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REC 2.1 Introduction

REC 2.1.1 G

This chapter contains the recognition requirements for UK RIEs4 (other than RAPs) 3 and sets out guidance on those requirements. Except for REC 2.5A, references to recognised body or UK recognised bodies in the rest of this chapter shall be read as referring to UK RIEs.4 This chapter also contains the MiFID implementing requirements for UK RIEs.2

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REC 2.1.1A G

3Guidance on the RAP recognition requirements which apply to RAPs is set out in REC 2A (Recognised Auction Platforms). Guidance on the recognition requirements for ROIEs4 is set out in REC 6 (Overseas Investment Exchanges).

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REC 2.1.2 G

These recognition requirements must be satisfied by applicants for UK RIE4 status before recognition is granted and by all UK RIEs4 at all times while they are recognised. In addition the MiFID implementing requirements must be satisfied by applicants for UK RIE status before recognition is granted and by all UK RIEs at all times while they are recognised. 2The same standards apply both on initial recognition and throughout the period recognised body status is held. The term UK RIE4 in the guidance should be taken, therefore, to refer also to an applicant when appropriate.

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REC 2.1.3 G
  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 UK RIEs.4

    4
  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.

    2
REC 2.1.4 G

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

Paragraphs 4(1) and 4(2)(aa)2

2

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

2Paragraph 4(2)(ea)

Conflicts

2.5

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

2Paragraph 4A

Provision of pre-trade information about share trading

2.6

2Paragraph 4B

Provision of post-trade information about share trading

2.6

Paragraph 6

Promotion and maintenance of standards

2.13

Paragraph 7

Rules and consultation

2.14

2Paragraph 7A

Admission of financial instruments to trading

2.12

2Paragraph 7B and 7C

Access to facilities

2.7

2Paragraph 7D

Settlement

2.8

2Paragraph 7E

Suspension and removal of financial instruments from trading

2.6

Paragraph 8

Discipline

2.15

Paragraph 9

Complaints

2.16

2Paragraph 9A

Operation of a multilateral trading facility

2.16A

Part II of the Schedule

UK RIE default rules in respect of market contracts

2.174

REC 2.1.5 G

2Recitals and articles from the MiFID Regulation (and the associated guidance) relevant to market transparency are set out in REC 2.6. Articles from the MiFID Regulation relevant to admission to trading are set out in REC 2.12.

REC 2.2 Method of satisfying the recognition requirements

REC 2.2.1 UK

Recognition Requirements Regulations, Regulation 6

2 (1) In considering whether a [UK recognised body] or applicant satisfiesrecognition requirements applying to it under these [Recognition Requirements Regulations], the [FCA]3 may take into account all relevant circumstances including the constitution of the person concerned and its regulatory provisions within the meaning of section 300E3 of the Act.

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(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.

Relevant circumstances

REC 2.2.2 G

The FCA3 will usually expect :

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  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;

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  5. (4A)

    competition in the markets for services provided, or proposed to be provided, by the UK recognised body or applicant in its capacity as such; and4

  6. (5)

    the nature and scale of the risks to the statutory objectives associated with the matters described in (1) to (4A4);

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

It is the UK recognised body's responsibility to demonstrate to the FCA3 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.

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REC 2.2.4 G

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

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

In determining whether the UK recognised body meets the recognition requirement in Regulation 6(3), the FCA3 may have regard to whether that body has ensured that the person who performs that function on its behalf:

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  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

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 FCA3 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:

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  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

Schedule to the Recognition Requirements Regulations, Paragraph 1

2 (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 [FCA]5must (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the [UK RIE's] connection with any person , and any activity carried on by the [UK RIE], whether or not it is anexempt activity.

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REC 2.3.2 UK

[deleted]

REC 2.3.3 G

In determining whether a UK recognised body has financial resources sufficient for the proper performance of its relevant functions, the FCA5 may have regard to:

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  1. (1)

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

  2. (2)

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

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  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.

  7. (7)

    2 the nature and extent of the transactions concluded on the UK RIE.

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Accounting information and standards

REC 2.3.4 G

The FCA5 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.

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Counterparty and market risks: principles

REC 2.3.5 G

In assessing whether a UK recognised body has sufficient financial resources in relation to counterparty and market risks, the FCA5 may have regard to:

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  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 UK financial system;3 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

In assessing whether a UK recognised body has sufficient financial resources in relation to operational and other risks, the FCA5 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:

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  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: components of calculation44

REC 2.3.7 G

In considering whether a UK recognised body has sufficient financial resources in relation to operational and other risks, the FCA5 will normally have regard to two components: eligible financial resources and net capital.4

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REC 2.3.8 G
  1. (1) 4

    [deleted]5

    5
  2. (2)

    [deleted]5

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Operational and other risks: UK RIEs - the standard and risk-based approach44

REC 2.3.9 G
4
  1. (1)

    4The FCA5 considers that a UK RIE which at any time holds:

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    1. (a)

      eligible financial resources not less than the greater of:

      1. (i)

        the amount calculated under the standard approach; and

      2. (ii)

        the amount calculated under the risk-based approach; and

    2. (b)

      net capital not less than the amount of eligible financial resources determined under (1)(a);

    will, at that time, have sufficient financial resources to meet the recognition requirement in respect of operational and other risks unless there are special circumstances indicating otherwise.

  2. (2)

    The FCA5 would normally regard the amount calculated under REC 2.3.9G (1)(a)(i) to be a minimum amount of financial resources below which a UK RIE would be failing the recognition requirements. The FCA5 would expect a UK RIE to hold, in addition to this minimum amount, an amount constituting an operational risk buffer calculated in accordance with REC 2.3.22 G.

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Operational and other risks: individual guidance

REC 2.3.10 G

4The FCA5 would expect to provide a UK recognised body with individual guidance on the amount of eligible financial resources which it considers would be sufficient for the UK recognised body to hold in respect of operational and other risks in order to satisfy the recognition requirements. In formulating its individual guidance, the FCA5 will ordinarily apply the approach described in REC 2.3.9 G for UK RIEs.

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Operational and other risks: eligible financial resources

REC 2.3.11 G

4For the purposes of REC 2.3, "eligible financial resources" should consist of liquid financial assets held on the balance sheet of a UK recognised body, including cash and liquid financial instruments where the financial instruments have minimal market and credit risk and are capable of being liquidated with minimal adverse price effect.

Operational and other risks: net capital

REC 2.3.12 G

4For the purposes of REC 2.3, "net capital" should be in the form of equity. For this purpose, the FCA5 considers that common stock, retained earnings, disclosed reserves and other instruments classified as common equity tier one capital or additional tier one capital constitute equity. The FCA5 considers that, when calculating its net capital, a UK recognised body:

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  1. (1)

    should deduct holdings of its own securities, or those of any undertaking in the same group as the UK recognised body, together with any amount owed to the UK recognised body by an undertaking in its group under any loan or credit arrangement and any exposure arising under any guarantee, charge or contingent liability given in favour of such an undertaking or a creditor of such undertaking; and

  2. (2)

    may include interim earnings that have been independently verified by its auditor.

Operational and other risks: eligible financial resources calculated under the standard approach

REC 2.3.13 G
  1. (1)

    4Under the standard approach, the amount of eligible financial resources is equal to six months of operating costs.

  2. (2)

    Under the standard approach, the FCA5 assumes liquid financial assets are needed to cover the costs that would be incurred during an orderly wind-down of the UK recognised body'sexempt activities, 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 FCA).5

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  3. (3)

    For the purposes of the standard approach, the FCA5 would normally expect the calculation of operating costs to be based on the UK recognised body's most recent audited annual accounts, with six months of operating costs being equal to one half of the sum of all operating costs reflected in the audited annual accounts of the UK recognised body in the course of performing its functions during the year to which the accounts relate. In calculating the gross annual operating costs, the FCA5 would consider it reasonable to exclude non-cash costs (costs that do not involve an outflow of funds).

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  4. (4)

    The FCA5 considers it to be reasonable for a UK recognised body to adjust its operating expenditure calculation if, during the period since its last audited accounts were prepared, its level of operating expenditure has changed materially as documented by the current annual budget or forecast adopted by the UK recognised body'sgoverning body.

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  5. (5)

    The FCA5 considers that it is reasonable for a UK recognised body to adjust its operating expenditure to take account of arrangements between two or more undertakings in the same group, which are all subject to prudential regulation in the United Kingdom under which specified costs are shared or recharged among those undertakings and those costs would otherwise be double-counted in the calculation of their financial resources requirement.

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Operational and other risks: eligible financial resources calculated under the risk-based approach (UK RIE's only)

REC 2.3.14 G
  1. (1)

    4The risk-based approach is intended to ensure that sufficient financial resources are maintained at all times such that a UK RIE would not be prevented from implementing an orderly wind-down as a result of the financial impacts of stress events affecting its business or the markets in which it operates.

