of the internal audit department and its relationship with other departments of the UK recognised body.

Information technology systems

REC 2.5.18 G RP

Information technology is likely to be a major component of the systems and controls used by any UK recognised body. In assessing the adequacy of the information technology used by a UK recognised body to perform or support its relevant functions, the FSA may have regard to:

  1. (1)

    the organisation, management and resources of the information technology department within the UK recognised body;

  2. (2)

    the arrangements for controlling and documenting the design, development, implementation and use of information technology systems; and

  3. (3)

    the performance, capacity and reliability of information technology systems.

REC 2.5.19 G RP

The FSA may also have regard to the arrangements for maintaining, recording and enforcing technical and operational standards and specifications for information technology systems, including:

  1. (1)

    the procedures for the evaluation and selection of information technology systems;

  2. (2)

    the arrangements for testing information technology systems before live operations;

  3. (3)

    the procedures for problem management and system change;

  4. (4)

    the arrangements to monitor and report system performance, availability and integrity;

  5. (5)

    the arrangements (including spare capacity and access to back-up facilities) made to ensure information technology systems are resilient and not prone to failure;

  6. (6)

    the arrangements made to ensure business continuity in the event that an information technology system does fail;

  7. (7)

    the arrangements made to protect information technology systems from damage, tampering, misuse or unauthorised access; and

  8. (8)

    the arrangements made to ensure the integrity of data forming part of, or being processed through, information technology systems.

REC 2.5.20 G RP

The FSA may have regard to the arrangements made to keep clear and complete audit trails of all uses of information technology systems and to reconcile (where appropriate) the audit trails with equivalent information held by system users and other interested parties.

REC 2.5A Guidance on Public Interest Disclosure Act: Whistleblowing

Application and Purpose: Application

REC 2.5A.1 G RP

This section is relevant to every UK recognised body to the extent that the Public Interest Disclosure Act 1998 ("PIDA") applies to it.

Purpose

REC 2.5A.2 G RP
  1. (1)

    The purposes of this section are to:

    1. (a)

      provide UK recognised bodies with guidance regarding the provisions of PIDA; and

    2. (b)

      Encourage UK recognised bodies to consider adopting and communicating to workers appropriate internal procedures for handling workers' concerns as part of an effective risk management system.

  2. (2)

    In this section "worker" includes, but is not limited to, an individual who has entered into a contract of employment.

REC 2.5A.3 G RP

The guidance in this section concerns the effect of PIDA in the context of the relationship between UK recognised bodies and the FSA. It is not comprehensive guidance on PIDA itself.

Practical Measures: Effect of PIDA

REC 2.5A.4 G RP

Under PIDA, any clause or term in an agreement between a worker and his employer is void in so far as it purports to preclude the worker from making a protected disclosure (that is, "blow the whistle").

REC 2.5A.5 G RP

In accordance with section 1 of PIDA:

  1. (1)

    a "protected disclosure" is a qualifying disclosure which meets the relevant requirements set out in that section;

  2. (2)

    a "qualifying disclosure" is a disclosure, made in good faith, of information which, in the reasonable belief of the worker making the disclosure, tends to show that one or more of the following (a "failure") has been, is being, or is likely to be, committed:

    1. (a)

      a criminal offence; or

    2. (b)

      a failure to comply with any legal obligation; or

    3. (c)

      a miscarriage of justice; or

    4. (d)

      the putting of the health and safety of any individual in danger; or

    5. (e)

      damage to the environment; or

    6. (f)

      deliberate concealment relating to any of (a) to (e);

    it is immaterial whether the relevant failure occurred, occurs or would occur in the United Kingdom or elsewhere, and whether the law applying to it is that of the United Kingdom or of any other country or territory.

Internal Procedures

REC 2.5A.6 G RP
  1. (1)

    UK recognised bodies are encouraged to consider adopting appropriate internal procedures which will encourage their workers with concerns to blow the whistle internally about matters which are relevant to the functions of the FSA.

  2. (2)

    In considering appropriate internal procedures, UK recognised bodiesmay find the guidance provided to firms in SYSC 4.2.2 G(2) and (3) helpful.

Link to fitness and propriety

REC 2.5A.7 G RP

In determining whether a UK recognised body is a fit and proper person, the FSA may have regard to any relevant factor including, but not limited to, how the UK recognised body and key individuals have complied with any relevant law (see REC 2.4.3 G (9)).

REC 2.6 General safeguards for investors

REC 2.6.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 4(1)

The [UK RIE] must ensure that business conducted by means of itsfacilitiesis conducted in an orderly manner and so as to afford proper protection to investors.1

REC 2.6.2 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 19(1)

The [UK RCH] must ensure that itsfacilitiesare such as to afford proper protection to investors.1

REC 2.6.3 UK

In determining whether:

  1. (1)

    business conducted by means of a UK RIE'sfacilities is conducted so; or

  2. (2)

    a UK RCH's facilities are such;

as to afford proper protection to investors, the FSA may, in addition to the matters dealt with in REC 2.7 to REC 2.12, have regard to all the arrangements made by the UK recognised body concerning the operation of its facilities.

REC 2.6.4 UK

The FSA may also have regard to the extent to which the UK recognised body's rules, procedures and the arrangements for monitoring and overseeing the use of its facilities:

  1. (1)

    include appropriate measures to prevent the use of its facilities for abusive or improper purposes;

  2. (2)

    provide appropriate safeguards for investors against fraud or misconduct, recklessness, negligence or incompetence by users of its facilities;

  3. (3)

    provide appropriate information to enable users of its facilities to monitor their use of the facilities;

  4. (4)

    include appropriate arrangements to enable users of its facilities to raise queries about any use of those facilities which they are reported to have made;

  5. (5)

    include appropriate arrangements to enable users of its facilities to comply with any relevant regulatory or legal requirements; and

  6. (6)

    include appropriate arrangements to reduce the risk that those facilities will be used in ways which are incompatible with relevant regulatory or legal requirements;

and in this paragraph "appropriate" should be taken to mean appropriate having regard to the nature and scale of the UK recognised body'sfacilities, the types of persons who will use the facilities and the use which they will make of those facilities.

Orderly markets

REC 2.6.5 G

In determining whether a UK RIE is ensuring that business conducted by means of its facilities is conducted in an orderly manner (and so as to afford proper protection to investors), the FSA may have regard to the extent to which the UK RIE's rules and procedures:

  1. (1)

    are consistent with the Code of Market Conduct (see MAR 1);

  2. (2)

    prohibit abusive trading practices or the deliberate reporting or publication of false information about trades; and

  3. (3)

    prohibit or prevent:

    1. (a)

      trades in which a party is improperly indemnified against losses;

    2. (b)

      trades intended to create a false appearance of trading activity ("wash trades");

    3. (c)

      cross trades executed for improper purposes;

    4. (d)

      improperly prearranged or prenegotiated trades;

    5. (e)

      trades intended to assist or conceal any potentially identifiable trading abuse ("accommodation trades"); and

    6. (f)

      trades which one party does not intend to close out or settle.

