This chapter contains the recognition requirements for UK RIEs4 (other than RAPs) 3 and sets out guidance on those requirements. Except for REC 2.5A, references to recognised body or UK recognised bodies in the rest of this chapter shall be read as referring to UK RIEs.4 This chapter also contains the MiFID implementing requirements for UK RIEs.2

3Guidance on the RAP recognition requirements which apply to RAPs is set out in REC 2A (Recognised Auction Platforms). Guidance on the recognition requirements for ROIEs4 is set out in REC 6 (Overseas Investment Exchanges).

These recognition requirements must be satisfied by applicants for UK RIE4 status before recognition is granted and by all UK RIEs4 at all times while they are recognised. In addition the MiFID implementing requirements must be satisfied by applicants for UK RIE status before recognition is granted and by all UK RIEs at all times while they are recognised. 2The same standards apply both on initial recognition and throughout the period recognised body status is held. The term UK RIE4 in the guidance should be taken, therefore, to refer also to an applicant when appropriate.

1. (1)

   The paragraphs in the Schedule to the Recognition Requirements Regulations are grouped in this sourcebook in sections which give guidance on the same subject for UK RIEs.4

   4
2. (2)

   The table in REC 2.1.4 G indicates in which section each of those paragraphs (and the associated guidance) can be found.

   2

2Recitals and articles from the MiFID Regulation (and the associated guidance) relevant to market transparency are set out in REC 2.6. Articles from the MiFID Regulation relevant to admission to trading are set out in REC 2.12.

The FCA3 will usually expect :

1. (1)

   the constitution, regulatory provisions and practices of the UK recognised body or applicant;

2. (2)

   the nature (including complexity, diversity and risk) and scale of the UK recognised body's or applicant's business;

3. (3)

   the size and nature of the market which is supported by the UK recognised body's or applicant's facilities;

4. (4)

   the nature and status of the types of investor who use the UK recognised body's or applicant's facilities or have an interest in the market supported by the UK recognised body's or applicant's facilities; and

5. (5)

   the nature and scale of the risks to the statutory objectives associated with the matters described in (1) to (4);

to be among the relevant circumstances which it will take into account in considering whether a UK recognised body or applicant satisfies the recognition requirements.

It is the UK recognised body's responsibility to demonstrate to the FCA3 that a person who performs a function on behalf of the UK recognised body is fit and proper and able and willing to perform that function. The recognition requirement referred to in Regulation 6(3) applies to the UK recognised body and not to any person who performs any function on its behalf. In this context, for a person to be "fit and proper" does not necessarily imply that he is an authorised person, or qualified to be so, or that the required standard is the same as that required either for authorised persons or recognised bodies.

If a UK recognised body makes arrangements for functions to be performed on its behalf by persons who are authorised persons or recognised bodies, this does not alter its obligations under Regulation 6.

If a person who performs a function on behalf of a UK recognised body is himself carrying on a regulated activity in the United Kingdom , he will, unless he is a person to whom the general prohibition does not apply, need to be either an authorised person or an exempt person . The person to whom a function is delegated is not covered by the UK recognised body's exemption.

In determining whether the UK recognised body meets the recognition requirement in Regulation 6(3), the FCA3 may have regard to whether that body has ensured that the person who performs that function on its behalf:

1. (1)

   has sufficient resources to be able to perform the function (after allowing for any other activities);

2. (2)

   has adequate systems and controls to manage that function and to report on its performance to the UK recognised body;

3. (3)

   is managed by persons of sufficient skill, competence and integrity;

4. (4)

   understands the nature of the function it performs on behalf of the UK recognised body and its significance for the UK recognised body's ability to satisfy the recognition requirements and other obligations in or under the Act ; and

5. (5)

   undertakes to perform that function in such a way as to enable the UK recognised body to continue to satisfy the recognition requirements and other obligations in or under the Act .

In determining whether a UK recognised body continues to satisfy the recognition requirements where it has made arrangements for any function to be performed on its behalf by any person , the FCA3 may have regard, in addition to any of the matters described in the appropriate section of this chapter, to the arrangements made to exercise control over the performance of the function, including:

1. (1)

   the contracts (and other relevant documents) between the UK recognised body and the person who performs the delegated function;

2. (2)

   the arrangements made to monitor the performance of that function; and

3. (3)

   the arrangements made to manage conflicts of interest and protect confidential regulatory information.