  2. (2)

    Under the risk-based approach the amount of eligible financial resources is calculated by adding together:

    1. (a)

      the amount estimated by the UK RIE to absorb the potential business losses that a business of its nature, scale and complexity might incur in stressed but plausible market conditions; and

    2. (b)

      the amount estimated by the UK RIE to effect an orderly closure.

    In this context, a business loss arises where there is an increase in cost or reduction of revenue relative to a UK RIE's expectation of its financial performance, such that a loss needs to be charged against its capital.

Operational and other risks: the risk-based assessment (UK RIEs only)

REC 2.3.15 G

4For the purposes of calculating the risk-based approach, the FCA5 would normally expect the UK RIE to provide the FCA5 with an annual financial risk assessment that identifies the risks to its business. As a financial risk assessment is likely to form an integral part of the UK RIE's management process and decision-making culture, the FCA5 would normally expect it to be approved by the UK RIE'sgoverning body.

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REC 2.3.16 G

4The FCA5 would normally expect to use the financial risk assessment prepared by the UK RIE in the course of preparing individual guidance on the amount of financial resources that it considers is sufficient for a UK RIE to hold in order to satisfy the recognition requirements. The financial risk assessment would provide the basis for calculating the amount of eligible financial resources that should be held by the UK RIE under the risk-based approach.

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REC 2.3.17 G

4The financial risk assessment should be based on a methodology which provides a reasonable estimate of the potential business losses which a UK RIE might incur in stressed but plausible market conditions. The FCA5 would expect a UK RIE to carry out a financial risk assessment at least once in every twelve-month period, or more frequently if there are material changes in the nature, scale or complexity of the UK RIE's operations or its business plans that suggest such financial risk assessment no longer provides a reasonable estimate of its potential business losses. The FCA5 considers that it would be reasonable for a financial risk assessment to proceed in the following way:

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  1. (1)

    Step 1: the UK RIE would identify, in writing, the risks to which the business of the UK RIE is exposed and which could have a material adverse effect on its financial position, in the light of the nature, scale and complexity of its operations and its business plans. For this purpose, it would be reasonable to refer to the categorisation of risk used under the system of risk management adopted by the UK RIE in order to meet its responsibilities under the recognition requirements referred to in REC 2.5. That description would identify which risks are indemnified or transferred by the UK RIE and which are retained and accepted.

  2. (2)

    Step 2: the UK RIE would conduct an assessment of the potential business losses that could arise in the event that the risks identified in accordance with step 1 were to materialise. For this purpose, it would be reasonable for a UK RIE to develop, and keep under review, a stress and scenario testing plan designed to simulate the effects of a pre-determined series of events, or sets of circumstances, that would be likely to occur following the crystallisation of one or more identified risks, taking into account the systems and controls in place to mitigate those risks. The stress and scenario testing plan would:

    1. (a)

      cover a forward-looking period of at least one year;

    2. (b)

      consider a suitable range of adverse events and sets of circumstances, of a defined severity and duration, which could occur in stressed but plausible market conditions;

    3. (c)

      consider how a particular adverse event or set of circumstances could lead to or be correlated with other events;

    4. (d)

      consider the potential for a particular adverse event or set of circumstances to affect multiple business lines;

    5. (e)

      take into account realistic management actions to resolve such adverse events and circumstances; and

    6. (f)

      where appropriate, involve sensitivity analysis showing the effects of changes to assumptions made about the impact of particular adverse events and circumstances.

    In designing its stress and scenario testing plan, the FCA5 considers that it would be reasonable for a UK RIE to be guided by any risk-scoring methodology that it deploys for general risk-management purposes that might have application in evaluating the probability and impact of its risks.

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  3. (3)

    Step 3: the UK RIE would assess the eligible financial resources that it would need to hold to cover such potential business losses. Such eligible financial resources would enable the UK RIE to absorb any financial shocks attributable to such business risks were they to arise.

    In carrying out this assessment, the FCA5 considers that it would be reasonable for a UK RIE to take account of any action which its senior management might plan on taking in response to a given stress event. For example, if the risk appetite of a UK RIE is such that it would not pursue recovery from a given stress event (and would instead initiate an orderly wind-down), the assessment of eligible financial resources needed in such circumstances might reasonably be limited to the costs of orderly wind-down from the point in time at which that decision would be likely to be made.

    Where a UK RIE expects to be making a loss during the period covered by the financial risk assessment as a result of its anticipated business performance in normal market conditions, the business losses which are relevant to the calculation of the risk-based approach are those additional losses which the UK RIE would expect to incur in stressed but plausible market conditions.

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  4. (4)

    Step 4: the UK RIE would make an assessment of the cost of orderly closure. The FCA5 considers that an orderly closure should normally include an assessment of the impact of closure on the users of the markets operated by that UK RIE. For the purpose of this assessment, the FCA5 considers that it would be reasonable for a UK RIE to adopt the amount needed under the standard approach as its cost of orderly closure or to use its own method of calculation based on a scenario plan which comprehensively documents the costs that a UK RIE in its position might incur in order to fully implement an orderly wind-down.

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  5. (5)

    Step 5: the UK RIE would produce a proposal for the amount of eligible financial resources considered to be adequate to meet the risk-based approach. Such a proposal would be based on the sum of:

    1. (a)

      the amount assessed to cover potential business losses in accordance with REC 2.3.17G (3); and

    2. (b)

      an amount assessed to cover the cost of orderly closure in accordance with REC 2.3.17G (4).

  6. (6)

    Step 6: the UK RIE would calculate the amount available as an operational risk buffer in accordance with REC 2.3.22 G. To the extent the amount available is insufficient to constitute an operational risk buffer, the UK RIE would include within its proposal the amount it would propose to hold (in addition to the sum of the amounts referred to in (5)(a) and (b)) for those purposes.

REC 2.3.18 G

4The FCA5 would normally expect a financial risk assessment to include a description of the methodology applied by the UK RIE to arrive at the proposal made in accordance with REC 2.3.17G (5).

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REC 2.3.19 G

4Where a UK RIE is a member of a group, the FCA5 would normally expect the annual risk assessment to be accompanied by a consolidated balance sheet:

5
  1. (1)

    of any group in which the UK RIE is a subsidiary undertaking; or

  2. (2)

    (if the UK RIE is not a subsidiary undertaking in any group) of any group of which the UK RIE is a parent undertaking.

REC 2.3.20 G

4The FCA5 would expect to consider the financial risk assessment, any proposal with respect to an operational risk buffer and, if applicable, the consolidated balance sheet, in formulating its guidance on the amount of eligible financial resources it considers to be sufficient for the UK RIE to hold in order to meet the recognition requirements. In formulating its guidance, the FCA5 would, where relevant, consider whether or not the financial risk assessment makes adequate provision for the following risks:

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  1. (1)

    the risks related to the administration and operation of the UK RIE as a business enterprise (whether as a result of adverse reputational effects, poor execution of business strategy, ineffective response to competition, or otherwise);

  2. (2)

    the risk that deficiencies in information systems or internal processes, human errors, management failures, or disruptions from external events will result in the reduction, deterioration, or breakdown of services provided by a UK RIE (whether as a result of errors or delays in processing, system outages, insufficient capacity, fraud, data loss and leakage, or otherwise);

  3. (3)

    the risk that the financial position of the UK RIE may be adversely affected by its relationships (financial or non-financial) with other entities in the same group or by risks which may affect the financial position of the whole group, including reputational contagion; and

  4. (4)

    any other type of risk which is relevant to that particular UK RIE.

Operational and other risks: purpose of the risk buffer

REC 2.3.21 G

4The FCA5 would normally consider a UK recognised body to be failing the recognition requirements if it held financial resources less than the amount calculated under REC 2.3.9G (1)(a)(i) (in respect of UK RIEs). The FCA5 therefore expects a UK recognised body to hold an operational risk buffer of a sufficient amount in excess of this minimum, to ensure that it is at all times able to comply with its regulatory obligations.

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Operational and other risks: calculation of the operational risk buffer - UK recognised bodies

REC 2.3.22 G
  1. (1)

    [deleted]5

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  2. (2)

    The FCA5 would normally expect a UK RIE to hold, in addition to the minimum amount determined under REC 2.3.9G (1)(a)(i), an operational risk buffer consistent with a risk-based approach.

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    1. (a)

      Where the amount of eligible financial resources calculated by a UK RIE under REC 2.3.17G (5) (the risk-based approach) is greater than the amount of eligible financial resources calculated under REC 2.3.13 G (the standard approach), and the difference is of an amount sufficient to serve the purposes of the operational risk buffer, then the FCA5 considers that there would be no need for a UK RIE to hold any further amount as an operational risk buffer.

      5
    2. (b)

      Where the amount of eligible financial resources calculated by a UK RIE under REC 2.3.17G (5) (the risk-based approach) is not sufficient to provide an effective operational risk buffer over and above the amount calculated under REC 2.3.13 G (the standard approach), then the FCA5 would expect the UK RIE to include within its annual risk assessment a proposal to hold additional financial resources sufficient to constitute an operational risk buffer.