REC 2.6.6 UK RP

In determining whether a UK RIE is ensuring that business conducted by means of its facilities is conducted in an orderly manner (and so as to afford proper protection to investors), the FSA may have regard to whether the UK RIE's arrangements and practices:

  1. (1)

    enable members and clients for whom they act to obtain the best price available at the time for their size and type of trade;

  2. (2)

    ensure:

    1. (a)

      sufficient pre-trade transparency in the UK RIE's markets taking account of the practices in those markets and the trading systems used; and

    2. (b)

      sufficient post-trade transparency in the UK RIE's markets taking into account the nature and liquidity of the specified investments traded, market conditions and the scale of transactions, the need (where appropriate) to preserve anonymity for members and clients for whom they act, and the needs of different market participants for timely price information;

  3. (3)

    include procedures which enable the UK RIE to influence trading conditions or suspend trading promptly when necessary to maintain an orderly market; and

  4. (4)

    if they include arrangements to support or encourage liquidity:

    1. (a)

      are transparent;

    2. (b)

      are not likely to encourage any person to enter into transactions other than for proper trading purposes (which may include hedging, investment, speculation, price determination, arbitrage and filling orders from any client for whom he acts);

    3. (c)

      are consistent with a reliable, undistorted price-formation process; and

    4. (d)

      alleviate dealing or other identified costs associated with trading on the UK RIE's markets and do not subsidise a market position of a user of its facilities or subsidise any margin payments (or the provision of collateral) which such a user would have to make.

REC 2.6.7 EU RP

The FSA accepts that block trading, upstairs trading and other types of specialist transactions (such as the "exchange of futures for physicals" in certain commodity markets) can have a legitimate commercial rationale consistent with the orderly conduct of business and proper protection for investors. They may therefore be permitted under the rules of a UK RIE, subject to any necessary safeguards, where appropriate.

REC 2.7 Access to facilities

REC 2.7.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 4(2)(a)

Without prejudice to the generality of sub-paragraph [4(1)], the [UK RIE] must ensure that -

access to the [UK RIE's ]facilitiesis subject to criteria designed to protect the orderly functioning of the market and the interests of investors;1

REC 2.7.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 19(2)(a)

Without prejudice to the generality of sub-paragraph [19(1)], the [UK RCH] must ensure that -

access to the [UK RCH's ] facilities is subject to criteria designed to protect the orderly functioning of those facilities and the interests of investors;1

REC 2.7.3 G RP

In assessing whether access to a UK recognised body's facilities is subject to criteria designed to protect the orderly functioning of the market, or of those facilities, and the interests of investors, the FSA may have regard to whether:

  1. (1)

    the UK recognised body limits access as a member to persons:

    1. (a)

      over whom it can with reasonable certainty enforce its rules contractually;

    2. (b)

      who have sufficient technical competence to use its facilities;

    3. (c)

      whom it is appropriate to admit to membership having regard to the size and sophistication of users of its facilities and the nature of the business effected by means of, or cleared through, its facilities; and

    4. (d)

      (if appropriate) who have adequate financial resources in relation to their exposure to the UK recognised body or its central counterparty;

  2. (2)

    the UK recognised body's membership criteria are objective and are applied in an objective and non-discriminatory manner;

  3. (3)

    indirect access to the UK recognised body'sfacilities is subject to suitable criteria, remains the responsibility of a member of the UK recognised body and is subject to its rules; and

  4. (4)

    where access is granted to members outside the United Kingdom, there are adequate safeguards against financial crime (see also REC 2.10).

Electronic access

REC 2.7.4 G

The FSA may have regard to the arrangements made to permit electronic access to the UK recognised body's facilities and to prevent and resolve problems likely to arise from the use of electronic systems to provide indirect access to its facilities by persons other than its members, including:

  1. (1)

    the rules and guidance governing members' procedures, controls and security arrangements for inputting instructions into the system;

  2. (2)

    the rules and guidance governing the facilities members provide to clients to input instructions into the system and the restrictions placed on the use of those systems;

  3. (3)

    the rules and practices to detect, identify, and halt or remove instructions breaching any relevant restrictions;

  4. (4)

    the quality and completeness of the audit trail of any transaction processed through an electronic connection system; and

  5. (5)

    procedures to determine whether to suspend trading by those systems or access to them by or through individual members.

REC 2.8 Settlement and clearing services

REC 2.8.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 4(2)(d)

Without prejudice to the generality of sub-paragraph [4(1)], the [UK RIE] must ensure that -

satisfactory arrangements are made for securing the timely discharge (whether by performance, compromise or otherwise) of the rights and liabilities of the parties to transactions effected on the [UK RIE] (being rights and liabilities in relation to those transactions);1

REC 2.8.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 19(2)(b)

Without prejudice to the generality of sub-paragraph [19(1)], the [UK RCH] must ensure that -

its clearing services involve satisfactory arrangements for securing the timely discharge (whether by performance, compromise or otherwise) of the rights and liabilities of the parties to transactions in respect of which it provides such services, (being rights and liabilities in relation to those transactions); 1

REC 2.8.3 G RP

In determining whether there are satisfactory arrangements for securing the timely discharge of the rights and liabilities of the parties to transactions, the FSA may have regard to the UK recognised body's:

  1. (1)

    rules and practices relating to clearing and settlement;

  2. (2)

    arrangements for matching trades and ensuring that the parties are in agreement about trade details;

  3. (3)

    arrangements for making deliveries and payments and, where relevant, for collecting margin and holding collateral, in all relevant jurisdictions;

  4. (4)

    procedures to detect and deal with the failure of a member to settle in accordance with its rules;

  5. (5)

    arrangements for taking action to settle a trade if a member does not settle in accordance with its rules;

  6. (6)

    arrangements for monitoring its members' settlement performance; and

  7. (7)

    (where appropriate) default rules and default procedures.

REC 2.8.4 G RP

A UK recognised body will not be regarded as failing to comply with the recognition requirement merely because it is unable to arrange for a specific transaction to be settled.