In determining whether a UK recognised body has financial resources sufficient for the proper performance of its relevant functions, the FCA5 may have regard to:

1. (1)

   the operational and other risks to which the UK recognised body is exposed;

2. (2)

   if the UK recognised body guarantees the performance of transactions in specified investments, the counterparty and market risks to which it is exposed in that capacity;

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3. (3)

   the amount and composition of the UK recognised body's capital;

4. (4)

   the amount and composition of the UK recognised body's liquid financial assets;

5. (5)

   the amount and composition of the UK recognised body's other financial resources (such as insurance policies and guarantees, where appropriate);

6. (6)

   the financial benefits, liabilities, risks and exposures arising from the UK recognised body's connection with any person, including but not limited to, its connection with:

   1. (a)

      any undertaking in the same group as the UK recognised body;

   2. (b)

      any other person with a significant shareholding or stake in the UK recognised body;

   3. (c)

      any other person with whom the UK recognised body has made a significant investment whether in the form of equity, debt, or by means of any guarantee or other form of commitment;

   4. (d)

      any person with whom it has a significant contractual relationship.

7. (7)

   2 the nature and extent of the transactions concluded on the UK RIE.

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The FCA5 will usually rely on a UK recognised body's published and internal management accounts and financial projections, provided that those accounts and projections are prepared in accordance with UK, US or international accounting standards.

In assessing whether a UK recognised body has sufficient financial resources in relation to counterparty and market risks, the FCA5 may have regard to:

1. (1)

   the amount and liquidity of its financial assets and the likely availability of liquid financial resources to the UK recognised body during periods of major market turbulence or other periods of major stress for the UK financial system;3 and

2. (2)

   the nature and scale of the UK recognised body's exposures to counterparty and market risks and, where relevant, the counterparties to which it is exposed.

In assessing whether a UK recognised body has sufficient financial resources in relation to operational and other risks, the FCA5 may have regard to the extent to which, after allowing for the financial resources necessary to cover counterparty and market risks, the UK recognised body's financial resources are sufficient and sufficiently liquid:

1. (1)

   to enable the UK recognised body to continue carrying on properly the regulated activities that it expects to carry on; and

2. (2)

   to ensure that it would be able to complete an orderly closure or transfer of its exempt activities without being prevented from doing so by insolvency or lack of available funds.

In considering whether a UK recognised body has sufficient financial resources in relation to operational and other risks, the FCA5 will normally have regard to two components: eligible financial resources and net capital.4

1. (1)

   4The FCA5 considers that a UK RIE which at any time holds:

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   1. (a)

      eligible financial resources not less than the greater of:

      1. (i)

         the amount calculated under the standard approach; and

      2. (ii)

         the amount calculated under the risk-based approach; and

   2. (b)

      net capital not less than the amount of eligible financial resources determined under (1)(a);

   will, at that time, have sufficient financial resources to meet the recognition requirement in respect of operational and other risks unless there are special circumstances indicating otherwise.

2. (2)

   The FCA5 would normally regard the amount calculated under REC 2.3.9G (1)(a)(i) to be a minimum amount of financial resources below which a UK RIE would be failing the recognition requirements. The FCA5 would expect a UK RIE to hold, in addition to this minimum amount, an amount constituting an operational risk buffer calculated in accordance with REC 2.3.22 G.

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4The FCA5 would expect to provide a UK recognised body with individual guidance on the amount of eligible financial resources which it considers would be sufficient for the UK recognised body to hold in respect of operational and other risks in order to satisfy the recognition requirements. In formulating its individual guidance, the FCA5 will ordinarily apply the approach described in REC 2.3.9 G for UK RIEs.

4For the purposes of REC 2.3, "eligible financial resources" should consist of liquid financial assets held on the balance sheet of a UK recognised body, including cash and liquid financial instruments where the financial instruments have minimal market and credit risk and are capable of being liquidated with minimal adverse price effect.

