CHAPTER I GENERAL ORGANISATIONAL REQUIREMENTS FOR TRADING VENUES ENABLING OR ALLOWING ALGORITHMIC TRADING THROUGH THEIR SYSTEMS
In this Regulation, ‘IP completion day’ has the meaning given in the European Union (Withdrawal) Act 2020.
In this Regulation, ‘IP completion day’ has the meaning given in the European Union (Withdrawal) Act 2020.
This Regulation applies to operators of UK trading venues, as defined by article 2(1)(16A) of Regulation 600/2014/EU.
Where a term is defined in article 4 of Directive 2014/65/EU, the same definition applies for this Regulation except that:
where it is defined in article 2 of Regulation 600/2014/EU, as amended by the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, in which case that definition shall apply for the purposes of this Regulation;
in the case of ‘algorithmic trading’ and ‘direct electronic access’ or ‘DEA’ which are as defined in regulation 2(1) of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017;
in the case of the definition of ‘senior management’, where the definition in the Handbook of Rules and Guidance published by the Financial Conduct Authority immediately after IP completion day shall apply.
References to UK law corresponding to EU legislation include any primary or secondary legislation or regulators’ requirements which were relied upon by the United Kingdom immediately before IP completion day to give effect to that EU legislation.
Article 2(1)(62) of Regulation 600/2014/EU shall apply for the purposes of this Regulation.
This Regulation lays down detailed rules for the organisational requirements of the systems of the trading venues allowing or enabling algorithmic trading, in relation to their resilience and capacity, requirements on trading venues to ensure appropriate testing of algorithms and requirements in relation to the controls concerning DEA pursuant to the UK law corresponding to Article 48(12)(a),(b) and (g) of Directive 2014/65/EU.
For the purposes of this Regulation, it is considered that a trading venue allows or enables algorithmic trading where order submission and order matching is facilitated by electronic means.
For the purposes of this Regulation, any arrangements or systems that allow or enable algorithmic trading shall be considered "algorithmic trading systems".
Before the deployment of a trading system and at least once a year, trading venues shall carry out a self-assessment of their compliance with the UK law corresponding to Article 48 of Directive 2014/65/EU, taking into account the nature, scale and complexity of their business. The self-assessment shall include an analysis of all parameters set out in the Annex to this Regulation.
Trading venues shall keep a record of their self-assessment for at least five years.
As part of their overall governance and decision making framework, trading venues shall establish and monitor their trading systems through a clear and formalised governance arrangement setting out:
their analysis of technical, risk and compliance issues when taking critical decisions.
clear lines of accountability, including procedures to approve the development, deployment and subsequent updates of trading systems and to resolve problems identified when monitoring the trading systems;
effective procedures for the communication of information such that instructions can be sought and implemented in an efficient and timely manner;
separation of tasks and responsibilities, to ensure effective supervision of compliance by the trading venues.
The management body or the senior management of trading venues shall approve:
the self-assessment of compliance in accordance with Article 2;
measures to expand the capacity of the trading venue where necessary in order to comply with Article 11;
actions to remedy any material shortcomings detected in the course of their monitoring in accordance with Articles 12 and 13 and after the periodic review of the performance and capacity of the trading systems in accordance with Article 14.
Trading venues shall ensure that their compliance function is responsible for:
providing clarity to all staff involved in algorithmic trading about the trading venues' legal obligations with respect to such trading;
developing and maintaining the policies and procedures to ensure that the algorithmic trading systems comply with those obligations.
Trading venues shall ensure that their compliance staff has at least a general understanding of the way in which algorithmic trading systems and algorithms operate.
The compliance staff shall be in continuous contact with persons within the trading venue who have detailed technical knowledge of the venue's algorithmic trading systems or algorithms.
Trading venues shall also ensure that compliance staff have, at all times, direct contact with persons who have access to the functionality referred to in Article 18(2)(c) ("kill functionality") or access to that kill functionality and to those who are responsible for the algorithmic trading system.
Where the compliance function, or elements thereof, is outsourced to a third party, trading venues shall provide the third party with the same access to information as they would to their own compliance staff. Trading venues shall enter into an agreement with such compliance consultants, ensuring that:
data privacy is guaranteed;
auditing of the compliance function by internal and external auditors or by the competent authority is not hindered.
Trading venues shall employ a sufficient number of staff with the necessary skills to manage their algorithmic trading systems and trading algorithms and with sufficient knowledge of:
the relevant trading systems and algorithms;
the monitoring and testing of such systems and algorithms;
the types of trading undertaken by the members, participants or clients of the trading venue ("members");
the trading venue's legal obligations.
