Content Options:

Content Options

View Options:


You are viewing the version of the document as on 2022-12-13.

MIFIDPRU 4.15 K-DTF requirement

MIFIDPRU 4.15.1R

1Subject to MIFIDPRU 4.15.11R, the K-DTF requirement of a MIFIDPRU investment firm is equal to the sum of:

  1. (1)

    0.1% of average DTF attributable to cash trades; and

  2. (2)

    0.01% of average DTF attributable to derivatives trades.

MIFIDPRU 4.15.2G
  1. (1)

    1The definition of DTF includes transactions that a firm enters into when dealing on own account or when executing client orders in the firm’s own name.

  2. (2)

    A firm that has permission to operate an organised trading facility may engage in:

    1. (a)

      matched principal trading in certain types of financial instruments with client consent, in accordance with MAR 5A.3.5R(1); and/or

    2. (b)

      dealing on own account in illiquid sovereign debt instruments in accordance with MAR 5A.3.5R(2).

  3. (3)

    Where a firm engages in either activity in (2), it must include those transactions in the measurement of its DTF.

  4. (4)

    Except for the transactions in (2), DTF does not include orders that a firm handles in the course of operating an organised trading facility. However, DTF includes transactions entered into by a firm in its own name through an organised trading facility where the firm is not operating that organised trading facility.

MIFIDPRU 4.15.3R

1A firm must calculate its K-DTF requirement on the first business day of each month.

MIFIDPRU 4.15.4R
  1. (1)

    1A firm must calculate the amount of its average DTF as:

    1. (a)

      taking the total DTF as measured throughout each business day in each of the previous 9 months;

    2. (b)

      excluding the daily values for the most recent 3 months; and

    3. (c)

      calculating the arithmetic mean of the daily values for the remaining 6 months.

  2. (2)

    When measuring the value of DTF for a particular business day, a firm must convert any amounts in foreign currencies on that date into the firm’s functional currency.

  3. (3)

    For the purposes of the currency conversion in (2), a firm must:

    1. (a)

      determine the conversion rate by reference to an appropriate market rate; and

    2. (b)

      record the rate that was chosen.

MIFIDPRU 4.15.5G
  1. (1)

    1The effect of MIFIDPRU 4.15.4R(2) is that when measuring the value of DTF at the end of each business day, a firm must apply the relevant conversion rate on that date to any amounts in foreign currencies forming part of the DTF attributable to that business day. The DTF for each preceding business day should continue to be measured by reference to the conversion rate that was applicable on that preceding day.

  2. (2)

    For the purposes of MIFIDPRU 4.15.4R(3), where a firm is carrying out a conversion that involves sterling, the FCA considers that an example of an appropriate market rate would be the relevant daily spot exchange rate against sterling published by the Bank of England.

MIFIDPRU 4.15.6R
  1. (1)

    1When measuring its DTF, a firm must use the sum of the absolute value of each buy order and sell order, as determined in accordance with this rule.

  2. (2)

    For cash trades relating to financial instruments, the value of the order is the amount paid or received on the trade.

  3. (3)

    For derivatives trades other than orders relating to interest rate derivatives, the value of the order is the notional amount of the contract, determined in accordance with MIFIDPRU 4.14.20R(2).

  4. (4)

    For orders relating to interest rate derivatives, the value of the order is the notional amount of the contract determined in accordance with MIFIDPRU 4.14.20R(2), adjusted in accordance with MIFIDPRU 4.15.8R.

MIFIDPRU 4.15.7G

1For cash trades relating to exchange-traded options, the amount paid or received on the trade under MIFIDPRU 4.15.6R(2) is the premium paid for the option.

MIFIDPRU 4.15.8R
  1. (1)

    1For the purposes of MIFIDPRU 4.15.6R(4), a firm must adjust the notional amount of an interest rate derivative by multiplying that notional amount by the duration.

  2. (2)

    For the purposes of (1), the duration must be determined in accordance with the following formula:

    Duration = time to maturity (in years) / 10

MIFIDPRU 4.15.9G

1When measuring DTF for the purposes of MIFIDPRU 4.15.4R, a firm must include transactions executed by a firm in its own name either for itself or on behalf of a client.

MIFIDPRU 4.15.10R
  1. (1)

    1This rule applies where a firm has had a daily trading flow for less than 9 months.