REC 2.9 Transaction recording

REC 2.9.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 4(2)(e)

Without prejudice to the generality of sub-paragraph [4(1)], the [UK RIE] must ensure that-

satisfactory arrangements are made for recording transactions effected on the [UK RIE], and transactions (whether or not effected on the [UK RIE ]) which are cleared or to be cleared by means of itsfacilities;1

REC 2.9.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 19(2)(c)

Without prejudice to the generality of sub-paragraph [19(1)], the [UK RCH] must ensure that-

satisfactory arrangements are made for recording transactions which are cleared or to be cleared by means of its facilities;1

REC 2.9.3 G RP

In determining whether a UK recognised body has satisfactory arrangements for recording the transactions effected on, or cleared or to be cleared by means of, its facilities, the FSA may have regard to:

  1. (1)

    whether the UK recognised body has arrangements for creating, maintaining and safeguarding an audit trail of transactions for at least three years (five years in respect of transactions carried out by members who are not incorporated in the United Kingdom if the UK recognised body is a regulated market); and

  2. (2)

    the type of information recorded and the extent to which the record includes details for each transaction of:

    1. (a)

      the name of the investment (and, if relevant, the underlying asset) and the price, quantity and date of the transaction;

    2. (b)

      the identities and, where appropriate, the roles of the counterparties to the transaction;

    3. (c)

      if the UK recognised body's rules make provision for transactions to be effected, cleared or to be cleared in more than one type of facility, or under more than one part of its rules, the type of facility in which, or the part of its rules under which, the transaction was effected, cleared or to be cleared; and

    4. (d)

      the date and manner of settlement of the transaction.

REC 2.9.4 G

Where transactions are effected on an UK RIE and cleared through an UK RCH, the UK recognised bodies concerned may agree which information is to be recorded by each UK recognised body and need not duplicate each other's records.

REC 2.10 Financial crime and market abuse

REC 2.10.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 4(2)(f)

Without prejudice to the generality of sub-paragraph [4(1)], the [ UK RIE ] must ensure that-

appropriate measures are adopted to reduce the extent to which the [ UK RIE's ] facilities can be used for a purpose connected with market abuse or financial crime, and to facilitate their detection and monitor their incidence;1

REC 2.10.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 19(2)(d)

Without prejudice to the generality of sub-paragraph [19(1)], the [ UK RCH ] must ensure that-

appropriate measures are adopted to reduce the extent to which the [ UK RCH's ] facilities can be used for a purpose connected with market abuse or financial crime, and to facilitate their detection and monitor their incidence;1

REC 2.10.3 G RP

In determining whether a UK recognised body's measures are appropriate to reduce the extent to which its facilities can be used for a purpose connected with market abuse or financial crime, to facilitate their detection and to monitor their incidence, the FSA may have regard to:

  1. (1)

    whether the rules of the UK recognised body enable it to disclose any information to the FSA, or other appropriate bodies involved in the detection, prevention or pursuit of market abuse or financial crime in the United Kingdom or overseas; and

  2. (2)

    whether the arrangements, resources, systems, and procedures of the UK recognised body enable it to:

    1. (a)

      monitor the use made of its facilities so as to obtain information regarding possible patterns of normal, abnormal or improper use of those facilities;

    2. (b)

      detect possible instances of market abuse and financial crime, for example, by detecting suspicious patterns in the use of its facilities;

    3. (c)

      communicate information about market abuse and financial crime promptly and accurately to appropriate organisations; and

    4. (d)

      cooperate with all relevant bodies in the prevention, investigation and pursuit of market abuse and financial crime.

REC 2.10.4 G RP

The law on market abuse and financial crime, including Part VI of the Criminal Justice Act 1988 and the Money Laundering Regulations, applies to UK recognised bodies. This recognition requirement (and this guidance) does not restrict, diminish or alter the obligations contained in that legislation.

REC 2.11 Custody

REC 2.11.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 4(2)(g)

Without prejudice to the generality of sub-paragraph [4(1)], the [ UK RIE ] must ensure that-

where the [ UK RIE's ] facilities include making provision for the safeguarding and administration of assets belonging to users of those facilities, satisfactory arrangements are made for that purpose.1

REC 2.11.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 19(2)(e)

Without prejudice to the generality of sub-paragraph [19(1)], the [ UK RCH ] must ensure that-

where the [ UK RCH's ] facilities include making provision for the safeguarding and administration of assets belonging to users of those facilities, satisfactoryarrangements are made for that purpose.1

REC 2.11.3 G RP

In determining whether a UK recognised body has made satisfactory arrangements for the safeguarding and administration of assets belonging to the users of its facilities, the FSA may have regard to:

  1. (1)

    the level of protection which the arrangements provide against the risk of theft or other types or causes of loss;

  2. (2)

    whether the arrangements ensure that assets are only used or transferred in accordance with the instructions of the owner of those assets or in accordance with the terms of the agreement by which the UK recognised body undertook to safeguard and administer those assets;

  3. (3)

    whether the arrangements ensure that the assets are not transferred to the UK recognised body or to any other person to settle the debts of the owner (or other person with the appropriate rights over the assets) except in accordance with valid instructions from a person entitled to give those instructions, or in accordance with the terms of the agreement by which the UK recognised body undertook to safeguard and administer those assets;

  4. (4)

    whether the arrangements include satisfactory procedures to ensure that any rights arising in relation to the assets held as a result of any actions by the issuers of those assets (or other relevant persons) are held, transferred or acted upon in a timely and accurate manner in accordance with the instructions of the owner of those assets or in accordance with the terms of the agreement by which the UK recognised body undertook to safeguard and administer those assets;

  5. (5)

    whether there are adequate arrangements to ensure the proper segregation of assets belonging to the UK recognised body (or to undertakings in the same group) from those belonging to the users of its facilities for the safeguarding and administration of assets;

  6. (6)

    whether the arrangements include satisfactory procedures for the selection, oversight and review of custodians or sub-custodians used to hold the assets;

  7. (7)

    whether the agreements by which the UK recognised body undertakes to safeguard and administer assets belonging to users of its facilities include appropriate information regarding the terms and conditions of that service and the obligations of the UK recognised body to the user of the service and of the user of the service to the UK recognised body;

  8. (8)

    whether the records kept of those assets and the operation of the safeguarding services provide sufficient accurate and timely information:

    1. (a)

      to identify the legal and beneficial owners of the assets and of any persons who have charges over, or other interests, in the assets;

    2. (b)

      to record separately any additions, reductions and transfers in each account of assets held for safeguarding or administration; and

    3. (c)

      to identify separately the assets owned by (or, where appropriate, on behalf of) different persons, including, where appropriate, the assets owned by members of the UK recognised body and their clients;

  9. (9)

    the frequency of reconciliation of the assets held by (or on behalf of) the UK recognised body with the accounts held with the UK recognised body by the users of its safeguarding and administration services and the extent of the arrangements for resolving a shortfall identified in any reconciliation; and

  10. (10)

    the frequency with which statements of their holdings are provided to the users of the safeguarding and administration services, to the owners of the assets held and other appropriate persons in accordance with the terms of the agreement by which the UK recognised body undertook to safeguard and administer those assets.