4For the purposes of REC 2.3, "net capital" should be in the form of equity. For this purpose, the FCA5 considers that common stock, retained earnings, disclosed reserves and other instruments classified as common equity tier one capital or additional tier one capital constitute equity. The FCA5 considers that, when calculating its net capital, a UK recognised body:

1. (1)

   should deduct holdings of its own securities, or those of any undertaking in the same group as the UK recognised body, together with any amount owed to the UK recognised body by an undertaking in its group under any loan or credit arrangement and any exposure arising under any guarantee, charge or contingent liability given in favour of such an undertaking or a creditor of such undertaking; and

2. (2)

   may include interim earnings that have been independently verified by its auditor.

1. (1)

   4Under the standard approach, the amount of eligible financial resources is equal to six months of operating costs.

2. (2)

   Under the standard approach, the FCA5 assumes liquid financial assets are needed to cover the costs that would be incurred during an orderly wind-down of the UK recognised body'sexempt activities, while continuing to satisfy all the recognition requirements and complying with any other obligations under the Act (including the obligations to pay periodic fees to the FCA).5

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3. (3)

   For the purposes of the standard approach, the FCA5 would normally expect the calculation of operating costs to be based on the UK recognised body's most recent audited annual accounts, with six months of operating costs being equal to one half of the sum of all operating costs reflected in the audited annual accounts of the UK recognised body in the course of performing its functions during the year to which the accounts relate. In calculating the gross annual operating costs, the FCA5 would consider it reasonable to exclude non-cash costs (costs that do not involve an outflow of funds).

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4. (4)

   The FCA5 considers it to be reasonable for a UK recognised body to adjust its operating expenditure calculation if, during the period since its last audited accounts were prepared, its level of operating expenditure has changed materially as documented by the current annual budget or forecast adopted by the UK recognised body'sgoverning body.

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5. (5)

   The FCA5 considers that it is reasonable for a UK recognised body to adjust its operating expenditure to take account of arrangements between two or more undertakings in the same group, which are all subject to prudential regulation in the United Kingdom under which specified costs are shared or recharged among those undertakings and those costs would otherwise be double-counted in the calculation of their financial resources requirement.

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1. (1)

   4The risk-based approach is intended to ensure that sufficient financial resources are maintained at all times such that a UK RIE would not be prevented from implementing an orderly wind-down as a result of the financial impacts of stress events affecting its business or the markets in which it operates.

2. (2)

   Under the risk-based approach the amount of eligible financial resources is calculated by adding together:

   1. (a)

      the amount estimated by the UK RIE to absorb the potential business losses that a business of its nature, scale and complexity might incur in stressed but plausible market conditions; and

   2. (b)

      the amount estimated by the UK RIE to effect an orderly closure.

   In this context, a business loss arises where there is an increase in cost or reduction of revenue relative to a UK RIE's expectation of its financial performance, such that a loss needs to be charged against its capital.

4For the purposes of calculating the risk-based approach, the FCA5 would normally expect the UK RIE to provide the FCA5 with an annual financial risk assessment that identifies the risks to its business. As a financial risk assessment is likely to form an integral part of the UK RIE's management process and decision-making culture, the FCA5 would normally expect it to be approved by the UK RIE'sgoverning body.

4The FCA5 would normally expect to use the financial risk assessment prepared by the UK RIE in the course of preparing individual guidance on the amount of financial resources that it considers is sufficient for a UK RIE to hold in order to satisfy the recognition requirements. The financial risk assessment would provide the basis for calculating the amount of eligible financial resources that should be held by the UK RIE under the risk-based approach.

4The financial risk assessment should be based on a methodology which provides a reasonable estimate of the potential business losses which a UK RIE might incur in stressed but plausible market conditions. The FCA5 would expect a UK RIE to carry out a financial risk assessment at least once in every twelve-month period, or more frequently if there are material changes in the nature, scale or complexity of the UK RIE's operations or its business plans that suggest such financial risk assessment no longer provides a reasonable estimate of its potential business losses. The FCA5 considers that it would be reasonable for a financial risk assessment to proceed in the following way:

1. (1)

   Step 1: the UK RIE would identify, in writing, the risks to which the business of the UK RIE is exposed and which could have a material adverse effect on its financial position, in the light of the nature, scale and complexity of its operations and its business plans. For this purpose, it would be reasonable to refer to the categorisation of risk used under the system of risk management adopted by the UK RIE in order to meet its responsibilities under the recognition requirements referred to in REC 2.5. That description would identify which risks are indemnified or transferred by the UK RIE and which are retained and accepted.