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  3. (3)

    As the operational risk buffer is an amount in excess of the minimum financial resources sufficient to meet the recognition requirements, the FCA5 would normally not regard a UK recognised body that draws upon or temporarily depletes the operational risk buffer to have failed or be failing a recognition requirement in respect of its financial resources. However, the FCA5 would expect to be notified as soon as reasonably practicable if the UK recognised body draws upon, or intends to draw upon, its operational risk buffer.

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REC 2.4 Suitability

REC 2.4.1 UK

Schedule to the Recognition Requirements Regulations, Paragraph 2

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 [FCA]4 may (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the [UK RIE's] connection with any person.

4

2(3) The persons who effectively direct the business and operations of the [UK RIE] must be of sufficiently good repute and sufficiently experienced to ensure the sound and prudent management and operation of the financial markets operated by it.

2(4) The persons who are in a position to exercise significant influence over the management of the [UK RIE], whether directly or indirectly must be suitable.

REC 2.4.2 UK

4

[deleted]

REC 2.4.3 G

In determining whether a UK recognised body is a fit and proper person, the FCA4 may have regard to any relevant factor including, but not limited to:

4
  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;

  4. (4)

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

  5. (5)

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

  6. (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;

  7. (7)

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

  8. (8)

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

  9. (9)

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

  10. (10)

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

  11. (11)

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

  12. (12)

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

REC 2.4.4 G

In determining whether a UK recognised body is a fit and proper person, the FCA4 may have regard to its connections with:

4
  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

In assessing whether its connection with any person could affect whether a UK recognised body is a fit and proper person, the FCA4 may have regard to:

4
  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 2.4.6 G

2In assessing whether the persons who effectively direct the business and operations of the UK RIE are of sufficiently good repute and sufficiently experienced to ensure the sound and prudent management and operation of the financial markets operated by 3it, the FCA4 may have regard to the repute and experience of the UK RIE'skey individuals.

4

REC 2.5 Systems and controls and conflicts

REC 2.5.1 UK

Schedule to the Recognition Requirements Regulations, paragraph 3

2 (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, mitigation and management of risks to the performance of the [UK RIE'srelevant functions];

(c)

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

(ca)

the technical operation of the [ UK RIE], including contingency arrangements for disruption to its facilities;

(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.

REC 2.5.1A UK

Schedule to the Recognition Requirements Regulations, paragraph 4(2)(ea)

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

appropriate arrangements are made to -

(i)

identify conflicts between the interests of the [ UK RIE ], its owners and operators and the interests of the persons who make use of its facilities or the interests of the financial markets operated by it; and

(ii)

manage such conflicts so as to avoid adverse consequences for the operation of the financial markets operated by the [ UK RIE ] and for the persons who make use of its facilities.

REC 2.5.2 UK

[deleted]

REC 2.5.3 G

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 FCA3 may have regard to the UK recognised body's:

3
  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 identification and 2management of conflicts of interest;

  3. (3)

    arrangements for internal and external audit; and

  4. (4)

    information technology systems.

REC 2.5.4 G

The following paragraphs set out other matters to which the FCA3 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 paragraph 4(2)(d) of the Schedule to the Recognition Requirements Regulations) and the safeguarding and administration of assets.

3 3

Information transmission

REC 2.5.5 G

In assessing a UK recognised body's systems and controls for the transmission of information, the FCA3 may also have regard to the extent to which these systems and controls ensure that information is transmitted promptly and accurately:

3
  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

In assessing a UK recognised body's systems and controls for assessing and managing risk, the FCA3 may also have regard to the extent to which these systems and controls enable the UK recognised body to:

3
  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

[deleted]3

Effecting and monitoring of transactions and operation of settlement arrangements

REC 2.5.8 G

In assessing a UK RIE's systems and controls for the effecting and monitoring of transactions, and for the operation of settlement arrangements, the FCA3 may have regard to the totality of the arrangements and processes through which the UK RIE's transactions are effected, cleared,3 and settled, including:

3 3 3
  1. (1)

    a UK RIE's arrangements under which orders are received and matched, its arrangements for trade and transaction reporting, and (if relevant) its arrangements with another person under which any rights or liabilities arising from transactions are discharged including arrangements3 for transmission to a settlement system or clearing house;

    3
  2. (2)

    (if relevant), a UK RIE's3 arrangements under which instructions relating to3 a transaction to be cleared by another person by means of a clearing facilitation service3 are entered into its systems by the relevant other person and transmitted to the other person; and3

    333
  3. (3)

    the arrangements made by the UK RIE3 for monitoring and reviewing the operation of these systems and controls.

    3

Safeguarding and administration of assets

REC 2.5.9 G

In assessing a UK recognised body's systems and controls for the safeguarding and administration of assets belonging to users of its facilities, the FCA3 may have regard to the totality of the arrangements and processes by which the UK recognised body:

3
  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

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

The FCA3 recognises that a UK RIE3 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.

3 2 3 2
REC 2.5.12 G

REC 2.5.13 G to REC 2.5.16 G set out the factors to which the FCA3 may have regard in assessing a UK recognised body's systems and controls for managing conflicts of interest.

3
REC 2.5.13 G

The FCA3 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:

3
  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

The FCA3 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 FCA3 etc.) and regulations made under section 349 (Exemptions from section 348) of the Act.

3 3
REC 2.5.15 G

The FCA3 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:

3
  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

The FCA3 may also have regard to the arrangements made:

3
  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

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 FCA3 may have regard to:

3
  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

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 FCA3 may have regard to:

3
  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

The FCA3 may also have regard to the arrangements for maintaining, recording and enforcing technical and operational standards and specifications for information technology systems, including:

3
  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

The FCA3 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.

3

REC 2.5A Guidance on Public Interest Disclosure Act: Whistleblowing

Application and Purpose: Application

REC 2.5A.1 G

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
  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

The guidance in this section concerns the effect of PIDA in the context of the relationship between UK recognised bodies and the FCA.2 It is not comprehensive guidance on PIDA itself.

2

Practical Measures: Effect of PIDA

REC 2.5A.4 G

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

In accordance with section 1 of PIDA:

  1. (1)

    a "protected disclosure" is a qualifying disclosure which meets the relevant requirements set out in part 4A of the Employment Rights Act 19963;

    3
  2. (2)

    a "qualifying disclosure" is a disclosure, made in the public interest3, 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:

    3
    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
  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 FCA.2

    2
  2. (2)

    In considering appropriate internal procedures, UK recognised bodiesmay find the guidance provided to firms in SYSC 18.2.2 G (2) and SYSC 18.2.2 G (3)1 helpful.

    1

Link to fitness and propriety

REC 2.5A.7 G

In determining whether a UK recognised body is a fit and proper person, the FCA2 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)).

2

REC 2.6 General safeguards for investors, provision of pre and post-trade information about share trading and suspension and removal of financial instruments from trading2

REC 2.6.1 UK

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

2 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.

REC 2.6.2 UK

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

2Without prejudice to the generality of sub-paragraph [4(1)], the [UK RIE] must ensure that -

it has transparent and non-discretionary rules and procedures -

(i)

to provide for fair and orderly trading, and

(ii)

to establish objective criteria for the efficient execution of orders;

REC 2.6.3 UK

Schedule to the Recognition Requirements Regulations, Paragraph 4A

2(1)

The [UK RIE] must make arrangements for-

(a)

current bid and offer prices for shares, and

(b)

the depth of trading interest in shares at the prices which are advertised through its systems,

to be made available to the public on reasonable commercial terms and on a continuous basis during normal trading hours, subject to the requirements contained in Chapter IV of the [MiFID Regulation] [(see REC 2.6.7 EU and REC 2.6.21 EU to REC 2.6.24 EU)].

(2)

If [a UK RIE] decides to give investment firms and credit institutions required to publish their quotes in shares-

(a)

in accordance with Article 27 of [MiFID], or

(b)

by the [FCA],5

5

access to the arrangements referred to in sub-paragraph (1), it must do so on reasonable commercial terms and on a non-discriminatory basis.

(3)

The [FCA]5 may waive the requirements of sub-paragraph (1) in the circumstances specified-

5

(a)

in the case of shares to be traded on a multilateral trading facility operated by the [UK RIE], in Article 29.2 of [MiFID] and Chapter IV of the [MiFID Regulation] [(see REC 2.6.10 EU and REC 2.6.13 EU)]; or

(b)

in the case of shares to be traded on a regulated market operated by the [UK RIE], in Article 44.2 of [MiFID] and Chapter IV of the [MiFID Regulation] [(see REC 2.6.10 EU and REC 2.6.13 EU)].