REC 2.11.4 G RP

Where a UK recognised body arranges for other persons to provide services for the safeguarding and administration services of assets belonging to users of its facilities, it will also need to satisfy the recognition requirement in Regulation 6 of the Recognition Requirements Regulations (see REC 2.2).

REC 2.12 Proper markets and disclosure of information (UK RIEs only)

REC 2.12.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraphs 4(2)(b) and 4(2)(c)

Without prejudice to the generality of sub-paragraph [4(1)], the [ UK RIE ] must ensure that -

(b)

dealings in [ specified investments ] on the [ UK RIE ] are limited to [ specified investments ] in which there is a proper market;

(c)

appropriate arrangements are made for relevant information to be made available (whether by the [ UK RIE ] or, where appropriate, by issuers of the [ specified investments ]) to persons engaged in dealing in [ specified investments ] on the [ UK RIE];1

REC 2.12.2 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 4(3)

In sub-paragraph [4(2)(c)],

"relevant information" means information which is relevant in determining the current value of the [specified investments].1

REC 2.12.3 D

[deleted]3

2

The general test

REC 2.12.4 G

In determining whether there is a proper market in a specified investment, the FSA may have regard to:

  1. (1)

    whether there is a sufficient range of persons already holding the specified investment (or, where relevant, the underlying asset) or interested in dealing in it to bring about adequate forces of supply and demand;

  2. (2)

    the extent to which there are any limitations on the persons who may hold or deal in the specified investment, or the amounts of the specified investment which may be held;

  3. (3)

    whether there are effective means to take and make delivery of the specified investment (or to settle the contract concerned) and, if appropriate, of any underlying asset; and

  4. (4)

    whether there is adequate information in the public domain to enable market participants to make a reasonably informed judgment about the value of the specified investment and the risks associated with it.

Comments on the general test

REC 2.12.5 G

There may be a proper market in a specified investment although:

  1. (1)

    different market participants have access to different information or receive information at different times;

  2. (2)

    there is more than one exchange on which the specified investment has been admitted to trading, or the specified investment is traded both on-exchange and over the counter;

  3. (3)

    the specified investment is a derivative of an underlying asset or other thing in which there is not a proper market;

  4. (4)

    the specified investment is an underlying asset of a derivative in which there is not a proper market for reasons not connected with the underlying asset; and

  5. (5)

    the market in the specified investment is illiquid, that is to say that it may not be possible to acquire, or to dispose of, a significant quantity of the specified investment without a substantial movement in its price.

Specific tests

REC 2.12.6 G

The FSA considers that there will usually be a proper market in the following types of specified investment:

  1. (1)

    a securityadmitted to trading by an arrangement between the UK RIE and the issuer which requires the issuer to comply with admission requirements and continuing obligations, if:

    1. (a)

      in the case of a security which is not listed, the UK RIE requires the issuer to comply with initial and continuing obligations which are appropriate for securities which may be offered to the public in the United Kingdom; or

    2. (b)

      it is a requirement under that arrangement that the security is listed in an EEA State;

    and the UK RIE has adequate procedures governing the suspension or removal of the security from trading;

  2. (2)

    a securityadmitted to trading other than by an arrangement with the issuer, if:

    1. (a)

      the security is admitted to, and has not been removed or suspended from, the official list in an EEA State; or

    2. (b)

      the security is admitted to trading, and has not been removed or is not suspended from trading, by an investment exchange or similar organisation, which imposes and enforces requirements on the issuer comparable to those required for admission of like securities to an official list in the EEA;

    and the UK RIE has adequate arrangements to suspend or remove the security from trading, including arrangements to obtain relevant information;

  3. (3)

    a derivative, if:

    1. (a)

      the terms of the derivative are sufficiently precise to provide for an understandable relationship between the price of the derivative and the price of the underlying asset or factor;

    2. (b)

      the UK RIE has adequate procedures for obtaining information relevant for determining whether or not to suspend or discontinue trading in that derivative;

    3. (c)

      there is sufficient information available to persons considering whether to enter into that derivative to make a reasonably informed judgment about its value and the risks associated with it; and

    4. (d)

      the additional tests in REC 2.12.7 G or REC 2.12.8 G are met.

REC 2.12.7 G

Where the derivative relates to an underlying asset, the additional tests are:

  1. (1)

    there are adequate settlement and delivery procedures for the underlying asset;

  2. (2)

    there is sufficient relevant information available to persons considering whether to enter into the derivative for them to make a reasonably informed judgment about the value of the underlying asset; and

  3. (3)

    the UK RIE has adequate arrangements to obtain relevant information about the underlying asset.

REC 2.12.8 G

Where the derivative is a contract for differences whose terms provide for obligations to be calculated or incurred by reference to fluctuations in an index or other factor, the additional test is that the parties to that derivative have access to information about that index or other factor and about fluctuations in that index or other factor.

General comment

REC 2.12.9 G

The general test set out in REC 2.12.4 G may be satisfied in different ways. The FSA does not prescribe any particular requirements which specified investments which are to be admitted to trading should satisfy or any particular principles which UK RIEs should follow in making decisions about the admission to trading of specified investments (or about whether such specified investments should subsequently be removed or suspended from trading). Each UK RIE should be able to show the FSA that its policies and practices in the admission to trading of specified investments ensure that the dealing will be limited to specified investments in which there is a proper market.

Suitability

REC 2.12.10 G

The existence of a proper market in a specified investment does not automatically imply that it is a suitable specified investment for any particular investor, or class of investors.

Proper information

REC 2.12.11 G

In determining whether appropriate arrangements have been made to make relevant information available to persons engaged in dealing in specified investmentsadmitted to trading on the UK RIE, the FSA may have regard to:

  1. (1)

    the extent to which members and clients for whom they act are able to obtain information about those specified investments, either through accepted channels for dissemination of information or through other regularly and widely accessible communication media, to make a reasonably informed judgment about the value and the risks associated with those specified investments in a timely fashion;

  2. (2)

    what restrictions, if any, there are on the dissemination of relevant information to the UK RIE's members and clients for whom they act; and

  3. (3)

    whether relevant information is or can be kept to restricted groups of persons in such a way as to facilitate or encourage dealing in contravention of the Code of Market Conduct (see MAR 1).

