Related provisions for REC 2.14.1

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REC 2.5.1UKRP

Schedule to the Recognition Requirements Regulations, paragraphs 3 – 3H4

Paragraph 3 – Systems and controls4

(1)

The [UK RIE] must ensure that the systems and controls, including procedures and arrangements,4 used in the performance of its functions and the functions of the trading venues it operates are adequate, effective4 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.

4(f)

the resilience of its trading systems;

4[Note:MiFID RTS 7 contains requirements on the resilience of trading systems operated by trading venues that enable algorithmic trading]

4(g)

the ability to have sufficient capacity to deal with peak order and message volumes;

4[Note:MiFID RTS 7 contains requirements on the adequacy of capacity of trading systems operated by trading venues that enable algorithmic trading]

4(h)

the ability to ensure orderly trading under conditions of severe market stress;

4(i)

the effectiveness of business continuity arrangements to ensure the continuity of the [UK RIE’s] services if there is any failure of its trading systems including the testing of the [UK RIE’s] systems and controls;

4(j)

the ability to reject orders that exceed predetermined volume or price thresholds or which are clearly erroneous;

4(k)

the ability to ensure algorithmic trading systems cannot create or contribute to disorderly trading conditions on trading venues operated by the [UK RIE];

4(l)

the ability to ensure disorderly trading conditions which arise from the use of algorithmic trading systems, including systems to limit the ratio of unexecuted orders to transactions that may be entered into the [UK RIE’s] trading system by a member or participant are capable of being managed;

[Note:MiFID RTS 9 contains requirements on the ratio of unexecuted orders to transactions to be taken into account by a trading venue that operates electronic continuous auction order book, quote-driven or hybrid trading systems]

4(m)

the ability to ensure the flow of orders is able to be slowed down if there is a risk of system capacity being reached;

4(n)

the ability to limit and enforce the minimum tick size which may be executed on its trading venues; and

4(o)

the requirement for members and participants to carry out appropriate testing of algorithms.

4[Note:MiFID RTS 7 contains requirements on the appropriate testing of algorithms to ensure that trading systems, when they enable algorithmic trading, cannot create or contribute to disorderly trading conditions]

4(3)

For the purposes of sub-paragraph 2(c), the [UK RIE] must -

4(a)

establish and maintain effective arrangements and procedures including the necessary resource for the regular monitoring of the compliance by members or participants with its rules; and

4(b)

monitor orders sent including cancellations and the transactions undertaken by its members or participants under its systems in order to identify infringements of those rules, disorderly trading conditions or conduct that may indicate behavior that is prohibited under the market abuse regulation or system disruptions in relation to a financial instrument.

4(4)

For the purpose of sub-paragraph (2)(o) the [UK RIE] must provide environments to facilitate such testing.

4(5)

The [UK RIE] must be adequately equipped to manage the risks to which it is exposed, to implement appropriate arrangements and systems to identify all significant risks to its operation, and to put in place effective measures to mitigate those risks.

4Paragraph 3A – Market making arrangements

4(1)

The [UK RIE] must -

4(a)

have written agreements with all investment firms pursuing a market making strategy on trading venues operated by it (“market making agreements”);

4(b)

have schemes, appropriate to the nature and scale of a trading venue, to ensure that a sufficient number of investment firms enter into such agreements which require them to post firm quotes at competitive prices with the result of providing liquidity to the market on a regular and predictable basis;

4(c)

monitor and enforce compliance with the market making agreements;

4(d)

inform the FCA of the content of its market making agreements; and

4(e)

provide the FCA with any information it requests which is necessary for the FCA to satisfy itself that the market making agreements comply with paragraphs (c) and (d) of this sub-paragraph and sub-paragraph 2.

4(2)

A market making agreement must specify-

4(a)

the obligations of the investment firm in relation to the provision of liquidity;

4(b)

where applicable, any obligations arising from the participation in a scheme mentioned in sub-paragraph (1)(b);

4(c)

any incentives in terms of rebates or otherwise offered by the [UK RIE] to the investment firm in order for it to provide liquidity to the market on a regular and predictable basis; and

4(d)

where applicable, any other rights accruing to the investment firm as a result of participation in the scheme referred to in sub-paragraph (1)(b).