REC 2.6.4 UK

Schedule to the Recognition Requirements Regulations, Paragraph 4B

2(1)

The [UK RIE] must make arrangements for the price, volume and time of transactions executed in shares to be made available to the public as soon as possible after the time of the transaction on reasonable commercial terms, subject to the requirements contained in Chapter IV of the [MiFID Regulation] [(see REC 2.6.15 EU3 and REC 2.6.21 EU to REC 2.6.24 EU]).

(2)

If [a UK RIE] decides to give investment firms and credit institutions required to make public details of their transactions in shares-

(a)

in accordance with Article 28 of [MiFID], or

(b)

by the [FCA].5

5

access to the arrangements referred to in sub-paragraph (1), it must do so on reasonable commercial terms and on a non discriminatory basis.

(3)

The [FCA]5 may permit [UK RIEs] to defer the publication required by sub-paragraph (1) in the circumstances specified, and subject to the requirements contained-

5

(a)

in the case of shares traded on a multilateral trading facility operated by [a UK RIE], in Article 30.2 of [MiFID] and Chapter IV of the [MiFID Regulation] [(see REC 2.6.18 EU)]; or

(b)

in the case of shares traded on regulated market operated by [a UK RIE], in Article 45.2 of [MiFID] and Chapter IV of the [MiFID Regulation] [(see REC 2.6.18 EU)].

(4)

If the [FCA]5 permits [UK RIEs] to defer the publication required by sub-paragraph (1), those [UK RIEs] must ensure that the existence of and the terms of the permission are disclosed to users and members of their facilities and to investors.

5
REC 2.6.5 G

2Articles 29.2 and 44.2 of MiFID provide that the pre-trade transparency requirement can be waived based on market model or the size and type of orders. In particular this obligation can be waived in respect of transactions that are large in scale compared with normal market size for the share or type of share in question. Articles 30.2 and 45.2 of MiFID provide that publication of the details of transactions can be deferred based on their type or size. In particular this obligation can be deferred in respect of transactions that are large in scale compared with the normal market size for that share or that class of shares.

REC 2.6.6 UK

Schedule to the Recognition Requirements Regulations, Paragraph 7E

2The rules of the [UK RIE] must provide that the [UK RIE] must not exercise its power to suspend or remove from trading on a regulated market operated by it any financial instrument which no longer complies with its rules, where such step would be likely to cause significant damage to the interests of investors or the orderly functioning of the financial markets.

REC 2.6.7 EU

Article 17 of the MiFID Regulation

2 Pre-trade transparency obligations

(1)

A ... market operator operating an MTF or a regulated market shall, in respect of each share admitted to trading on a regulated market that is traded within a system operated by it and specified in Table 1 of Annex II [(see REC 2.6.8 EU)], make public the information set out in paragraphs 2 to 6.

(2)

Where one of the entities referred to in paragraph 1 operates a continuous auction order book trading system, it shall, for each share as specified in paragraph 1, make public continuously throughout its normal trading hours the aggregate number of orders and of the shares those orders represent at each price level, for the five best bid and offer price levels.

(3)

Where one of the entities referred to in paragraph 1 operates a quote-driven trading system, it shall, for each share as specified in paragraph 1, make public continuously throughout its normal trading hours the best bid and offer by price of each market maker in that share, together with the volumes attaching to those prices.

The quotes made public shall be those that represent binding commitments to buy and sell the shares and which indicate the price and volume of shares in which the registered market makers are prepared to buy or sell.

In exceptional market conditions, however, indicative or one-way prices may be allowed for a limited time.

(4)

Where one of the entities referred to in paragraph 1 operates a periodic auction trading system, it shall, for each share specified in paragraph 1, make public continuously throughout its normal trading hours the price that would best satisfy the system's trading algorithm and the volume that would potentially be executable at that price by participants in that system.

(5)

Where one of the entities referred to in paragraph 1 operates a trading system which is not wholly covered by paragraphs 2 or 3 or 4, either because it is a hybrid system falling under more than one of those paragraphs or because the price determination process is of a different nature, it shall maintain a standard of pre-trade transparency that ensures that adequate information is made public as to the price level of orders or quotes for each share specified in paragraph 1, as well as the level of trading interest in that share.

In particular, the five best bid and offer price levels and/or two-way quotes of each market maker in that share shall be made public, if the characteristics of the price discovery mechanism permit it.

(6)

A summary of the information to be made public in accordance with paragraphs 2 to 5 is specified in Table 1 of Annex II. [(see REC 2.6.8 EU)]

REC 2.6.8 EU

Table 1 of Annex II to the MiFID Regulation: Information to be made public in accordance with Article 17 (see REC 2.6.9EU)

2 Type of system

Description of system

Summary of information to be made public, in accordance with Article 17

continuous auction order book trading system

a system that by means of an order book and a trading algorithm operated without human intervention matches sell orders with matching buy orders on the basis of the best available price on a continuous basis

the aggregate number of orders and the shares they represent at each price level, for at least the five best bid and offer price levels.

quote-driven trading system

a system where transactions are concluded on the basis of firm quotes that are continuously made available to participants, which requires the market makers to maintain quotes in a size that balances the needs of members and participants to deal in a commercial size and the risk to which the market maker exposes itself

the best bid and offer by price of each market maker in that share, together with the volumes attaching to those prices

periodic auction trading system

a system that matches orders on the basis of a periodic auction and a trading algorithm operated without human intervention

the price at which the auction trading system would best satisfy its trading algorithm and the volume that would potentially be executable at that price

trading system not covered by first three rows

A hybrid system falling into two or more of the first three rows or a system where the price determination process is of a different nature than that applicable to the types of system covered by [the] first three rows

adequate information as to the level of orders or quotes and of trading interest; in particular, the five best bid and offer price levels and/or two way quotes of each market maker in the share, if the characteristics of the price discovery mechanism so permit

REC 2.6.9 EU

Recital 14 to the MiFID Regulation

2A waiver from pre-transparency obligations arising under Articles 29 or 44 of [MiFID] [(see REC 2.6.3 UK)] ... should not enable [MiFID investment firms] to avoid such obligations in respect of those transactions in liquid shares which they conclude on a bilateral basis under the rules of a regulated market or an MTF where, if carried out outside the rules of the regulated market or MTF, those transactions would be subject to the requirements to publish quotes set out in Article 27 of [MiFID].

REC 2.6.10 EU

Article 18 of the MiFID Regulation

2 Waivers based on market model and type of order or transaction

(1)

Waivers in accordance with Article 29(2) and 44(2) of [MiFID] [(see REC 2.6.3 UK)] may be granted by the[FCA]5 for systems operated by an MTF or a regulated market, if those systems satisfy one of the following criteria:

5

(a)

they must be based on a trading methodology by which the price is determined in accordance with a reference price generated by another system, where that reference price is widely published and is regarded generally by market participants as a reliable reference price;

(b)

they formalise negotiated transactions [(see REC 2.6.11 EU)], each of which meets one of the following criteria:

(i)

it is made at or within the current volume weighted spread reflected on the order book or the quotes of the market makers of the regulated market or MTF operating that system or, where the share is not traded continuously, within a percentage of a suitable reference price, being a percentage and a reference price set in advance by the system operator;

(ii)

it is subject to conditions other than the current market price of the share [see REC 2.6.12 EU)].

For the purposes of point (b), the other conditions specified in the rules of the regulated market or MTF for a transaction of this kind must also have been fulfilled.

In the case of systems having functionality other than as described in points (a) or (b), the waiver shall not apply to that other functionality.

(2)

Waivers in accordance with Articles 29(2) and 44(2) of [MiFID] [(see REC 2.6.3 UK)], based on the type of orders may be granted only in relation to orders held in an order management facility maintained by the regulated market or the MTF pending their being disclosed to the market.

REC 2.6.11 EU

Article 19 of the MiFID Regulation

2 References to negotiated transaction

For the purpose of Article 18(1)(b) [(see REC 2.6.10 EU)] a negotiated transaction shall mean a transaction involving members or participants of a regulated market or an MTF which is negotiated privately but executed within the regulated market or MTF and where that member or participant in doing so undertakes one of the following tasks:

(a)

dealing on own account with another member or participant who acts for the account of a client;

(b)

dealing with another member or participant, where both are executing orders on own account;

(c)

acting for the account of both the buyer and seller;

(d)

acting for the account of the buyer, where another member or participant acts for the account of the seller;

(e)

trading for own account against a client order.

REC 2.6.12 EU

Article 3 of the MiFID Regulation

2 Transactions related to an individual share in a portfolio trade and volume weighted average price transactions

(1)

A transaction related to an individual share in a portfolio trade shall be considered, for the purposes of Article 18(1)(b)(ii) [(see REC 2.6.10 EU)], as a transaction subject to conditions other than the current market price.

(2)

A volume weighted average price transaction shall be considered, for the purposes of Article 18(1)(b)(ii) [(see REC 2.6.10 EU)], as a transaction subject to conditions other than the current market price.