Own means of dissemination

REC 2.12.12 G

UK RIEs do not need to maintain their own arrangements for disseminating news or information about specified investments (or underlying assets) to their members where they have made adequate arrangements for other persons to do so on their behalf or there are other effective and reliable arrangements for this purpose.

3
REC 2.12.13 G

[deleted]23

3

REC 2.13 Promotion and maintenance of standards

REC 2.13.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 6

(1) The [UK RIE] must be able and willing to promote and maintain high standards of integrity and fair dealing in the carrying on ofregulated activities by persons in the course of using the facilities provided by the [UK RIE].

(2) The [UK RIE] must be able and willing to cooperate by the sharing of information or otherwise, with the [FSA], with any other authority, body orperson having responsibility in theUnited Kingdom for the supervision or regulation of anyregulated activity or other financial service, or with anoverseas regulator within the meaning of section 195 of theAct.1

REC 2.13.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 20

(1) The [UK RCH] must be able and willing to promote and maintain high standards of integrity and fair dealing in the carrying on ofregulated activities by persons in the course of using the facilities provided by the [UK RCH].

(2) The [UK RCH ] must be able and willing to cooperate, by the sharing of information or otherwise, with the [ FSA ], with any other authority, body or person having responsibility in the United Kingdom for the supervision or regulation of any regulated activity or other financial service, or with an overseas regulator within the meaning of section 195 of the Act.1

REC 2.13.3 G RP

In determining whether a UK recognised body is able and willing to promote and maintain high standards of integrity and fair dealing in the carrying on of regulated activities, the FSA may have regard to the extent to which the UK recognised body seeks to promote and encourage, through its rules, practices and procedures, conduct in regulated activities which is consistent with the Code of Market Conduct (see MAR 1) and with any other codes of conduct, rules or principles relating to behaviour in regulated activities which users of the financial system in the United Kingdom would normally expect to apply to the regulated activity and the conduct in question.

REC 2.13.4 G RP

In assessing the ability of a UK recognised body to cooperate with the FSA and other appropriate bodies, the FSA may have regard to the extent to which the constitution and rules of the UK recognised body and its agreements with its members enable it to obtain information from members and to disclose otherwise confidential information to the FSA and other appropriate bodies.

REC 2.13.5 G RP

In assessing the willingness of a UK recognised body to cooperate with the FSA and other appropriate bodies, the FSA may have regard to:

  1. (1)

    the extent to which the UK recognised body is willing to provide information about it and its activities to assist the FSA in the exercise of its functions;

  2. (2)

    the extent to which the UK recognised body is open with the FSA or other appropriate bodies in regulatory matters;

  3. (3)

    how diligently the UK recognised body investigates or pursues enquiries from the FSA or other appropriate bodies; and

  4. (4)

    whether the UK recognised body participates in appropriate international fora.

REC 2.13.6 G RP

For the purpose of this section, 'information' includes information held about large positions held by members of a UK recognised body.

REC 2.14 Rules and consultation

REC 2.14.1 UK RP

Schedule to the Recognition Requirements Regulations, paragraph 7

(1) The [UK RIE] must ensure that appropriate procedures are adopted for it to make rules, for keeping its rules under review and for amending them.

(2) The procedures must include procedures for consulting users of the [UK RIE's ] facilities in appropriate cases.

(3) The [UK RIE ] must consult users of itsfacilities on any arrangements it proposes to make for dealing with penalty income in accordance with paragraph 8(3) ... (or on any changes it proposes to make to those arrangements).1

REC 2.14.2 UK

Schedule to the Recognition Requirements Regulations, paragraph 21

(1) The [UK RCH ] must ensure that appropriate procedures are adopted for it to make rules, for keeping its rules under review and for amending them.

(2) The procedures must include procedures for consulting users of the [UK RCH's ] facilities in appropriate cases.

(3) The [UK RCH ] must consult users of itsfacilities on any arrangements it proposes to make for dealing with penalty income in accordance with paragraph 22(3) ... (or on any changes it proposes to make to those arrangements).1

REC 2.14.3 G RP

In determining whether a UK recognised body has appropriate procedures for it to make rules, for keeping its rules under review and for amending them, the FSA may have regard to:

  1. (1)

    the arrangements made for taking decisions about making and amending rules in the UK recognised body, including the level at which the decisions are taken and any provision for the delegation of decisions by the governing body;

  2. (2)

    the arrangements made for determining whether or not it is appropriate to consult members or other users of the UK recognised body's facilities;

  3. (3)

    the procedures for consulting members and other users of its facilities in appropriate cases; and

  4. (4)

    the arrangements for notifying members (and other appropriate persons) of rule changes.

REC 2.14.4 G RP
  1. (1)

    In determining whether a UK recognised body's procedures include procedures for consulting users of its facilities in appropriate cases, the FSA may have regard to whether those procedures include provision for consulting users of those facilities before changes are made to any rules relating to its regulatory functions.

  2. (2)

    In the FSA's view, a UK recognised body's procedures may not need to contain provision for consulting users of its facilities before making minor changes to any rules of an administrative or commercial character.

REC 2.14.5 G RP
  1. (1)

    In determining whether a UK recognised body's procedures for consulting members and other users of its facilities are appropriate, the FSA may have regard to the range of persons to be consulted by the UK recognised body under those procedures.

  2. (2)

    In the FSA's view, consultation with a smaller range of persons may be appropriate where limited, technical changes to a UK recognised body's rules are proposed.

  3. (3)

    In the FSA's view, a UK recognised body's procedures may include provision to restrict consultation where it is essential to make a change to the rules without delay in order to ensure continued compliance with the recognition requirements or other obligations under the Act.

REC 2.14.6 G RP

In determining whether a UK recognised body's procedures for consulting members and other users of its facilities are appropriate, the FSA may have regard to the extent to which the procedures include:

  1. (1)

    informal discussions at an early stage with users of its facilities or appropriate representative bodies;

  2. (2)

    publication to users of its facilities of a formal consultation paper which includes clearly expressed reasons for the proposed changes and an appropriately detailed assessment of the likely costs and benefits;

  3. (3)

    adequate time for users of its facilities to respond to the consultation paper and for the UK recognised body to take their responses properly into account;

  4. (4)

    adequate arrangements for making responses to consultation available for inspection by users of its facilities, unless the respondent requests otherwise;

  5. (5)

    adequate arrangements for ensuring that the UK recognised body has proper regard to the representations received; and

  6. (6)

    publication, no later than the publication of the amended rules, of a reasoned account of the UK recognised body's decision to amend its rules.

