The MiFID 2 Guide - FCA Handbook

1 The MiFID 2 GuideM2G ContentsThe MiFID 2 GuideM2G 1 Onshoring for Trading Venues & Data Reporting Service onshoring onshoring in UK legislation and the FCA in Financial Instruments Regulation ( MiFIR ) standards and delegated Annex 1 MiFID and Market Infrastru0cture: An OverviewM2G 2 Onshoring of senior management arrangements and systems andcontrols types of senior management and organisational requirements inMiFID II onshoring and MiFID optional Collective portfolio management investmentfirms andauthorised organisational requirements2 Annex 1 Overviewn Release 26l Feb iThe MiFID 2 GuideChapter 1 Onshoring for TradingVenues & Data ReportingService Providersn Release 26l Feb 1/1M2G 1 : Onshoring for TradingSection : BackgroundVenues & Data Reporting Release 26l Feb 1 Guide sets out an overview of the FCA s approach to onshoring of therecast Markets in Financial Instruments Directive 2 ( MiFID 2) in the MAR andREC sourcebooks.

2 Onshoring , for these purposes, refers to the process bywhich law deriving from EU legislation at IP completion day is retained oradapted, post IP completion day. This Guide focuses on the regulatory regimein MiFID 2 for UK trading venues (as defined by 2(16A) MiFIR: this termcomprises UK regulated markets, multilateral trading facilities and organisedtrading facilities but not systematic internalisers) and UK data reportingservices providers (DRSPs)).[deleted] MiFID 2 enables the Commission to make secondary legislation in severalplaces. That legislation takes the form of a combination of delegated acts(for example as provided for in article 4(2) MiFID to specify elements of thedefinitions), regulatory technical standards (RTS) and implementing technicalstandards (ITS). Delegated acts under MiFID 2 are both drafted and made bythe Commission, after it receives advice from the European Securities andMarkets Authority (ESMA), and may take the form of either directives ordirectly applicable regulations.

3 As for RTS and ITS, these are prepared indraft by ESMA and subject to public consultation, before endorsement andmaking by the Commission; both take the form of regulations and so aredirectly applicable. RTS and ITS feature, in particular, in the MiFID 2provisions relating to trading venues and DRSPs. After IP completion day, inthe United Kingdom, in broad terms, the former role of the Commission isdischarged by the Treasury and ESMA s functions are performed by the further details, see the Financial Regulators Powers (Technical Standardsetc.) (Amendment etc.) (EU Exit) Regulations can be subject to a MiFID derived or MiFIR requirement, even if you arenot an authorised financial institution. regulation 30 of the Financial Servicesand Markets Act 2000 (Markets in Financial Instruments) Regulations 2017applies algorithmic trading requirements to certain persons exempt underMiFID, where they are members of a regulated market or multilateraltrading facility (article 1(5) MiFID ).

4 Similarly, article 1 MiFIR requires non-financial counterparties above the clearing threshold in article 10 of theEuropean Market Infrastructure Regulation ( EMIR ) (Regulation 648/2012 our EMIR webpage ( ) for furtherdetails about non-financial counterparties and the clearing threshold) tocomply with the obligations inM2G 1 : Onshoring for TradingSection : BackgroundVenues & Data Reporting ServiceProviders1n Release 26l Feb 1/3 Title V MiFIR. This means trading certain classes of derivatives on organisedvenues only, UK regulated markets, UK multilateral trading facilities (MTFs),UK organised trading facilities (OTFs) and permitted third country venues(article 28 MiFIR). EEA venues are treated as third country venues for 1 : Onshoring for TradingSectionVenues & Data Reporting ServiceProviders1 GGn Release 26l Feb 1 onshoring provisionsThe effect of section 3 of the European Union (Withdrawal) Act 2018 is that direct EU legislation became part of UK law, as at IP completion day (andis known as retained EU law in accordance with section 6 of the samelegislation).

5 As such, MiFIR and all directly applicable regulations made underMiFID and MiFIR, including the MiFID Org Regulation (Commission DelegatedRegulation 2017/565), the MiFIR Delegated Regulation (CommissionDelegated Regulation 2017/567) and technical standards became part of UKlaw, as at IP completion of these pieces of legislation is subject to the power in section 8 of theEuropean Union (Withdrawal) Act 2018 to deal with deficiencies arising outof the United Kingdom s withdrawal from the EU. The Treasury has exercisedthis power in the Markets in Financial Instruments (Amendment) (EU Exit)Regulations 2018 (the Exit Regulations ) to amend each of the following:lMiFIR;lMiFID Org Regulation;lMiFIR Delegated Regulation;lData Reporting services Regulations; andlThe Financial services and Markets Act 2000 (Markets in FinancialInstruments) Regulations reference to any of the above in the remaining text of this Guide is to thelegislation as amended by the Exit 1 : Onshoring for TradingSection : MiFID onshoring in UKVenues & Data Reporting Servicelegislation and the FCA Release 26l Feb 1 onshoring in UK legislationand the FCA HandbookThe UK s onshoring of the directive takes the form of a combination oflegislation made by HM Treasury, in the form of a number of statutoryinstruments, and rules contained in the FCA Handbook and the Treasury legislation is set out in the following statutory instruments asamended by the Exit Regulations.