REC 2.6.13 EU

Article 20 of the MiFID Regulation

2 Waivers in relation to transactions which are large in scale

An order shall be considered to be large in scale compared with normal market size if it is equal to or larger than the minimum size of order specified in Table 2 in Annex II [(see REC 2.6.14 EU)]. For the purposes of determining whether an order is large in scale compared to normal market size, all shares admitted to trading on a regulated market shall be classified in accordance with their average daily turnover, which shall be calculated in accordance with the procedure set out in Article 33.

REC 2.6.14 EU

Table 2 in Annex II to the MiFID Regulation: Orders large in scale compared with normal market size

2Class in terms of average daily turnover (ADT)

ADT < €500 000

€500 000 < ADT < €1 000 000

€1 000 000 < ADT < €25 000 000

€25 000 000 < ADT < €50 000 000

ADT < €50 000 000

Minimum size of order qualifying as large in scale compared with normal market size

€50 000

€100 000

€250 000

€400 000

€500 000

REC 2.6.15 EU

Article 27(1) of the MiFID Regulation

2 Post-trade transparency obligation

1.

... regulated markets, and ... market operators operating an MTF shall, with regard to transactions in respect of shares admitted to trading on regulated markets concluded ... within their systems, make public the following details:

(a)

the details specified in points 2, 3, 6, 16, 17, 18 and 21 of Table 1 of Annex I [(see REC 2.6.16 EU)]

(b)

an indication that the exchange of shares is determined by factors other than the current market valuation of the share, where applicable [(see REC 2.6.17 EU)];

(c)

an indication that the trade was a negotiated trade, where applicable;

(d)

any amendments to previously disclosed information, where applicable.

Those details shall be made public either by reference to each transaction or in a form aggregating the volume and price of all transactions in the same share taking place at the same price at the same time.

REC 2.6.16 EU

Points 2, 3, 6, 16, 17, 18 and 21 of Table 1 of Annex I of the MiFID Regulation

22.

Trading Day

The trading day on which the transaction was executed.

3.

Trading Time

The time at which the transaction was executed, reported in the local time of the competent authority to which the transaction will be reported, and the basis in which the transaction is reported expressed as Co-ordinated Universal Time (UTC) +/- hours.

6.

Instrument Identification

This shall consist in:

- a unique code to be decided by the competent authority (if any) to which the report is made identifying the [share] which is the subject of the transaction;

- if the [share] in question does not have a unique identification code, the report must include the name of the [share] ...

16.

Unit Price

The price per [share] excluding commission and (where relevant) accrued interest. ...

17.

Price Notation

The currency in which the price is expressed ...

18.

Quantity

The number of units of the [shares].

21.

Venue identification

Identification of the venue where the transaction was executed. That identification shall consist ... [of the regulated market or MTF's] ... unique harmonised identification code;

...

REC 2.6.17 EU

Article 3 of the MiFID Regulation

2 Transactions related to an individual share in a portfolio trade and volume weighted average price transactions

1.

A transaction related to an individual share in a portfolio trade ... shall ... be considered, for the purposes of Article 27(1)(b) [(see REC 2.6.15 EU)] as a transaction where the exchange of shares is determined by factors other than the current market valuation of the share.

2.

A volume weighted average price transaction ... shall be considered, for the purposes of Article 27(1)(b) [(see REC 2.6.15 EU)] as a transaction where the exchange of shares is determined by factors other than the current market valuation of the share.

REC 2.6.18 EU

Article 28 of the MiFID Regulation

2 Deferred publication of large transactions

The deferred publication of information in respect of transactions may be authorised, for a period no longer than the period specified in Table 4 in Annex II [(see REC 2.6.20 EU)] for the class of share and transaction concerned, provided the following criteria are satisfied:

(a)

the transaction is between [a MiFID investment firm] dealing on own account and a client of that firm;

(b)

the size of that transaction is equal to or exceeds the relevant minimum qualifying size, as specified in Table 4 in Annex II [(see REC 2.6.20 EU)].

In order to determine the relevant minimum qualifying size for the purposes of point (b), all shares admitted to trading on a regulated market shall be classified in accordance with their average daily turnover to be calculated in accordance with Article 33.

REC 2.6.19 EU

Article 29(3), second sentence of the MiFID Regulation

Each constituent transaction [of a portfolio trade] shall be assessed separately for the purposes of determining whether deferred publication in respect of that transaction is available under Article 28 (see REC 2.6.18 EU).

REC 2.6.20 EU

Table 4 in Annex II to the MiFID Regulation: Deferred publication thresholds and delays

2The table below shows, for each permitted delay for publication and each class of shares in terms of average daily turnover (ADT), the minimum qualifying size of transaction that will qualify for that delay in respect of a share of that type.

Class of shares in terms of average daily turnover (ADT)

ADT< €100 000

€100 000 < ADT < €1 000 000

€1 000 000 < ADT < €50 000 000

ADT < €50 000 000

Minimum qualifying size of transaction for permitted delay

Permitted delay for publication

60 minutes

€10 000

Greater of 5% of ADT and €25 000

Lower of 10% of ADT and €3 500 000

Lower of 10% of ADT and €7 500 000

180 minutes

€25 000

Greater of 15% of ADT and €75 000

Lower of 15% of ADT and €5 000 000

Lower of 20% of ADT and €15 000 000

Until end of trading day (or roll-over to noon of next trading day if trade undertaken in final 12 hours of trading day)

€45 000

Greater of 25% of ADT and €100 000

Lower of 25% of ADT and €10 000 000

Lower of 30% of ADT and €30 000 000

Until end of trading day next after trade

€60 000

Greater of 50% of ADT and €100 000

Greater of 50% of ADT and €1 000 000

100% of ADT

Until end of second trading day next after trade

€80 000

100% of ADT

100% of ADT

250% of ADT

Until end of third trading day next after trade

250% of ADT

250% of ADT

REC 2.6.21 EU

Article 29 of the MiFID Regulation

2Publication and availability of pre- and post-trade transparency data

1.

A regulated market [or] MTF ... shall be considered to publish pre-trade information on a continuous basis during normal trading hours if that information is published as soon as it becomes available during the normal trading hours of the regulated market [or] MTF concerned, and remains available until it is updated.

2.

Pre-trade information, and post-trade information relating to transactions taking place on [regulated markets or MTFs] and within normal trading hours, shall be made available as close to real time as possible. Post-trade information relating to such transactions shall be made available in any case within three minutes of the relevant transaction.

3.

Information relating to a portfolio trade shall be made available with respect to each constituent transaction as close to real time as possible, having regard to the need to allocate prices to particular shares. ...

4.

Post-trade information referring to transactions taking place on a [regulated market or MTF] but outside its normal trading hours shall be made public before the opening of the next trading day of the [regulated market or MTF] on which the transaction took place.

REC 2.6.22 EU

Recital 18 to the MiFID Regulation

2Information which is required to be made available as close to real time as possible should be made available as close to instantaneously as technically possible, assuming a reasonable level of efficiency and of expenditure on systems on the part of the person concerned. The information should only be published close to the three minute maximum limit in exceptional cases where the systems available do not allow for a publication in a shorter time

REC 2.6.23 EU

Article 30 of the MiFID Regulation

2 Public availability of pre- and post-trade information

... pre- and post-trade information shall be considered to be made public or available to the public if it is made available generally through one of the following to investors located in the Community:

(a)

the facilities of a regulated market or an MTF;

(b)

the facilities of a third party;

(c)

proprietary arrangements.

REC 2.6.24 EU

Article 32 of the MiFID Regulation

2 Arrangements for making information public

Any arrangement to make information public, adopted for the purposes of Article ... 30 [(see REC 2.6.23 EU)] ... , shall satisfy the following conditions:

(a)

it must include all reasonable steps necessary to ensure that the information to be published is reliable, monitored continuously for errors, and corrected as soon as errors are detected;

(b)

it must facilitate the consolidation of the data with similar data from other sources;

(c)

it must make the information available to the public on a non-discriminatory commercial basis at a reasonable cost.

REC 2.6.25 EU

[deleted]5

REC 2.6.26 G

2In determining whether:

  1. (1)

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

    5
  2. (2)

    [deleted]5

    5

as to afford proper protection to investors, the FCA5 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.

5
REC 2.6.27 G

2The FCA5 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:

5
  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 2.6.28 G

2In 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 FCA5 may have regard to the extent to which the UK RIE's rules and procedures:

5
  1. (1)

    are consistent with the Market Abuse Regulation6;

    6
  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 2.6.29 G

2In 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 FCA5 may have regard to whether the UK RIE's arrangements and practices:

5
  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. (2A)

    (2) does not apply to a UK RIE's markets for shares admitted to trading on a regulated market. For pre-trade and post-trade transparency for a UK RIE's markets for shares admitted to trading on a regulated market, see in particular REC 2.6.3 UK and REC 2.6.4 UK and REC 2.6.7 EU to REC 2.6.24 EU;

  4. (3)

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

  5. (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.