REC 2.15 Discipline

REC 2.15.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 8

(1)

The [UK RIE] must have effective arrangements for monitoring and enforcing compliance with -

(a)

its rules (including rules in relation to the provision of clearing services in respect of transactions other than transactions effected on the [UK RIE]); and

(b)

the arrangements made by it as mentioned in paragraph 4(2)(d) . .

(2)

Arrangements made pursuant to sub-paragraph (1) must include procedures for -

(a)

investigating complaints made to the [UK RIE] about the conduct ofpersonsin the course of using the [UK RIE's ] facilities; and

(b)

the fair, independent and impartial resolution of appeals against decisions of the [UK RIE].

(3)

Where arrangements made pursuant to sub-paragraph (1) include provision for requiring the payment of financial penalties, they must include arrangements for ensuring that any amount so paid is applied only in one or more of the following ways -

(a)

towards meeting expenses incurred by the [UK RIE] in the course of the investigation of the breach in respect of which the penalty is paid, or in the course of any appeal against the decision of the [UK RIE] in relation to that breach;

(b)

for the benefit of users of the [UK RIE's ] facilities;

(c)

for charitable purposes. 1

REC 2.15.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 22

(1) The [UK RCH] must have effective arrangements for monitoring and enforcing compliance with its rules.

(2) The arrangements must include procedures for -

(a) investigating complaints made to the [UK RCH] about the conduct ofpersonsin the course of using the [UK RCH's] facilities; and

(b) the fair, independent and impartial resolution of appeals against decisions of the [UK RCH].

(3) Where the arrangements include provision for requiring the payment of financial penalties, they must include arrangements for ensuring that any amount so paid is applied only in one or more of the following ways -

(a) towards meeting expenses incurred by the [UK RCH ] in the course of the investigation of the breach in respect of which the penalty is paid, or in the course of any appeal against the decision of the [ UK RCH] in relation to that breach;

(b) for the benefit of users of the [UK RCH's] facilities;

(c) for charitable purposes. 1

REC 2.15.3 G RP

In determining whether a UK recognised body has effective arrangements for monitoring and enforcing compliance with its rules (and, in the case of a UK RIE, its settlement arrangements), the FSA may have regard to:

  1. (1)

    the UK recognised body's ability to:

    1. (a)

      monitor and oversee the use of its facilities;

    2. (b)

      assess its members' compliance with its rules (and settlement arrangements, where appropriate);

    3. (c)

      assess the significance of any non-compliance;

    4. (d)

      take appropriate disciplinary action against members in breach of its rules (and settlement arrangements, where appropriate);

    5. (e)

      suspend a member's access to its facilities;

    6. (f)

      refer members' or others' conduct to other appropriate authorities for possible action or further investigation;

    7. (g)

      retain authority over a member for at least one year after he has ceased to be a member;

    8. (h)

      where appropriate, enforce its rules (and settlement arrangements, where appropriate) against users (other than members) of its facilities; and

    9. (i)

      take action against suppliers of services to members (for example, warehouses) whose performance or conduct may be critical to ensuring compliance with its rules (and settlement arrangements, where appropriate);

  2. (2)

    the position, management and resources of the departments responsible for monitoring and overseeing the use of the UK recognised body'sfacilities and for enforcing compliance with its rules (and settlement arrangements, where appropriate); and

  3. (3)

    the arrangements made for the determination of disciplinary matters including the arrangements for disciplinary hearings and the arrangements made for appeals from the UK recognised body's decisions in those matters.

REC 2.15.4 G RP

In assessing whether the procedures made by a UK recognised body to investigate complaints about the users of its facilities are satisfactory, the FSA may have regard to:

  1. (1)

    whether these procedures include arrangements which enable the UK recognised body to:

    1. (a)

      acknowledge complaints promptly;

    2. (b)

      consider and investigate these complaints objectively, promptly and thoroughly;

    3. (c)

      provide a timely reply to the complainant; and

    4. (d)

      keep adequate records of complaints and investigations;

  2. (2)

    the arrangements made to enable a person who is the subject of a complaint to respond in an appropriate manner to that complaint; and

  3. (3)

    the documentation of these procedures and the arrangements made to ensure that the existence of these procedures is brought to the attention of persons who might wish to make a complaint.

REC 2.15.5 G RP

In assessing whether the arrangements include procedures for the fair, independent and impartial resolution of appeals against decisions of a UK recognised body, the FSA may have regard to at least the following factors:

  1. (1)

    the appeal procedures of the UK recognised body, including the composition and roles of any appeal committees or tribunals, and their relationship to the governing body;

  2. (2)

    the arrangements made to ensure prompt hearings of appeals from decisions made by the UK recognised body;

  3. (3)

    the format, organisation and rules of procedure of those hearings;

  4. (4)

    the arrangements made to select the persons to preside over those hearings and to serve as members of any appeal tribunal;

  5. (5)

    the provision for determining whether or not such hearings should be in public;

  6. (6)

    the provision made to enable an appellant to be aware of the procedure at any appeal hearing and to have the opportunity to prepare and present his case at that hearing;

  7. (7)

    the provision made for an appeal tribunal to give an explanation of its decision;

  8. (8)

    the provision for publicity for any appeals or for determining whether or not publicity should be given to the outcome of any appeal.

REC 2.15.6 G RP

In assessing whether a UK recognised body's arrangements include appropriate provision for ensuring the application of any financial penalties in ways described in the recognition requirement, the FSA may have regard to:

  1. (1)

    the UK recognised body's policy regarding the application of financial penalties;

  2. (2)

    the arrangements made for applying that policy in individual cases;

but the FSA does not consider that it is necessary for UK recognised bodies to follow any specific policy in order to meet this recognition requirement.

REC 2.16 Complaints

REC 2.16.1 UK RP

Schedule to the Recognition Requirements Regulations, Paragraph 9

(1)

The [UK RIE] must have effective arrangements for the investigation and resolution of complaints arising in connection with the performance of, or failure to perform, any of itsregulatory functions.

(2)

But sub-paragraph (1) does not extend to -

(a)

complaints about the content of rules made by the [UK RIE], or

(b)

complaints about a decision against which the complainant has the right to appeal under procedures of the kind mentioned in paragraph 8(2)(b).

(3)

The arrangements must include arrangements for a complaint to be fairly and impartially investigated by a person independent of the [UK RIE], and for him to report on the result of his investigation to the [UK RIE] and to the complainant.

(4)

The arrangements must confer on the person mentioned in sub-paragraph (3) the power to recommend, if he thinks appropriate, that the [UK RIE] -

(a)

makes a compensatory payment to the complainant,

(b)

remedies the matter complained of,

or takes both of those steps.