4(3)

For the purposes of this paragraph, an investment firm pursues a market making strategy if -

4(a)

the firm is a member or participant of one or more trading venues;

4(b)

the firm’s strategy, when dealing on own account, involves posting firm, simultaneous two-way quotes of comparable size at competitive prices relating to one or more financial instruments on a single trading venue, across different trading venues; and

4(c)

the result is providing liquidity on a regular and frequent basis to the overall market.

4Paragraph 3B – Halting trading

4(1)

The [UK RIE] must be able to -

4(a)

temporarily halt or constrain trading on any trading venue operated by it if there is a significant price movement in a financial instrument on such a trading venue or a related trading venue during a short period; and

4(b)

in exceptional cases be able to cancel, vary, or correct any transaction.

4(2)

For the purposes of sub-paragraph (1), the [UK RIE] must ensure that the parameters for halting trading are appropriately calibrated in a way which takes into account -

4(a)

the liquidity of different asset classes and subclasses;

4(b)

the nature of the trading venue market model; and

4(c)

the types of users,

4to ensure the parameters are sufficient to avoid significant disruptions to the orderliness of trading.

4(3)

The [UK RIE] must report the parameters mentioned in sub-paragraph (2) and any material changes to those parameters to the FCA in a format to be specified by the FCA.

4(4)

If a trading venue operated by the [UK RIE] is material in terms of liquidity of the trading of a financial instrument and it halts trading in an EEA State in that instrument it must have systems and procedures in place to ensure that it notifies the FCA.

4[Note:MiFID RTS 12 contains requirements for when a regulated market is material in terms of liquidity in a financial instrument for purposes of trading halt notifications]

4Paragraph 3C – Direct electronic access

4Where the [UK RIE] permits direct electronic access to a trading venue it operates, it must -

4(1)

(a)

ensure that a member of, or participant in that trading venue is only permitted to provide direct electronic access to the venue if the member or participant -

4(i)

is an investment firm, as defined by Article 4.1.1 of the markets in financial instruments directive (definitions), authorised in accordance with the directive;

4(ii)

is a credit institution authorised in accordance with the capital requirements directive;

4(iii)

comes within Article 2.1(a), (e), (i), or (j) of the markets in financial instruments directive (exemptions) and has a Part 4A permission relating to investment services and activities;

4(iv)

is a third country firm providing the direct electronic access in the course of exercising rights under Article 46.1 (general provisions) or 47.3 (equivalence decision) of the markets in financial instruments regulation;

4(v)

is a third country firm and the provision of the direct electronic access by that firm is subject to the exclusion in Article 72 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; or

4(vi)

is a third country firm which does not come within paragraph (iv) or (v) and is otherwise permitted to provide the direct electronic access under the Act;

4(b)

ensure that appropriate criteria are set and applied for the suitability of persons to whom direct electronic access services may be provided;

4(c)

ensure that a member of, or participant in, the trading venue retains responsibility for adherence to the requirements of the markets in financial instruments directive in respect of orders and trades executed using the direct electronic access service;

4(d)

set appropriate standards regarding risk controls and thresholds on trading through direct electronic access;

4(e)

be able to distinguish and if necessary stop orders or trading on that trading venue by a person using direct electronic access separately from -

4(i)

other orders; or

4(ii)

trading by the member or participant providing the direct electronic access; and

4(f)

have arrangements in place to suspend or terminate the provision to a client of direct electronic access to that trading venue by a member of, or participant in, the trading venue in the case of non-compliance with this paragraph.

4[Note:MiFID RTS 7 contains requirements on direct electronic access permitted through a trading venue’s systems]

4Paragraph 3D – Co-location services

4(1)

The [UK RIE’s] rules on colocation services must be transparent, fair and nondiscriminatory.

4[Note:MiFID RTS 10 contains requirements to ensure co-location services are transparent, fair and non-discriminatory]

4Paragraph 3E – Fee structures

4(1)

The [UK RIE’s] fee structure, for all fees it charges including execution fees and ancillary fees and rebates it grants, must -

4(a)

be transparent, fair and non-discriminatory;

4[Note:MiFID RTS 10 contains requirements to ensure fee structures are transparent, fair and non-discriminatory]

4(b)

not create incentives to place, modify or cancel orders, or execute transactions, in a way which contributes to disorderly trading conditions or market abuse; and

4[Note:MiFID RTS 10 contains requirements concerning prohibited fee structures]

4(c)

impose market making obligations in individual shares or suitable baskets of shares for any rebates that are granted.