2. (2)

   Step 2: the UK RIE would conduct an assessment of the potential business losses that could arise in the event that the risks identified in accordance with step 1 were to materialise. For this purpose, it would be reasonable for a UK RIE to develop, and keep under review, a stress and scenario testing plan designed to simulate the effects of a pre-determined series of events, or sets of circumstances, that would be likely to occur following the crystallisation of one or more identified risks, taking into account the systems and controls in place to mitigate those risks. The stress and scenario testing plan would:

   1. (a)

      cover a forward-looking period of at least one year;

   2. (b)

      consider a suitable range of adverse events and sets of circumstances, of a defined severity and duration, which could occur in stressed but plausible market conditions;

   3. (c)

      consider how a particular adverse event or set of circumstances could lead to or be correlated with other events;

   4. (d)

      consider the potential for a particular adverse event or set of circumstances to affect multiple business lines;

   5. (e)

      take into account realistic management actions to resolve such adverse events and circumstances; and

   6. (f)

      where appropriate, involve sensitivity analysis showing the effects of changes to assumptions made about the impact of particular adverse events and circumstances.

   In designing its stress and scenario testing plan, the FCA5 considers that it would be reasonable for a UK RIE to be guided by any risk-scoring methodology that it deploys for general risk-management purposes that might have application in evaluating the probability and impact of its risks.

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3. (3)

   Step 3: the UK RIE would assess the eligible financial resources that it would need to hold to cover such potential business losses. Such eligible financial resources would enable the UK RIE to absorb any financial shocks attributable to such business risks were they to arise.

   In carrying out this assessment, the FCA5 considers that it would be reasonable for a UK RIE to take account of any action which its senior management might plan on taking in response to a given stress event. For example, if the risk appetite of a UK RIE is such that it would not pursue recovery from a given stress event (and would instead initiate an orderly wind-down), the assessment of eligible financial resources needed in such circumstances might reasonably be limited to the costs of orderly wind-down from the point in time at which that decision would be likely to be made.

   Where a UK RIE expects to be making a loss during the period covered by the financial risk assessment as a result of its anticipated business performance in normal market conditions, the business losses which are relevant to the calculation of the risk-based approach are those additional losses which the UK RIE would expect to incur in stressed but plausible market conditions.

   5
4. (4)

   Step 4: the UK RIE would make an assessment of the cost of orderly closure. The FCA5 considers that an orderly closure should normally include an assessment of the impact of closure on the users of the markets operated by that UK RIE. For the purpose of this assessment, the FCA5 considers that it would be reasonable for a UK RIE to adopt the amount needed under the standard approach as its cost of orderly closure or to use its own method of calculation based on a scenario plan which comprehensively documents the costs that a UK RIE in its position might incur in order to fully implement an orderly wind-down.

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5. (5)

   Step 5: the UK RIE would produce a proposal for the amount of eligible financial resources considered to be adequate to meet the risk-based approach. Such a proposal would be based on the sum of:

   1. (a)

      the amount assessed to cover potential business losses in accordance with REC 2.3.17G (3); and

   2. (b)

      an amount assessed to cover the cost of orderly closure in accordance with REC 2.3.17G (4).

6. (6)

   Step 6: the UK RIE would calculate the amount available as an operational risk buffer in accordance with REC 2.3.22 G. To the extent the amount available is insufficient to constitute an operational risk buffer, the UK RIE would include within its proposal the amount it would propose to hold (in addition to the sum of the amounts referred to in (5)(a) and (b)) for those purposes.

4The FCA5 would normally expect a financial risk assessment to include a description of the methodology applied by the UK RIE to arrive at the proposal made in accordance with REC 2.3.17G (5).

4Where a UK RIE is a member of a group, the FCA5 would normally expect the annual risk assessment to be accompanied by a consolidated balance sheet:

1. (1)

   of any group in which the UK RIE is a subsidiary undertaking; or

2. (2)

   (if the UK RIE is not a subsidiary undertaking in any group) of any group of which the UK RIE is a parent undertaking.