      5
REC 2.6.30 G
  1. (1)

    2The FCA5 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.

    5
  2. (2)

    (1) does not apply to a UK RIE's markets for shares admitted to trading on a regulated market. For pre-trade and post-trade transparency for a UK RIE's markets for shares admitted to trading on a regulated market, see in particular REC 2.6.3 UK and REC 2.6.4 UK and REC 2.6.7EU to REC 2.6.24 EU.

Waiver of pre-trade transparency requirements and deferral of post-trade transparency requirements

REC 2.6.31 G

2The FCA5 has exercised its power referred to in REC 2.6.3 UK(3) to waive the pre-trade transparency requirements referred to in REC 2.6.3 UK(1). The waivers granted are those based on market model (see REC 2.6.10 EU1), type of order (see REC 2.6.10 EU2) and transactions which are large in scale (see REC 2.6.13 EU). These waivers apply to all regulated markets and MTFs operated by UK RIEs.

5
REC 2.6.32 G

2The FCA5 has exercised its power referred to in REC 2.6.4 UK(3) to permit the deferral of the post-trade transparency requirements referred to in REC 2.6.4 UK(1). This permission is with respect to large transactions (see REC 2.6.17 EU). This permission applies to all regulated markets and MTFs operated by UK RIEs.

5

Arrangements for making information public4

REC 2.6.33 G

4The FCA5 considers that for the purposes of ensuring that published information is reliable, monitored continuously for errors, and corrected as soon as errors are detected (see REC 2.6.24 EU(a)), a verification process should be established which does not need to be external from the organisation of the publishing entity, but which should be an independent cross-check of the accuracy of the information generated by the trading process. This process should have the capability to at least identify price and volume anomalies, be systematic and conducted in real-time. The chosen process should be reasonable and proportionate in relation to the business.

5
REC 2.6.34 G
  1. (1)

    4In respect of arrangements facilitating the consolidation of data as required in REC 2.6.24 EU(b), the FCA5 considers information as being made public in accordance with REC 2.6.24 EU(b), if it:

    5
    1. (a)

      is accessible by automated electronic means in a machine-readable way;

    2. (b)

      utilises technology that facilitates consolidation of the data and permits commercially viable usage; and

    3. (c)

      is accompanied by instructions outlining how users can access the information.

  2. (2)

    The FCA5 considers that an arrangement fulfils the 'machine-readable' criteria where the data:

    5
    1. (a)

      is in a physical form that is designed to be read by a computer;

    2. (b)

      is in a location on a computer storage device where that location is known in advance by the party wishing to access the data; and

    3. (c)

      is in a format that is known in advance by the party wishing to access the data.

  3. (3)

    The FCA5 considers that publication on a non-machine-readable website would not meet the MiFID requirements.

    5
  4. (4)

    The FCA5 considers that information that is made public in accordance with REC 2.6.24 EU should conform to a consistent and structured format based on industry standards. Regulated markets or market operators operating an MTF can choose the structure that they use.

    5

REC 2.7 Access to facilities

REC 2.7.1 UK

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

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

access to the [UK RIE's] facilities is subject to criteria designed to protect the orderly functioning of the market and the interests of investors and is in accordance with paragraph 7B;

REC 2.7.1A UK

Schedule to the Recognition Requirements Regulations, Paragraph 7B

2(1)

The [UK RIE] must make transparent and non-discriminatory rules, based on objective criteria, governing access to, or membership of, its facilities.

(2)

In particular those rules must specify the obligations for users or members of its facilities arising from -

(a)

the constitution and administration of the [UK RIE];

(b)

rules relating to transactions on the market;

(c)

its professional standards for staff of any investment firm or credit institution having access to or membership of a financial market operated by the [UK RIE];

(d)

conditions established under sub-paragraph (3)(c) for access to or membership of a financial market operated by the [UK RIE] by persons other than investment firms or credit institutions; and

(e)

the rules and procedures for clearing and settlement of transactions concluded on a financial market operated by the [UK RIE].

(3)

Rules of the [UK RIE] about access to, or membership of, a financial market operated by it must permit the [UK RIE] to give access to or admit to membership (as the case may be) only -

(a)

an investment firm,

(b)

a credit institution, or

(c)

a person who -

(i)

is fit and proper,

(ii)

has a sufficient level of trading ability and competence,

(iii)

where applicable, has adequate organisational arrangements, and

(iv)

has sufficient resources for the role he is to perform, taking into account the [UK RIE's] arrangements under paragraph 4(2)(d).

(4)

Rules under this paragraph must enable -

(a)

an investment firm authorised under Article 5 of [MiFID], or

(b)

a credit institution authorised under the Banking Consolidation Directive,

by the competent authority of another EEA State (including a branch established in the United Kingdom of such a firm or institution) to have direct or remote access to or membership of, any financial market operated by the [UK RIE] on the same terms as a UK firm.

(5)

The [UK RIE] must make arrangements regularly to provide the [FCA]3 with a list of users or members of its facilities.

3

(6)

This paragraph is without prejudice to the generality of paragraph 4.

REC 2.7.1B UK

Schedule to the Recognition Requirements Regulations, Paragraph 7C

2(1)

This paragraph applies to [a UK RIE] which provides central counterparty, clearing or settlement facilities.

(2)

The [UK RIE] must make transparent and non-discriminatory rules based on objective criteria, governing access to those facilities.

(3)

The rules under sub-paragraph (2) must enable an investment firm or a credit institution authorised by the competent authority of another EEA State (including a branch established in the United Kingdom of such a firm or institution) to have access to those facilities on the same terms as a UK firm for the purposes of finalising or arranging the finalisation of transactions in financial instruments.

(4)

The [UK RIE] may refuse access to those facilities on legitimate commercial grounds.

REC 2.7.2 UK

[deleted]3

REC 2.7.2A UK

[deleted]3

REC 2.7.3 G

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 FCA3 may have regard to whether:

3
  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)

    [deleted]2

    2
  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).

REC 2.7.3A G

2 REC 2.7.3 G does not apply to a UK RIE's arrangements to grant access to investment firms or credit institutions.

Electronic access

REC 2.7.4 G

The FCA3 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:

3
  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 facilitation services3

REC 2.8.1 UK

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

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

satisfactory arrangements which comply with paragraph 7D 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);

REC 2.8.1A UK

Schedule to the Recognition Requirements Regulations, Paragraph 7D

2(1)

The rules of the [UK RIE] must permit a user or member of a regulated market operated by it to use whatever settlement facility he chooses for a transaction.

(2)

Sub-paragraph (1) only applies where -

(a)

such links and arrangements exist between the chosen settlement facility and any other settlement facility as are necessary to ensure the efficient and economic settlement of the transaction; and

(b)

the [UK RIE] is satisfied that the smooth and orderly functioning of the financial markets will be maintained.

REC 2.8.2 UK

[deleted]3

REC 2.8.3 G

In determining whether there are satisfactory arrangements for securing the timely discharge of the rights and liabilities of the parties to transactions, the FCA3 may have regard to the UK recognised body's:

3
  1. (1)

    rules and practices relating to clearing and settlement including its arrangements with another person for the provision of clearing and settlement services;3

  2. (2)

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

  3. (3)

    where relevant,3 arrangements for making deliveries and payments, in all relevant jurisdictions;

    3
  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

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

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

2 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;

REC 2.9.2 UK

[deleted]3

REC 2.9.3 G

In determining whether a UK recognised body has satisfactory arrangements for recording the transactions effected on its facilities,3 or cleared or to be cleared by another person3 by means of, its facilities, the FCA3 may have regard to:

3
  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 or clearing facilitation services3 to be effected, 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 or clearing facilitation service3 was effected; and

      33
    4. (d)

      the date and manner of settlement of the transaction.

REC 2.9.4 G

[deleted]3

3

REC 2.10 Financial crime and market abuse

REC 2.10.1 UK

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

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

appropriate measures (including the monitoring of transactions effected on the [UK RIE]) 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;

REC 2.10.2 UK

[deleted]3

REC 2.10.3 G

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 FCA3 may have regard to:

3
  1. (1)

    whether the rules of the UK recognised body enable it to disclose any information to the FCA,3 or other appropriate bodies involved in the detection, prevention or pursuit of market abuse or financial crime in the United Kingdom or overseas; and

    3
  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

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

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

2 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.

REC 2.11.2 UK

[deleted]3

REC 2.11.3 G

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 FCA3 may have regard to:

3
  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

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 4Availability of relevant information and admission of financial instruments to trading4 (UK RIEs only)

REC 2.12.1 UK

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

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

(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];

REC 2.12.2 UK

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

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

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

REC 2.12.2A UK

Schedule to the Recognition Requirements Regulations, Paragraph 7A

4(1)

The [UK RIE] must make clear and transparent rules concerning the admission of financial instruments to trading on any financial market operated by it.