Trading venues shall define the necessary skills referred to in paragraph 1. The staff referred to in paragraph 1 shall have those necessary skills at the time of recruitment or shall acquire them through training after recruitment. The trading venues shall ensure that those staff's skills remain up-to-date and shall evaluate their skills on a regular basis.
The staff training referred to in paragraph 2 shall be tailored to the experience and responsibilities of the staff, taking into account the nature, scale and complexity of their activities.
The staff referred to in in paragraph 1 shall include staff with sufficient seniority to perform their functions effectively within the trading venue.
Trading venues outsourcing all or part of their operational functions in relation to the systems allowing or enabling algorithmic trading shall ensure that:
the outsourcing agreement exclusively relates to operational functions and does not alter the responsibilities of the senior management and the management body;
the relationship and obligations of the trading venue towards its members, competent authorities, or any third parties, such as clients of data feed services are not altered;
they meet the requirements that they must comply with in order to be authorised in accordance with the UK law corresponding to Title III of Directive 2014/65/EU.
For the purposes of this article, operational functions shall include all direct activities related to the performance and surveillance of the trading systems supporting the following elements:
upstream connectivity, order submission capacity, throttling capacities and ability to balance customer order entrance through different gateways;
trading engine to match orders;
downstream connectivity, order and transaction edit and any other type of market data feed;
infrastructure to monitor the performance of the elements referred to in points (a), (b) and (c).
Trading venues shall document the process of selecting the service provider to whom the operational functions are to be outsourced ("the service provider"). They shall take the necessary steps to ensure, before concluding the outsourcing agreement and throughout its duration, that the following conditions are satisfied:
the service provider has the ability to perform the outsourced functions reliably and professionally and is the holder of any authorisations required by law for those purposes;
the service provider properly supervises the carrying out of the outsourced functions and adequately manages risks associated with the outsourcing agreement;
the outsourced services are provided in accordance with the specifications of the outsourcing agreement, which are based on pre-determined methods for assessing the standard of performance of the service provider, including metrics to measure the service provided and specifications of the requirements that shall be met;
the trading venue has the necessary expertise to supervise the outsourced functions effectively and manage risks associated with the outsourcing agreement;
the trading venue has the ability to take swift action if the service provider does not carry out the functions effectively and in compliance with applicable laws and regulatory requirements;
the service provider discloses to the trading venue any fact that may have a material impact on its ability to carry out the outsourced functions effectively and in compliance with its legal obligations;
the trading venue is able to terminate the outsourcing agreement where necessary without detriment to the continuity and quality of its services to clients;
the service provider cooperates with the competent authorities of the trading venue in connection with the outsourced activities;
the trading venue has effective access to data related to the outsourced activities and to the business premises of the service provider, and auditors of the trading venue and competent authorities have effective access to data related to the outsourced activities;
the trading venue sets out requirements to be met by the service providers to protect confidential information relating to the trading venue and its members, and to the venue's proprietary information and software;
the service provider meets the requirements referred to in point (j);
the trading venue and the service provider establish, implement and maintain a contingency plan for disaster recovery and periodic testing of backup facilities, where that is necessary having regard to the operational function that has been outsourced;
the outsourcing agreement specifies the obligations of the service provider in case it cannot provide its services, including the provision of the service by a substituting firm;
the trading venue has access to information in relation to the business continuity arrangements referred to in Article 16 of the service provider.
Outsourcing agreements shall be concluded in writing and shall set out:
the assignment of rights and obligations between service provider and trading venue;
a clear description of:
the operational functions that are outsourced;
the access of the trading venue to the books and records of the service provider;
the procedure to identify and address potential conflicts of interest;
the responsibility assumed by each party;
the procedure for the amendment and termination of the agreement.
the means to ensure that both the trading venue and the service provider facilitate in any way necessary the exercise by the competent authority of its supervisory powers.
Trading venues shall report to the competent authority their intention to outsource operational functions in the following cases:
where the service provider provides the same service to other trading venues;
where critical operational functions necessary for business continuation would be outsourced, in which case the trading venues shall request a prior authorisation from the competent authority.
For the purposes of point (b) in paragraph 5, critical operational functions shall include those functions necessary to comply with the obligations referred to in the UK law corresponding to Article 47(1)(b), (c) and (e) of Directive 2014/65/EU.
Trading venues shall inform the competent authority of any outsourcing agreements not subject to prior authorisation requirement immediately after the signature of the agreement.