4The FCA5 would expect to consider the financial risk assessment, any proposal with respect to an operational risk buffer and, if applicable, the consolidated balance sheet, in formulating its guidance on the amount of eligible financial resources it considers to be sufficient for the UK RIE to hold in order to meet the recognition requirements. In formulating its guidance, the FCA5 would, where relevant, consider whether or not the financial risk assessment makes adequate provision for the following risks:

1. (1)

   the risks related to the administration and operation of the UK RIE as a business enterprise (whether as a result of adverse reputational effects, poor execution of business strategy, ineffective response to competition, or otherwise);

2. (2)

   the risk that deficiencies in information systems or internal processes, human errors, management failures, or disruptions from external events will result in the reduction, deterioration, or breakdown of services provided by a UK RIE (whether as a result of errors or delays in processing, system outages, insufficient capacity, fraud, data loss and leakage, or otherwise);

3. (3)

   the risk that the financial position of the UK RIE may be adversely affected by its relationships (financial or non-financial) with other entities in the same group or by risks which may affect the financial position of the whole group, including reputational contagion; and

4. (4)

   any other type of risk which is relevant to that particular UK RIE.

4The FCA5 would normally consider a UK recognised body to be failing the recognition requirements if it held financial resources less than the amount calculated under REC 2.3.9G (1)(a)(i) (in respect of UK RIEs). The FCA5 therefore expects a UK recognised body to hold an operational risk buffer of a sufficient amount in excess of this minimum, to ensure that it is at all times able to comply with its regulatory obligations.

1. (1)

   [deleted]5

   5
2. (2)

   The FCA5 would normally expect a UK RIE to hold, in addition to the minimum amount determined under REC 2.3.9G (1)(a)(i), an operational risk buffer consistent with a risk-based approach.

   5
   1. (a)

      Where the amount of eligible financial resources calculated by a UK RIE under REC 2.3.17G (5) (the risk-based approach) is greater than the amount of eligible financial resources calculated under REC 2.3.13 G (the standard approach), and the difference is of an amount sufficient to serve the purposes of the operational risk buffer, then the FCA5 considers that there would be no need for a UK RIE to hold any further amount as an operational risk buffer.

      5
   2. (b)

      Where the amount of eligible financial resources calculated by a UK RIE under REC 2.3.17G (5) (the risk-based approach) is not sufficient to provide an effective operational risk buffer over and above the amount calculated under REC 2.3.13 G (the standard approach), then the FCA5 would expect the UK RIE to include within its annual risk assessment a proposal to hold additional financial resources sufficient to constitute an operational risk buffer.

      5
3. (3)

   As the operational risk buffer is an amount in excess of the minimum financial resources sufficient to meet the recognition requirements, the FCA5 would normally not regard a UK recognised body that draws upon or temporarily depletes the operational risk buffer to have failed or be failing a recognition requirement in respect of its financial resources. However, the FCA5 would expect to be notified as soon as reasonably practicable if the UK recognised body draws upon, or intends to draw upon, its operational risk buffer.

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In determining whether a UK recognised body is a fit and proper person, the FCA4 may have regard to any relevant factor including, but not limited to:

1. (1)

   the commitment shown by the UK recognised body'sgoverning body to satisfying the recognition requirements and to complying with other obligations in or under the Act;

2. (2)

   its arrangements, policies and resources for fulfilling its obligations under the Act in relation to its activities as a UK recognised body;

3. (3)

   the extent to which its constitution and organisation provide for effective governance;

1. (4)

   the arrangements made to ensure that its governing body has effective oversight of the UK recognised body'srelevant functions;

2. (5)

   the access which its regulatory department has to the governing body;

3. (6)

   the size and composition of its governing body, including:

   1. (a)

      the number of members of the governing body who represent members of the UK recognised body or other persons and the types of person whom they represent;

   2. (b)

      the number and responsibilities of any members of the governing body with executive roles within the UK recognised body; and

   3. (c)

      the number of independent members of the governing body;

4. (7)

   the structure and organisation of its governing body, including any distribution of responsibilities among its members and committees;

5. (8)

   the integrity and competence of its governing body and key individuals;

6. (9)

   breaches of any relevant law, regulation or code of practice by the UK recognised body or its key individuals;

7. (10)

   its arrangements for ensuring that it employs individuals who are honest and demonstrate high standards of integrity;

8. (11)

   the effectiveness of its arrangements to control conflicts of interest (see also REC 2.5); and

9. (12)

   the independence of its regulatory department from its commercial and marketing departments.

