M2G 1.2 MiFID onshoring in UK legislation and the FCA Handbook

1The UK’s onshoring2 of the directive takes the form of a combination of legislation made by HM Treasury, in the form of a number of statutory instruments, and rules contained in the FCA Handbook and the PRA Rulebook.

1The Treasury legislation is set out in the following statutory instruments as amended by the Exit Regulations2:

1. ● Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (‘MiFI regulations’), SI 2017/7012

2. ● The Data Reporting Services Regulations 2017 (‘DRS regulations’), SI 2017/6992

3. ● Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (‘RAO’), SI 2001/5442

4. ● The MiFI regulations amend Part XVIII FSMA and the Recognition Requirements Regulations (‘RRR’) applying to recognised investment exchanges. This includes implementing the regulatory regimes relating to a market operator operating an organised trading facility and data reporting services, as well as obligations in regard to the management body and systems and controls. It also includes applying algorithmic trading requirements in relation to unauthorised entities and position management requirements for trading venues on which commodity derivatives are traded. 2

5. ● The DRS regulations create a self-standing regime for data reporting services providers including authorisation, operating conditions, reporting and enforcement.

6. ● The RAO reflects2 scope changes arising out of MiFID, notably the new investment service of operating an organised trading facility and the extension of“financial instruments”2 to include emission allowances. The onshoring amendments to Part 1 of Schedule 2 to the RAO essentially preserve the pre-IP completion day scope of regulation relating to physically-settled power forward contracts.2

The2 FCA Handbook complements2 the Treasury legislation, referred to above, so for example:

1. ● REC contains, in REC 2, extracts of the RRRs and ‘Notes’ signposting technical standards2 which are relevant to recognised investment exchanges’ compliance with certain RRRs. These include having adequate systems and controls for algorithmic trading (see REC 2.5), and sufficient price transparency to ensure fair and orderly trading (see REC 2.6). 2

2. ● REC 3, which contains 2FCA rules requiring certain notifications to be made by RIEs to the FCA, also includes2 ‘Notes’ signposting notification requirements set out in the RRRs or technical standards2.

3. ● MAR 5 applies2 the MiFID requirements on systems and controls for algorithmic trading to MTFs, including requirements in the areas of systems resilience, algorithmic market-making, tick sizes and clock synchronisation. It also aligns2 further the organisational requirements on MTFs with those for regulated markets, in the areas of conflicts of interest and risk management, and the management of technical operations. Rules on the suspension and removal of financial instruments also align with those for regulated markets. The chapter contains2 guidance on the ability to register an MTF as an SME Growth Market2.

4. ● MAR 5A imposes2 a regime for OTFs. OTFs are distinguished from MTFs and regulated markets by the requirement for discretionary order execution and by trading only being permitted on these venues in bonds, structured finance products, emission allowances or derivatives. Restrictions on proprietary and matched principal trading applicable to MTFs and regulated markets are more relaxed for OTFs. In other respects, however, the regulation of these venues aligns with that for MTFs, and also, therefore, substantially with that for regulated markets.

5. ● MAR 6 relates to systematic internalisers 2and the article 27(3) MiFID execution quality publication requirement (applying to systematic internalisers, amongst other execution venues). This requirement has been preserved as part of onshoring2 as a rule (see MAR 6.3A).

6. 2

7. ● MAR 7A corresponds to2 article 17 of the recast MiFID2. It imposes systems and controls and notification requirements on firms engaging in algorithmic trading, as well as providing for market making obligations where a firm engages in a high-frequency algorithmic trading technique. It also imposes systems and controls and notification requirements on firms providing direct electronic access services. The services of a general clearing member are also subject to rules2 of a similar nature.

8. ● MAR 9 provides directions and guidance applicable to the operation of the2data reporting services regime, set out in the DRS regulations.

9. ● MAR 10 comprises requirements and guidance relating to the setting of position limits in respect of commodity derivatives traded on trading venues, position management obligations relating to the venues themselves and position reporting by trading venues and investment firms.

1More generally, where requirements in MiFID correspond to2 FCA rules, the source of the corresponding requirement is referred to below the relevant provision, for example MAR 5A.3.5: -

1. 5A.3.5 R A firm must not engage in:

   1. 5A.3.5 R (1) matched principal trading on an OTF operated by it except in bonds, structured finance products, emission allowances and derivatives which have not been declared subject to the clearing obligation in accordance with article 5 of EMIR, where the client has consented; or

   2. 5A.3.5 R (2) dealing on own account on an OTF operated by it, excluding matched principal trading, except in sovereign debt instruments for which there is not a liquid market.

   [Note: article 20(2) and (3) of MiFID]

1The2 scope of MIFID is2 the subject of guidance in PERG 2 and 13.