(2)

The rules must ensure that all financial instruments admitted to trading on any regulated market operated by the [UK RIE] are capable of being traded in a fair, orderly and efficient manner (in accordance with Chapter V of the [MiFID Regulation], where applicable).

(3)

The rules must ensure that -

(a)

all transferable securities admitted to trading on a regulated market operated by the [UK RIE] are freely negotiable (in accordance with Chapter V of the [MiFID Regulation], where applicable); and

(b)

all contracts for derivatives admitted to trading on a regulated market operated by the [UK RIE] are designed so as to allow for their orderly pricing as well as for the existence of effective settlement conditions.

(4)

The [UK RIE] must maintain arrangements to provide sufficient publicly available information (or satisfy itself that sufficient information is publicly available) to enable the users of a multilateral trading facility operated by it to form investment judgments, taking into account both the nature of the users and the types of instrument traded.

(5)

The [UK RIE] must maintain effective arrangements to verify that issuers of transferable securities admitted to trading on a regulated market operated by it comply with the disclosure obligations.

(6)

The [UK RIE] must maintain arrangements to assist users of a regulated market operated by it to obtain access to information made public under the disclosure obligations.

(7)

The [UK RIE] must maintain arrangements regularly to review whether the financial instruments admitted to trading on a regulated market operated by it comply with the admission requirements for those instruments.

(8)

The rules must provide that where a [UK RIE], without obtaining the consent of the issuer, admits to trading on a regulated market operated by it a transferable security which has been admitted to trading on another regulated market, the [UK RIE] -

(a)

must inform the issuer of that security as soon as is reasonably practicable; and

(b)

may not require the issuer of that security to demonstrate compliance with the disclosure obligations.

(9)

The rules must provide that where a [UK RIE], without obtaining the consent of the issuer, admits to trading on a multilateral trading facility operated by it a transferable security which has been admitted to trading on a regulated market, it may not require the issuer of that security to demonstrate compliance with the disclosure obligations.

...

(11)

This paragraph is without prejudice to the generality of paragraph 4.

REC 2.12.2B EU

Article 35 of the MiFID Regulation

4 Transferable securities

1.

Transferable securities shall be considered freely negotiable for the purposes of Article 40(1) of [MiFID] [(see REC 2.12.2A UK)] if they can be traded between the parties to a transaction, and subsequently transferred without restriction, and if all securities within the same class as the security in question are fungible.

2.

Transferable securities which are subject to a restriction on transfer shall not be considered as freely negotiable unless the restriction is not likely to disturb the market.

3.

Transferable securities that are not fully paid may be considered as freely negotiable, if arrangements have been made to ensure that the negotiability of such securities is not restricted and that adequate information concerning the fact that the securities are not fully paid, and the implications of that fact for shareholders, is publicly available.

4.

When exercising its discretion whether to admit a share to trading, a regulated market shall, in assessing whether the share is capable of being traded in a fair, orderly and efficient manner, take into account the following:

(a)

the distribution of those shares to the public; and

(b)

such historical financial information, information about the issuer, and information providing a business overview as is required to be prepared under [the PD], or is or will be otherwise publicly available.

5.

A transferable security that is officially listed in accordance with [CARD], and the listing of which is not suspended, shall be deemed to be freely negotiable and capable of being traded in a fair, orderly and efficient manner.

6.

For the purposes of Article 40(1) of [MiFID] [(see REC 2.12.2A UK)], when assessing whether a transferable security referred to Article 4(1)(18)(c) of [MiFID] is capable of being traded in a fair, orderly and efficient manner, the regulated market shall take into account, depending on the nature of the security being admitted, whether the following criteria are satisfied:

(a)

the terms of the security are clear and unambiguous and allow for a correlation between the price of the security and the price or other value measure of the underlying;

(b)

the price or other value measure of the underlying is reliable and publicly available;

(c)

there is sufficient information publicly available of a kind needed to value the security;

(d)

the arrangements for determining the settlement price of the security ensure that this price properly reflects the price or other value measure of the underlying;

(e)

where the settlement of the security requires or provides for the possibility of the delivery of an underlying security or asset rather than cash settlement, there are adequate settlement and delivery procedures for that underlying as well as adequate arrangements to obtain relevant information about that underlying.

REC 2.12.2C EU

Recital 19 to the MiFID Regulation

4For the purposes of the provisions of [the MiFID Regulation] as to the admission to trading on a regulated market of a transferable security as defined in article 4(1)(18)(c) of [MiFID], [(see REC 2.12.2B EU6(c))], in the case of a security within the meaning of [the PD], there should be considered to be sufficient information publicly available of a kind needed to value that financial instrument.

REC 2.12.2D EU

Article 36 of the MiFID Regulation

4 Units in collective investment undertakings

1.

A regulated market shall, when admitting to trading units in a collective investment undertaking, whether or not that undertaking is constituted in accordance with [the UCITS Directive], satisfy itself that the collective investment undertaking complies or has complied with the registration, notification or other procedures which are a necessary precondition for the marketing of the collective investment undertaking in the jurisdiction of the regulated market.

2.

Without prejudice to [the UCITS Directive] or any other Community legislation or national law relating to collective investment undertakings, Member States may provide that compliance with the requirements referred to in paragraph 1 is not a necessary precondition for the admission of units in a collective investment undertaking to trading on a regulated market.

3.

When assessing whether units in an open-ended collective investment undertaking are capable of being traded in a fair, orderly and efficient manner in accordance with Article 40(1) of [MiFID] [(see REC 2.12.2A UK)], the regulated market shall take the following aspects into account:

(a)

the distribution of those units to the public;

(b)

whether there are appropriate market-making arrangements, or whether the management company of the scheme provides appropriate alternative arrangements for investors to redeem the units;

(c)

whether the value of the units is made sufficiently transparent to investors by means of the periodic publication of the net asset value.

4.

When assessing whether units in a closed-end collective investment undertaking are capable of being traded in a fair, orderly and efficient manner, in accordance with Article 40(1) of [MiFID] [(see REC 2.12.2A UK)], the regulated market shall take the following aspects into account:

(a)

the distribution of those units to the public;

(b)

whether the value of the units is made sufficiently transparent to investors, either by publication of information on the fund's investment strategy or by the periodic publication of net asset value.

REC 2.12.2E EU

Article 37 of the MiFID Regulation

4 Derivatives

1.

When admitting to trading a financial instrument of a kind listed in points 4 to 10 of Section C of Annex I to [MiFID], regulated markets shall verify that the following conditions are satisfied:

(a)

the terms of the contract establishing the financial instrument must be clear and unambiguous, and enable a correlation between the price of the financial instrument and the price or other value measure of the underlying;

(b)

the price or other value measure of the underlying must be reliable and publicly available;

(c)

sufficient information of a kind needed to value the derivative must be publicly available;

(d)

the arrangements for determining the settlement price of the contract must be such that the price properly reflects the price or other value measure of the underlying;

(e)

where the settlement of the derivative requires or provides for the possibility of the delivery of an underlying security or asset rather than cash settlement, there must be adequate arrangements to enable market participants to obtain relevant information about that underlying, as well as adequate settlement and delivery procedures for the underlying.

2.

Where the financial instruments concerned are of a kind listed in Sections C (5), (6), (7) or (10) of Annex I to [MiFID], point (b) of paragraph 1 shall not apply if the following conditions are satisfied:

(a)

the contract establishing that instrument must be likely to provide a means of disclosing to the market, or enabling the market to assess, the price or other value measure of the underlying, where the price or value measure is not otherwise publicly available;

(b)

the regulated market must ensure that appropriate supervisory arrangements are in place to monitor trading and settlement in such financial instruments;

(c)

the regulated market must ensure that settlement and delivery, whether physical delivery or by cash settlement, can be effected in accordance with the contract terms and conditions of those financial instruments.

REC 2.12.3 D

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REC 2.12.4 G

[deleted]4

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REC 2.12.5 G

[deleted]4

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REC 2.12.6 G

[deleted]4

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REC 2.12.7 G

[deleted]4

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REC 2.12.8 G

[deleted]4

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REC 2.12.9 G

[deleted]4

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REC 2.12.10 G

[deleted]4

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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 FCA5 may have regard to:

5
  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 Market Abuse Regulation6.

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.

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REC 2.12.13 G

[deleted]23

3

4Rules concerning the admission of financial instruments to trading on a multilateral trading facility

REC 2.12.14 G

4In determining whether a UK RIE has clear and transparent rules concerning the admission of financial instruments to trading on any multilateral trading facility operated by it, the FCA5 considers that it is reasonable that the rules be based on criteria designed to promote fair and orderly trading (see REC 2.6.2 UK). In determining whether the rules are based on such criteria, the FCA5 may have regard to:

5 5
  1. (1)

    whether there is a sufficient range of persons already holding the financial instrument (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 financial instrument, or the amounts of the financial instrument which may be held; and

  3. (3)

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

REC 2.13 Promotion and maintenance of standards

REC 2.13.1 UK

Schedule to the Recognition Requirements Regulations, Paragraph 6

2 (1) The [UK RIE] must be able and willing to promote and maintain high standards of integrity and fair dealing in the carrying on of regulated 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 [FCA].4with 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.