In determining whether a UK recognised body is a fit and proper person, the FCA4 may have regard to its connections with:

1. (1)

   any undertaking in the same group;

2. (2)

   any owner or part-owner of the UK recognised body;

3. (3)

   any person who has the right to appoint or remove members of the governing body or other key individuals;

4. (4)

   any person who is able in practice to appoint or remove members of the governing body or other key individuals;

5. (5)

   any person in accordance with whose instructions the governing body or any key individual is accustomed to act; and

6. (6)

   any key individual in relation to the UK recognised body .

In assessing whether its connection with any person could affect whether a UK recognised body is a fit and proper person, the FCA4 may have regard to:

1. (1)

   the reputation and standing of that other person, including his standing with any relevant UK or overseas regulator;

2. (2)

   breaches of any law or regulation by that other person;

3. (3)

   the roles of any of the UK recognised body's key individuals who have a position within organisations under the control or influence of that other person, including their responsibilities in that organisation and the extent and type of their access to its senior management or governing body;

4. (4)

   the extent to which the UK recognised body operates as a distinct entity notwithstanding its connection with that other person;

5. (5)

   the extent to which the UK recognised body'sgoverning body is responsible for its day-to-day management and operations;

but nothing in this paragraph should be taken to imply any restriction on the ability of a UK recognised body to outsource any function to any person in a manner consistent with Regulation 6 of the Recognition Requirements Regulations.

2In assessing whether the persons who effectively direct the business and operations of the UK RIE are of sufficiently good repute and sufficiently experienced to ensure the sound and prudent management and operation of the financial markets operated by 3it, the FCA4 may have regard to the repute and experience of the UK RIE'skey individuals.

In assessing whether the systems and controls used by a UK recognised body in the performance of its relevant functions are adequate and appropriate for the scale and nature of its business, the FCA3 may have regard to the UK recognised body's:

1. (1)

   arrangements for managing, controlling and carrying out its relevant functions, including:

   1. (a)

      the distribution of duties and responsibilities among its key individuals and the departments of the UK recognised body responsible for performing its relevant functions;

   2. (b)

      the staffing and resources of the departments of the UK recognised body responsible for performing its relevant functions;

   3. (c)

      the arrangements made to enable key individuals to supervise the departments for which they are responsible;

   4. (d)

      the arrangements for appointing and supervising the performance of key individuals (and their departments); and

   5. (e)

      the arrangements by which the governing body is able to keep the allocation of responsibilities between, and the appointment, supervision and remuneration of, key individuals under review;

2. (2)

   arrangements for the identification and 2management of conflicts of interest;

3. (3)

   arrangements for internal and external audit; and

4. (4)

   information technology systems.

The following paragraphs set out other matters to which the FCA3 may have regard in assessing the systems and controls used for the transmission of information, risk management, the effecting and monitoring of transactions, the operation of settlement arrangements (the matters covered in paragraph 4(2)(d) of the Schedule to the Recognition Requirements Regulations) and the safeguarding and administration of assets .

In assessing a UK recognised body's systems and controls for the transmission of information, the FCA3 may also have regard to the extent to which these systems and controls ensure that information is transmitted promptly and accurately:

1. (1)

   within the UK recognised body itself;

2. (2)

   to members; and

3. (3)

   (where appropriate) to other market participants or other relevant persons.

In assessing a UK recognised body's systems and controls for assessing and managing risk, the FCA3 may also have regard to the extent to which these systems and controls enable the UK recognised body to:

1. (1)

   identify all the general, operational, legal and market risks wherever they arise in its activities;

2. (2)

   measure and control the different types of risk;

3. (3)

   allocate responsibility for risk management to persons with appropriate knowledge and expertise; and

4. (4)

   provide sufficient, reliable information to key individuals and, where relevant, the governing body of the UK recognised body.