  2. (2)

    For the purposes of its calculation of average DTF under MIFIDPRU 4.15.4R, a firm must use the modified calculation in MIFIDPRU TP 4.11R(1) with the following adjustments:

    1. (a)

      in MIFIDPRU TP 4.11R(1)(b), n is the relevant number of months for which the firm has had a daily trading flow (with the month during which the firm begins that activity being counted as month zero); and

    2. (b)

      during month zero of the calculation, the firm must:

      1. (i)

        use a best efforts estimate of expected DTF for that month based on its projections when beginning the new activity; and

      2. (ii)

        use the estimate in (i) as its average DTF;

    3. (c)

      during month 1 of the calculation and each month thereafter, the firm must apply the approach in (a) using observed historical data from the preceding months;

    4. (d)

      the modified calculation ceases to apply on the date that falls 9 months after the date on which the firm first had a daily trading flow.

Adjusted coefficient in stressed market conditions

MIFIDPRU 4.15.11R
  1. (1)

    1This rule applies where a firm’s measurement of its DTF under MIFIDPRU 4.15.4R includes a proportion of daily trading flow that occurred on a trading segment of a trading venue to which stressed market conditions (as defined in article 6 of the Market Making RTS) applied.

  2. (2)

    Where this rule applies, a firm may apply the following adjusted coefficients:

    1. (a)

      for cash trades, a coefficient determined in accordance with (3) instead of the relevant coefficient in MIFIDPRU 4.15.1R(1); or

    2. (b)

      for derivatives trades, a coefficient determined in accordance with (4) instead of the relevant coefficient in MIFIDPRU 4.15.1R(2).

  3. (3)

    For cash trades, the adjusted coefficient must be determined by using the following formula:

    CadjCash = C * (DTFexcl/DTFincl)

    where:

    1. (a)

      CadjCash = the adjusted coefficient in (2)(a);

    2. (b)

      C = the original coefficient in MIFIDPRU 4.15.1R(1);

    3. (c)

      DTFexcl = the average DTF of cash trades calculated in accordance with MIFIDPRU 4.15.4R, excluding the value of any cash trade that occurred on a trading segment of a trading venue between the time at which the trading venue determined that:

      1. (i)

        stressed market conditions began to apply; and

      2. (ii)

        stressed market conditions ceased to apply;

    4. (d)

      DTFincl = the average DTF of all cash trades calculated in accordance with MIFIDPRU 4.15.4R.

  4. (4)

    For derivative trades, the adjusted coefficient must be determined by using the following formula:

    CadjDer = C * (DTFexcl/DTFincl)

    where:

    1. (a)

      CadjDer = the adjusted coefficient in (2)(b);

    2. (b)

      C = the original coefficient in MIFIDPRU 4.15.1R(2);

    3. (c)

      DTFexcl = the average DTF of derivative trades calculated in accordance with MIFIDPRU 4.15.4R, excluding the value of any derivative trade that occurred on a trading segment of a trading venue between the time at which the trading venue determined that:

      1. (i)

        stressed market conditions began to apply; and

      2. (ii)

        stressed market conditions ceased to apply;

    4. (d)

      DTFincl = the average DTF of all derivative trades calculated in accordance with MIFIDPRU 4.15.4R.

MIFIDPRU 4.15.12G
  1. (1)

    1MIFIDPRU 4.15.11R permits a firm to apply a reduced coefficient for the purposes of determining its K-DTF requirement where part of the firm’s average DTF for the relevant period is attributable to transactions that took place on a segment of a trading venue to which stressed market conditions applied. The relevant coefficient must be calculated separately for cash trades and derivative trades.

  2. (2)

    MIFIDPRU 4.15.11R permits a firm to substitute a reduced coefficient that applies to the firm’s average DTF for the relevant calculation period. The size of the reduction is proportional to the value of trades that were placed on a segment of a trading venue during stressed market conditions within the calculation period, relative to the overall value of trades entered into by the firm during that period.

MIFIDPRU 4.15.13G
  1. (1)

    1The following is an example of how the adjusted coefficient in MIFIDPRU 4.15.11R applies.

  2. (2)

    A firm executes total cash trades in its own name worth £9,600m during the 6-month calculation period for determining average DTF under MIFIDPRU 4.15.4R(1)(c). That 6-month period includes 128 business days.

  3. (3)

    The total £9,600m of cash trades includes £375m of cash trades that were executed on trading venues during stressed market conditions (as defined in article 6 of the Market Making RTS).

  4. (4)

    In this example:

    DTFincl = £9,600m / 128 days = £75m

    DTFexcl = (£9,600m - £375m) / 128 days = £9,225m / 128 days = £72.07m

    C = 0.1%

    CadjCash = 0.1% x (72.07 / 75) = 0.1% x 0.961 = 0.0961%

  5. (5)

    To calculate its K-DTF requirement for this calculation period, the firm multiplies the full amount of its average DTF for the period by the adjusted coefficient (CadjCash). Therefore:

    K-DTF requirement for cash trades = £75m x 0.0961% = £72,075