(5)

Sub-paragraph (3) is not to be taken as preventing the [UK RIE] from making arrangements for the initial investigation of a complaint to be conducted by the [UK RIE].1

REC 2.16.2 UK

Schedule to the Recognition Requirements Regulations, Paragraph 23

(1)

The [UK RCH] must have effective arrangements for the investigation and resolution of complaints arising in connection with the performance of, or failure to perform, any of itsregulatory functions.

(2)

But sub-paragraph (1) does not extend to -

(a)

complaints about the content of rules made by the [UK RCH], or

(b)

complaints about a decision against which the complainant has the right to appeal under procedures of the kind mentioned in paragraph 22(2)(b).

(3)

The arrangements must include arrangements for a complaint to be fairly and impartially investigated by a person independent of the [UK RCH], and for him to report on the result of his investigation to the [UK RCH] and to the complainant.

(4)

The arrangements must confer on the person mentioned in sub-paragraph (3) the power to recommend, if he thinks it appropriate, that the [UK RCH] -

(a)

makes a compensatory payment to the complainant,

(b)

remedies the matter complained of,

or takes both of those steps.

(5)

Sub-paragraph (3) is not to be taken as preventing the [UK RCH] from making arrangements for the initial investigation of a complaint to be conducted by the [UK RCH].1

REC 2.16.3 G RP

In determining whether a UK recognised body has effective arrangements for the investigation and resolution of complaints arising in connection with the performance of, or failure to perform, any of its regulatory functions, the FSA may have regard to the extent to which the UK recognised body's resources and procedures enable it to:

  1. (1)

    acknowledge complaints promptly;

  2. (2)

    make an objective, prompt and thorough initial investigation of complaints;

  3. (3)

    provide a timely reply to the complainant after that initial investigation;

  4. (4)

    inform the complainant of his right to apply to the UK recognised body'scomplaints investigator; and

  5. (5)

    keep adequate records of complaints and investigations.

REC 2.16.4 G RP

In determining whether a UK recognised body's arrangements for the investigation of complaints include appropriate arrangements for the complaint to be fairly and impartially investigated by an independent person (a "complaints investigator"), the FSA may have regard to:

  1. (1)

    the arrangements made for appointing (and removing) a complaints investigator, including the terms and conditions of such an appointment and the provision for remuneration of a complaints investigator;

  2. (2)

    the complaints investigator's access to, and relationship with, the UK recognised body'sgoverning body and key individuals;

  3. (3)

    the arrangements made for giving complainants access to the complaints investigator;

  4. (4)

    the facilities made available to the complaints investigator to enable him to pursue his investigation and prepare his report and recommendations, including access to the UK recognised body's records, key individuals and other staff (including, where appropriate suppliers, contractors or other persons to whom any functions have been outsourced and their staff); and

  5. (5)

    the arrangements made for the UK recognised body to consider the complaints investigator's report and recommendations.

REC 2.17 Recognition requirements relating to the default rules of UK recognised bodies

REC 2.17.1 G RP

The text of Parts II and IV of the Schedule to the Recognition Requirements Regulations is set out below.

REC 2.17.2 UK RP

Schedule to the Recognition Requirements Regulations, Part II

Paragraph 10 (Default rules in respect of market contracts)

(1)

The [UK RIE] must havedefault ruleswhich, in the event of amemberof the [UK RIE] being or appearing to be unable to meet his obligations in respect of one or moremarket contracts, enable action to be taken in respect of unsettledmarket contractsto which he is party.

(2)

The [default rules] may authorise the taking of the same or similar action in relation to amemberwho appears to be likely to become unable to meet his obligations in respect of one or moremarket contracts.

(3)

The [default rules] must enable action to be taken in respect of all unsettledmarket contracts, other than those entered into by [anRCH] for the purposes of or in connection with the provision of clearing services for the [UK RIE].

Paragraph 11 (Content of rules)

(1)

This paragraph applies as regards contracts falling within section 155(2)(a) of the Companies Act [1989].

(2)

The [default rules] must provide -

(a)

for all rights and liabilities between those party as principal to unsettled market contracts to which the defaulter is party as principal to be discharged and for there to be paid by one party to the other such sum of money (if any) as may be determined in accordance with the [default rules];

(b)

for the sums so payable in respect of different contracts between the same parties to be aggregated or set off so as to produce a net sum; and

(c)

for the certification by or on behalf of the [UK RIE] of the net sum payable or, as the case may be, of the fact that no sum is payable.

(3)

The reference in sub-paragraph (2) to rights and liabilities between those party as principal to unsettled market contracts does not include rights and liabilities -

(a)

in respect of margin; or

(b)

arising out of a failure to perform a market contract.

(4)

The [default rules] may make the same or similar provision, in relation to [designated non-members] designated in accordance with the procedures mentioned in sub-paragraph (5), as in relation tomembersof the [UK RIE].

(5)

If such provision is made as is mentioned in sub-paragraph (4), the [UK RIE] must have adequate procedures -

(a)

for designating the persons, or descriptions of person, in respect of whom action may be taken;

(b)

for keeping under review the question which persons or descriptions of person should be or remain so designated; and

(c)

for withdrawing such designation.

(6)

The procedures must be designed to secure that -

(a)

a person is not, or does not remain, designated if failure by him to meet his obligations in respect of one or more market contracts would be unlikely adversely to affect the operation of the market; and

(b)

a description of persons is not, or does not remain, designated if failure by a person of that description to meet his obligations in respect of one or more market contracts would be unlikely adversely to affect the operation of the market.

(7)

The [UK RIE] must have adequate arrangements -

(a)

for bringing a designation or withdrawal of designation to the attention of the person or description of persons concerned; and

(b)

where a description of persons is designated, or the designation of a description of persons is withdrawn, for ascertaining which persons fall within that description.

Paragraph 12 (Content of rules)

(1)

This paragraph applies as regards contracts falling within section 155(2)(b) of the Companies Act [1989].

(2)

The [default rules] must provide -

(a)

for all rights and liabilities of the defaulter under or in respect of unsettled market contracts to be discharged and for there to be paid by or to the defaulter such sum of money (if any) as may be determined in accordance with the [default rules];

(b)

for the sums so payable by or to the defaulter in respect of different contracts to be aggregated or set off so as to produce a net sum;

(c)

for that sum -

(i)

if payable by the defaulter to the [UK RIE], to be set off against any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property) so as to produce a further net sum;

(ii)

if payable by the [UK RIE] to the defaulter, to be aggregated with any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property); and

(d)

for the certification by or on behalf of the [UK RIE] of the sum finally payable or, as the case may be, of the fact that no sum is payable.