In assessing a UK RIE's systems and controls for the effecting and monitoring of transactions, and for the operation of settlement arrangements, the FCA3 may have regard to the totality of the arrangements and processes through which the UK RIE's transactions are effected, cleared,3 and settled, including:

1. (1)

   a UK RIE's arrangements under which orders are received and matched, its arrangements for trade and transaction reporting, and (if relevant) its arrangements with another person under which any rights or liabilities arising from transactions are discharged including arrangements3 for transmission to a settlement system or clearing house;

   3
2. (2)

   (if relevant), a UK RIE's3 arrangements under which instructions relating to3 a transaction to be cleared by another person by means of a clearing facilitation service3 are entered into its systems by the relevant other person and transmitted to the other person; and3

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3. (3)

   the arrangements made by the UK RIE3 for monitoring and reviewing the operation of these systems and controls.

   3

In assessing a UK recognised body's systems and controls for the safeguarding and administration of assets belonging to users of its facilities, the FCA3 may have regard to the totality of the arrangements and processes by which the UK recognised body:

1. (1)

   records the assets held and the identity of the owners of (and other persons with relevant rights over) those assets;

2. (2)

   records any instructions given in relation to those assets;

3. (3)

   records the carrying out of those instructions;

4. (4)

   records any movements in those assets (or any corporate actions or other events in relation to those assets); and

5. (5)

   reconciles its records of assets held with the records of any custodian or sub-custodian used to hold these assets, and with the records of beneficial or legal ownership of those assets.

A conflict of interest arises in a situation where a person with responsibility to act in the interests of one person may be influenced in his action by an interest or association of his own, whether personal or business or employment related. Conflicts of interest can arise both for the employees of UK recognised bodies and for the members (or other persons) who may be involved in the decision-making process, for example where they belong to committees or to the governing body. Conflicts of interest may also arise for the UK recognised body itself as a result of its connection with another person.

The FCA3 recognises that a UK RIE3 has legitimate interests of its own and that its general business policy may properly be influenced by other persons (such as its owners). Such a connection does not necessarily imply the existence of a conflict of interest nor is it necessary to exclude individuals closely connected with other persons (for example, those responsible for the stewardship of the owner's interests) from all decision-making processes in a UK recognised body. However, there may be decisions, primarily regulatory decisions, from which it may be appropriate to exclude an individual in certain circumstances where an interest, position or connection of his conflicts with the interest of the recognised body.

REC 2.5.13 G to REC 2.5.16 G set out the factors to which the FCA3 may have regard in assessing a UK recognised body's systems and controls for managing conflicts of interest.

The FCA3 may have regard to the arrangements a UK recognised body makes to structure itself and to allocate responsibility for decisions so that it can continue to take proper regulatory decisions notwithstanding any conflicts of interest, including:

1. (1)

   the size and composition of the governing body and relevant committees;

2. (2)

   the roles and responsibilities of key individuals, especially where they also have responsibilities in other organisations;

3. (3)

   the arrangements for transferring decisions or responsibilities to alternates in individual cases; and

4. (4)

   the arrangements made to ensure that individuals who may have a permanent conflict of interest in certain circumstances are excluded from the process of taking decisions (or receiving information) about matters in which that conflict of interest would be relevant.

The FCA3 may also have regard to the systems and controls intended to ensure that confidential information is only used for proper purposes. Where relevant, recognised bodies will have to comply with section 348 (Restrictions on disclosure of confidential information by the FCA3 etc.) and regulations made under section 349 (Exemptions from section 348) of the Act.

The FCA3 may also have regard to the contracts of employment, staff rules, letters of appointment for members of the governing body, members of relevant committees and other key individuals and other guidance given to individuals on handling conflicts of interest. Guidance to individuals may need to cover:

1. (1)

   the need for prompt disclosure of a conflict of interest to enable others, who are not affected by the conflict, to assist in deciding how it should be managed;

2. (2)

   the circumstances in which a general disclosure of conflicts of interest in advance of any particular instance in which a conflict of interest arises may be sufficient;

3. (3)

   the circumstances in which a general advance disclosure may not be adequate;

4. (4)

   the circumstances in which it would be appropriate for a conflicted individual to withdraw from involvement in the matter concerned, without disclosing the interest; and

5. (5)

   the circumstances in which safeguards in addition to disclosure would be required, such as the withdrawal of the individual from the decision-taking process, or from access to relevant information.

The FCA3 may also have regard to the arrangements made:

1. (1)

   for enforcing rules or other provisions applicable to staff and other persons involved in regulatory decisions; and

2. (2)

   to keep records of disclosures of conflicts of interest and the steps taken to handle them.