4
REC 2.13.2 UK

[deleted]4

REC 2.13.3 G

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 FCA4 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 Market Abuse Regulation5 and with any5 codes of conduct, rules or principles relating to behaviour in regulated activities which users of the UK3financial system would normally expect to apply to the regulated activity and the conduct in question.

4 3
REC 2.13.4 G

In assessing the ability of a UK recognised body to cooperate with the FCA4 and other appropriate bodies, the FCA4 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 FCA4 and other appropriate bodies.

4 4 4
REC 2.13.5 G

In assessing the willingness of a UK recognised body to cooperate with the FCA4 and other appropriate bodies, the FCA4 may have regard to:

4 4
  1. (1)

    the extent to which the UK recognised body is willing to provide information about it and its activities to assist the FCA4 in the exercise of its functions;

    4
  2. (2)

    the extent to which the UK recognised body is open with the FCA4 or other appropriate bodies in regulatory matters;

    4
  3. (3)

    how diligently the UK recognised body investigates or pursues enquiries from the FCA4 or other appropriate bodies; and

    4
  4. (4)

    whether the UK recognised body participates in appropriate international fora.

REC 2.13.6 G

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

Schedule to the Recognition Requirements Regulations, paragraph 7

2 (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 ] facilitiesin 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).

REC 2.14.2 UK

[deleted]3

REC 2.14.3 G

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 FCA3 may have regard to:

3
  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
  1. (1)

    In determining whether a UK recognised body's procedures include procedures for consulting users of its facilities in appropriate cases, the FCA3 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.

    3
  2. (2)

    In the FCA's3 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.

    3
REC 2.14.5 G
  1. (1)

    In determining whether a UK recognised body's procedures for consulting members and other users of its facilities are appropriate, the FCA3 may have regard to the range of persons to be consulted by the UK recognised body under those procedures.

    3
  2. (2)

    In the FCA's3 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. (3)

    In the FCA's3 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.

    3
REC 2.14.6 G

In determining whether a UK recognised body's procedures for consulting members and other users of its facilities are appropriate, the FCA3 may have regard to the extent to which the procedures include:

3
  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

Schedule to the Recognition Requirements Regulations, Paragraph 8

2 (1)

The [UK RIE] must have -

(a)

effective arrangements (which include the monitoring of transactions effected on the [UK RIE]) for monitoring and enforcing compliance with its rules, including rules in relation to the provision of clearing services in respect of transactions other than transactions effected on the [UK RIE]);

(b)

effective arrangements for monitoring and enforcing compliance with the arrangements made by it as mentioned in paragraph 4(2)(d); and

(c)

effective arrangements for monitoring transactions effected on the [UK RIE] in order to identify disorderly trading conditions.

(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.

REC 2.15.2 UK

[deleted]3

REC 2.15.3 G

In determining whether a UK recognised body has effective arrangements for monitoring and enforcing compliance with its rules (including3 its settlement arrangements), the FCA3 may have regard to:

3 3
  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

In assessing whether the procedures made by a UK recognised body to investigate complaints about the users of its facilities are satisfactory, the FCA3 may have regard to:

3
  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

In assessing whether the arrangements include procedures for the fair, independent and impartial resolution of appeals against decisions of a UK recognised body, the FCA3 may have regard to at least the following factors:

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  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

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 FCA3 may have regard to:

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  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 FCA3 does not consider that it is necessary for UK recognised bodies to follow any specific policy in order to meet this recognition requirement.

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REC 2.16 Complaints

REC 2.16.1 UK

Schedule to the Recognition Requirements Regulations, Paragraph 9

2 (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].

REC 2.16.2 UK

[deleted]3

REC 2.16.3 G

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 FCA3 may have regard to the extent to which the UK recognised body's resources and procedures enable it to:

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  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

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 FCA3 may have regard to:

3
  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 2.16A Operation of a multilateral trading facility

REC 2.16A.1 UK

Schedule to the Recognition Requirements Regulations, Paragraph 9A

1(1)

[A UK RIE] operating a multilateral trading facility must also operate a regulated market.

(2)

[A UK RIE] operating a multilateral trading facility must comply with those requirements of-

(a)

Chapter I of Title II of [MiFID], and

(b)

MiFID implementing Directive,

which are applicable to a market operator ... operating such a facility.

(3)

The requirements of this paragraph do not apply for the purposes of section 292(3)(a) of the Act (requirements for overseas investment exchanges and overseas clearing houses).

REC 2.16A.2 G

1In determining whether a UK RIE operating a multilateral trading facility complies with those requirements of Chapter I of Title II of MiFID and the MiFID implementing Directive which are applicable to a market operator operating such a facility, the FCA2 will have regard to the compliance of the UK RIE with equivalent recognition requirements.

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REC 2.17 Recognition requirements relating to the default rules of UK RIEs

REC 2.17.1 G

The text of part of regulation 3 (Interpretation) of and 3Parts II and IV of the Schedule to the Recognition Requirements Regulations is set out below.

REC 2.17.1A UK

3Regulation 3 (Interpretation) of the Recognition Requirements Regulations:

..."default fund" means the sum of the default fund contributions by the members or designated non-members of a [recognised investment exchange] to that exchange or by one [recognised investment exchange] to another or by the members of a [recognised clearing house] to that clearing house or by one [recognised clearing house] to another to the extent those contributions have not been returned or otherwise applied;

"default fund contribution" has the same meaning as in section 188(3A) of the Companies Act [1989];"...

REC 2.17.2 UK

Schedule to the Recognition Requirements Regulations, Part II

2 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 for the purposes of or in connection with the provision of clearing services for the [UK RIE].

3 (4)

Sub-paragraph (5) applies where the exchange has arrangements for transacting business with, or in relation to common members of, a [ recognised clearing house ] or another [ recognised investment exchange ].

3 (5)

A [ UK RIE ] must have [ default rules ] which in the event of the clearing house or the investment exchange being or appearing to be unable to meet its obligations in respect of one or more [ market contracts ], enable action to be taken in respect of unsettled [ market contracts ] to which that person is a party.

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) or (c) of the Companies Act [1989]. 3

(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 entered into by the defaulter in one capacity for the purposes of section 187 of the Companies Act [1989] to be aggregated or set off so as to produce a net sum; 3

3 (bb)

if relevant, for that sum to be aggregated with, or set off against, any sum owed by or to the investment exchange by or to AP under an indemnity given or reimbursement or similar obligation in respect of a margin set off agreement in which the defaulter chose to participate so as to produce a net sum;

(c)

for the net sum referred to in [(2)](b) or, if relevant, the net sum referred to in [(2)](bb) - 3

3

(i)

if payable by the defaulter to the exchange, to be set off against - 3

3

(aa) any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property); 3

(bb) to the extent (if any) that any sum remains after set off under (aa), any default fund contribution provided by the defaulter remaining after any application of such contribution; 3

(ii)

to the extent (if any) that any sum remains after set off under (i), to be paid from such other funds, including the default fund, or resources as the exchange may apply under its default rules ; 3

3

(iii)

if payable by the exchange to the defaulter, to be aggregated with - 3

(aa) any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property); 3

(bb) any default fund contribution provided by the defaulter remaining after any application of such contribution; and 3

(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 (2A)

In sub-paragraph (2), "margin set off agreement" means an agreement between the exchange and AP permitting any eligible position to which the Participant Member is party with the exchange and any eligible position to which the Participant Member is party with AP to be taken into account in calculating a net sum owed by or to the Participant Member to either the exchange or AP and/or margin to be provided to, either or both, the exchange and AP.

3 (2B)

In sub-paragraph (2) -

"AP" means a [ recognised clearing house ] or another [ recognised investment exchange ] of whom a Participant Member is a member;

"eligible position" means any position which may be included in the set off calculation;

"Participant Member" means a person who

(a) is a member of the exchange;

(b) is a member or participant of AP; and

(c) chooses to participate, in accordance with the rules of the exchange, in such agreement.

3 (2C)

The property, contribution, funds or resources referred to in (2)(c), against which the net sum is to be set off (or with which it is to be aggregated) are subject to any unsatisfied claims arising out of the default of a defaulter before the default in relation to which the calculation is being made.

(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.

3 Paragraph 12A (Content of rules)

3 The rules of the [ UK RIE ] must provide that, in the event of a default, any default fund contribution provided by the defaulter shall only be used in accordance with paragraph 12(2)(c)(i) or (ii).

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] or the default of a [recognised clearing house] or another [recognised investment exchange].34

REC 2.17.3 UK

[deleted]4

REC 2.17.4 G

[deleted]4

3 4
REC 2.17.5 G

[deleted]4

4
REC 2.17.6 G

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.