4(2)

Nothing in sub-paragraph (1) prevents the [UK RIE] from -

4(a)

adjusting its fees for cancelled orders according to the length of time for which the order was maintained;

4(b)

calibrating its fees to each financial instrument to which they apply;

4(c)

imposing a higher fee -

4(i)

for placing an order which is cancelled than an order which is executed;

4(ii)

on participants placing a high ratio of cancelled orders to executed orders; or

4(iii)

on a person operating a high-frequency algorithmic trading technique,

4in order to reflect the additional burden on system capacity.

4Paragraph 3F – Algorithmic trading

4(1)

The [UK RIE] must require members of and participants in trading venues operated by it to flag orders generated by algorithmic trading in order for it to be able to identify the -

4(a)

the different algorithms used for the creation of orders; and

4(b)

the persons initiating those orders.

4Paragraph 3G – Tick size regimes

4(1)

The [UK RIE] must adopt tick size regimes in respect of trading venues operated by it in -

4(a)

shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments traded on each trading venue; and

4[Note:MiFID RTS 11 contains requirements on the tick size regime for shares, depositary receipts, exchange traded funds and certificates5]

4(b)

any financial instrument for which regulatory technical standards are adopted by the European Commission pursuant to Article 49.3 or 4 of the markets in financial instruments directive which is traded on that trading venue.

[Note:MiFID RTS 11]

4 (2)

The tick size regime must -

4(a)

be calibrated to reflect the liquidity profile of the financial instrument in different markets and the average bid-ask spread taking into account desirability of enabling reasonably stable prices without unduly constraining further narrowing of spreads; and

4(b)

adapt the tick size for each financial instrument appropriately.

4(3)

The tick size regime must comply with any regulatory technical standards adopted by the European Commission pursuant to Article 49.3 or 4 of the markets in financial instruments directive.

4[Note:MiFID RTS 11]

4Paragraph 3H – Syncronisation of business clocks

4(1)

The [UK RIE] must synchronise the business clocks it uses to record the date and time of any reportable event in accordance with regulatory technical standards adopted by the European Commission pursuant to Article 50 of the markets in financial instruments directive.

4[Note:MiFID RTS 25]

REC 2.1.4GRP

Location of recognition requirements and guidance

Recognition Requirements Regulations

Subject

Section in REC 2/other parts of the Handbook5

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

5Paragraphs 2A and 2B

Management Body

2.4A

Paragraphs 3, 3A, 3B, 3C, 3D, 3E, 3G and 3H5

Systems and controls, market making agreements, halting trading, direct electronic access, co-location services, fee structures, algorithmic trading, tick size regimes, synchronisation of business clocks5

2.5

Paragraphs 4(1), 4(2)(aa) and 4C5

22

General safeguards for investors and publication of data regarding execution of transactions5

2.6

Paragraph 4(2)(a)

Access to facilities

2.7

5

5

5

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) and 4(2)(fa)5

Financial crime and market abuse

2.10

Paragraph 4(2)(g)

Custody

2.11

Paragraph 4(3)

Definition of relevant information

2.12

5

2

5

5

5

2

5

5

Paragraph 6

Promotion and maintenance of standards

2.13

Paragraph 7

Rules and consultation

2.14

Paragraphs 7A and 9ZB (regulated markets only)5

2

Admission of financial instruments to trading

2.12

Paragraphs 7B, 7C and 9ZC (regulated markets only)5

2

Access to facilities

2.7

5Paragraphs 7BA & 7BB

Position management and position reporting re commodity derivatives

2.7A

2Paragraph 7D

Settlement and clearing facilitation services5

2.8

Paragraphs 7E and 7F5

2

Suspension and removal of financial instruments from trading

2.6

Paragraph 8

Discipline

2.15

Paragraph 9

Complaints

2.16

Paragraphs 9A, 9B, 9C, 9D, 9E, 9F, 9G, 9H and 9ZD5

2

Operation of a multilateral trading facility or an organised trading facility5

2.16A/MAR 5 and MAR 5A

5Paragraph 9ZA (regulated markets only)

Order execution

2.6

5Paragraph 9K

Provision of data reporting services

2.16B/ MAR 9

Part II of the Schedule

UK RIE default rules in respect of market contracts

2.174