6 LFinancial services and Markets Act 2000 (Markets in FinancialInstruments) Regulations 2017 ( MiFI regulations ), SI 2017/701lThe Data Reporting services Regulations 2017 ( DRS regulations ), SI2017/699l Financial services and Markets Act 2000 (Regulated Activities)Order 2001 ( RAO ), SI 2001/544lThe MiFI regulations amend Part XVIII FSMA and the RecognitionRequirements Regulations ( RRR ) applying to recognised investmentexchanges. This includes implementing the regulatory regimesrelating to a market operator operating an organised trading facilityand data reporting services , as well as obligations in regard to themanagement body and systems and controls. It also includes applyingalgorithmic trading requirements in relation to unauthorised entitiesand position management requirements for trading venues on whichcommodity derivatives are DRS regulations create a self-standing regime for datareporting services providers including authorisation, operatingconditions, reporting and RAO reflects scope changes arising out of MiFID , notably thenew investment service of operating an organised trading facility andthe extension of financial instruments to include emissionallowances.

7 The onshoring amendments to Part 1 of Schedule 2 tothe RAO essentially preserve the pre-IP completion day scope ofregulation relating to physically-settled power forward FCA Handbook complements the Treasury legislation, referred to above,so for example:M2G 1 : Onshoring for TradingSection : MiFID onshoring in UKVenues & Data Reporting Servicelegislation and the FCA HandbookProviders1n Release 26l Feb 1/6lREC contains, in REC 2, extracts of the RRRs and Notes signpostingtechnical standards which are relevant to recognised investmentexchanges compliance with certain RRRs. These include havingadequate systems and controls for algorithmic trading (see REC ),and sufficient price transparency to ensure fair and orderly trading(see REC ).lREC 3, which contains FCA rules requiring certain notifications to bemade by RIEs to the FCA, also includes Notes signpostingnotification requirements set out in the RRRs or technical 5 applies the MiFID requirements on systems and controls foralgorithmic trading to MTFs, including requirements in the areas ofsystems resilience, algorithmic market-making, tick sizes and clocksynchronisation.

8 It also aligns further the organisational requirementson MTFs with those for regulated markets, in the areas of conflicts ofinterest and risk management, and the management of technicaloperations. Rules on the suspension and removal of financialinstruments also align with those for regulated markets. The chaptercontains guidance on the ability to register an MTF as an SMEG rowth 5A imposes a regime for OTFs. OTFs are distinguished fromMTFs and regulated markets by the requirement for discretionaryorder execution and by trading only being permitted on thesevenues in bonds, structured finance products, emission allowances orderivatives. Restrictions on proprietary and matched principal tradingapplicable to MTFs and regulated markets are more relaxed for other respects, however, the regulation of these venues alignswith that for MTFs, and also, therefore, substantially with that forregulated 6 relates to systematic internalisers and the article 27(3) MiFIDexecution quality publication requirement (applying to systematicinternalisers, amongst other execution venues).

9 This requirement hasbeen preserved as part of onshoring as a rule (see MAR ).lMAR 7A corresponds to article 17 of the recast MiFID . It imposessystems and controls and notification requirements on firmsengaging in algorithmic trading, as well as providing for marketmaking obligations where a firm engages in a high-frequencyalgorithmic trading technique. It also imposes systems and controlsand notification requirements on firms providing direct electronicaccess services . The services of a general clearing member are alsosubject to rules of a similar 9 provides directions and guidance applicable to theoperation of thedata reporting services regime, set out in the 10 comprises requirements and guidance relating to thesetting of position limits in respect of commodity derivatives tradedon trading venues, position management obligations relating to thevenues themselves and position reporting by trading venues andinvestment 1 : Onshoring for TradingSection : MiFID onshoring in UKVenues & Data Reporting Servicelegislation and the FCA Release 26l Feb 1/7 More generally, where requirements in MiFID correspond to FCA rules, thesource of the corresponding requirement is referred to below the relevantprovision, for example MAR.

10 R A firm must not engage (1) matched principal trading on an OTF operated by itexcept in bonds, structured finance products, emissionallowances and derivatives which have not been declared subjectto the clearing obligation in accordance with article 5 of EMIR,where the client has consented; (2) dealing on own account on an OTF operated by it,excluding matched principal trading, except in sovereign debtinstruments for which there is not a liquid market.[Note: article 20(2) and (3) of MiFID ]The scope of MiFID is the subject of guidance in PERG 2 and 1 : Onshoring for TradingSection : Markets in FinancialVenues & Data Reporting ServiceInstruments Regulation ( MiFIR ) Release 26l Feb 1 in Financial InstrumentsRegulation ( MiFIR )[deleted][deleted]MiFIR as onshored provides for delegated acts and technical standards onamongst other things:lprice transparency for equity and derivative instruments, see REC 2,MAR 5 and MAR 5A;lstraight-through processing of clearing for derivative instruments,see REC 2, MAR 5 and MAR 5A; andltransaction reporting, see SUP 1 : Onshoring for TradingSection : Technical standards andVenues & Data Reporting Servicedelegated Release 26l Feb 1 standards and delegatedactsTechnical standards, submitted by ESMA.