(3)

The reference in sub-paragraph (2) to the rights and liabilities of a defaulter under or in respect of an unsettled market contract includes (without prejudice to the generality of that provision) rights and liabilities arising in consequence of action taken under provisions of the [default rules] authorising -

(a)

the effecting by the [UK RIE] of corresponding contracts in relation to unsettledmarket contractsto which the defaulter is party;

(b)

the transfer of the defaulter's position under an unsettled market contract to another member of the [UK RIE];

(c)

the exercise by the UK RIE of any option granted by an unsettled market contract.

(4)

A "corresponding contract" means a contract on the same terms (except as to price or premium) as the market contract but under which the person who is the buyer under the market contract agrees to sell and the person who is the seller under the market contract agrees to buy.

(5)

Sub-paragraph (4) applies with any necessary modifications in relation to a market contract which is not an agreement to sell.

(6)

The reference in sub-paragraph (2) to the rights and liabilities of a defaulter under or in respect of an unsettled market contract does not include, where he acts as agent, rights or liabilities of his arising out of the relationship of principal and agent.

Paragraph 13 (Notification to other parties affected)

The [UK RIE] must have adequate arrangements for ensuring that -

(a)

in the case of unsettled market contracts with a defaulter acting as principal, parties to the contract are notified as soon as reasonably practicable of the default and of any decision taken under the [default rules] in relation to contracts to which they are a party; and

(b)

in the case of unsettled market contracts with a defaulter acting as agent, parties to the contract and the defaulter's principals are notified as soon as reasonably practicable of the default and of the identity of the other parties to the contract.

Paragraph 14 (Cooperation with other authorities)

The [UK RIE] must be able and willing to cooperate, by the sharing of information and otherwise, with the Secretary of State, anyrelevant office-holderand any other authority or body having responsibility for any matter arising out of, or connected with, the default of amemberof the [UK RIE] or any [designated non-member].

Paragraph 15 (Margin)

(1)

Where the [UK RIE] provides clearing services, the [default rules] of the [UK RIE] must provide that in the event of a default, margin provided by the defaulter for his own account is not to be applied to meet a shortfall on aclientaccount.

(2)

This paragraph is without prejudice to the requirements of any rules relating to clients' money made by the [FSA] under sections 138 and 139 of theAct.1

REC 2.17.3 UK

Schedule to the Recognition Requirements Regulations, Part IV

Paragraph 24 (Default rules in respect of market contracts)

(1)

The [UK RCH] must havedefault ruleswhich, in the event of amemberof the [UK RCH] being or appearing to be unable to meet his obligations in respect of one or moremarket contracts, enable action to be taken to close out his position in relation to all unsettledmarket contractsto which he is a party.

(2)

The [default rules] may authorise the taking of the same or similar action where amemberappears to be likely to become unable to meet his obligations in respect of one or moremarket contracts.

Paragraph 25 (Content of rules)

(1)

The [default rules] must provide -

(a)

for all rights and liabilities of the defaulter under or in respect of unsettled market contracts to be discharged and for there to be paid by or to the defaulter such sum of money (if any) as may be determined in accordance with the [default rules];

(b)

for the sums so payable by or to the defaulter in respect of different contracts to be aggregated or set off so as to produce a net sum;

(c)

for that sum -

(i)

if payable by the defaulter to the [UK RCH], to be set off against any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property) so as to produce a further net sum;

(ii)

if payable by the [UK RCH] to the defaulter, to be aggregated with any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property); and

(d)

for the certification by or on behalf of the [UK RCH] of the sum finally payable or, as the case may be, of the fact that no sum is payable.

(2)

The reference in sub-paragraph (1) to the rights and liabilities of a defaulter under or in respect of an unsettled market contract includes (without prejudice to the generality of that provision) rights and liabilities arising in consequence of action taken under provisions of the [default rules] authorising -

(a)

the effecting by the [market contracts] of corresponding contracts in relation to unsettledmarket contractsto which the defaulter is party;

(b)

the transfer of the defaulter's position under an unsettled market contract to another member of the [UK RCH];

(c)

the exercise by the [UK RCH] of anyoptiongranted by an unsettledmarket contract.

(3)

A "corresponding contract" means a contract on the same terms (except as to price or premium) as the market contract but under which the person who is the buyer under the market contract agrees to sell and the person who is the seller under the market contract agrees to buy.

(4)

Sub-paragraph (3) applies with any necessary modifications in relation to a market contract which is not an agreement to sell.

(5)

The reference in sub-paragraph (1) to the rights and liabilities of a defaulter under or in respect of an unsettled market contract does not include, where he acts as agent, rights or liabilities of his arising out of the relationship of principal and agent.

Paragraph 26 (Notification to other parties affected)

The [UK RCH] must have adequate arrangements for ensuring that parties to unsettledmarket contractswith a defaulter are notified as soon as reasonably practicable of the default and of any decision taken under the [default rules] in relation to contracts to which they are a party.

Paragraph 27 (Cooperation with other authorities)

The [UK RCH] must be able and willing to cooperate, by the sharing of information and otherwise, with the Secretary of State, anyrelevant office-holderand any other authority or body having responsibility for any matter arising out of or connected with the default of amemberof the [UK RCH].

Paragraph 28 (Margin)

(1)

The [default rules] of the [UK RCH] must provide that in the event of a default, margin provided by the defaulter for his own account is not to be applied to meet a shortfall on aclientaccount.

(2)

This paragraph is without prejudice to the requirements of any rules relating to clients' money made by the [ FSA ] under sections 138 and 139 of the Act.1

REC 2.17.4 G

UK RIEs which, under their rules, have market contracts and UK RCHs which, under their rules, enter into market contracts are required to have default rules. The default rules must enable the UK recognised body to take action in relation to a member or,for an RIE, a designated non-member, who appears unable, or likely to become unable, to meet his obligations in respect of one or more unsettled market contracts.

REC 2.17.5 G

This action is to provide for all rights and liabilities of the defaulter and any counterparty to an unsettled market contract to be discharged and for there to be paid between the defaulter and each counterparty one sum representing the net amount of all the contracts between them. Where property has been provided by the defaulter as cover for margin, that property may be set off against any amount owing by the defaulter. At the conclusion of this process, the UK recognised body must certify the sum finally payable in each case.

REC 2.17.6 G RP

The Companies Act 1989 contains provisions which protect action taken by a UK recognised body under its default rules from the normal operation of insolvency law which might otherwise leave this action open to challenge by a relevant office-holder.