A UK recognised body's arrangements for internal and external audit will be an important part of its systems and controls. In assessing the adequacy of these arrangements, the FCA3 may have regard to:

1. (1)

   the size, composition and terms of reference of any audit committee of the UK recognised body'sgoverning body;

2. (2)

   the frequency and scope of external audit;

3. (3)

   the provision and scope of internal audit;

4. (4)

   the staffing and resources of the UK recognised body's internal audit department;

5. (5)

   the internal audit department's access to the UK recognised body's records and other relevant information; and

6. (6)

   the position, responsibilities and reporting lines of the internal audit department and its relationship with other departments of the UK recognised body.

Information technology is likely to be a major component of the systems and controls used by any UK recognised body. In assessing the adequacy of the information technology used by a UK recognised body to perform or support its relevant functions, the FCA3 may have regard to:

1. (1)

   the organisation, management and resources of the information technology department within the UK recognised body;

2. (2)

   the arrangements for controlling and documenting the design, development, implementation and use of information technology systems; and

3. (3)

   the performance, capacity and reliability of information technology systems.

The FCA3 may also have regard to the arrangements for maintaining, recording and enforcing technical and operational standards and specifications for information technology systems, including:

1. (1)

   the procedures for the evaluation and selection of information technology systems;

2. (2)

   the arrangements for testing information technology systems before live operations;

3. (3)

   the procedures for problem management and system change;

4. (4)

   the arrangements to monitor and report system performance, availability and integrity;

5. (5)

   the arrangements (including spare capacity and access to back-up facilities) made to ensure information technology systems are resilient and not prone to failure;

6. (6)

   the arrangements made to ensure business continuity in the event that an information technology system does fail;

7. (7)

   the arrangements made to protect information technology systems from damage, tampering, misuse or unauthorised access; and

8. (8)

   the arrangements made to ensure the integrity of data forming part of, or being processed through, information technology systems.

The FCA3 may have regard to the arrangements made to keep clear and complete audit trails of all uses of information technology systems and to reconcile (where appropriate) the audit trails with equivalent information held by system users and other interested parties.

This section is relevant to every UK recognised body to the extent that the Public Interest Disclosure Act 1998 ("PIDA") applies to it.

1. (1)

   The purposes of this section are to:

   1. (a)

      provide UK recognised bodies with guidance regarding the provisions of PIDA; and

   2. (b)

      Encourage UK recognised bodies to consider adopting and communicating to workers appropriate internal procedures for handling workers' concerns as part of an effective risk management system.

2. (2)

   In this section "worker" includes, but is not limited to, an individual who has entered into a contract of employment.

The guidance in this section concerns the effect of PIDA in the context of the relationship between UK recognised bodies and the FCA.2 It is not comprehensive guidance on PIDA itself.

Under PIDA, any clause or term in an agreement between a worker and his employer is void in so far as it purports to preclude the worker from making a protected disclosure (that is, "blow the whistle").

In accordance with section 1 of PIDA:

1. (1)

   a "protected disclosure" is a qualifying disclosure which meets the relevant requirements set out in part 4A of the Employment Rights Act 19963;

   3
2. (2)

   a "qualifying disclosure" is a disclosure, made in the public interest3, of information which, in the reasonable belief of the worker making the disclosure, tends to show that one or more of the following (a "failure") has been, is being, or is likely to be, committed:

   3
   1. (a)

      a criminal offence; or

   2. (b)

      a failure to comply with any legal obligation; or

   3. (c)

      a miscarriage of justice; or

   4. (d)

      the putting of the health and safety of any individual in danger; or

   5. (e)

      damage to the environment; or

   6. (f)

      deliberate concealment relating to any of (a) to (e);

   it is immaterial whether the relevant failure occurred, occurs or would occur in the United Kingdom or elsewhere, and whether the law applying to it is that of the United Kingdom or of any other country or territory.

1. (1)

   UK recognised bodies are encouraged to consider adopting appropriate internal procedures which will encourage their workers with concerns to blow the whistle internally about matters which are relevant to the functions of the FCA.2

   2
2. (2)

   In considering appropriate internal procedures, UK recognised bodiesmay find the guidance provided to firms in SYSC 18.2.2 G (2) and SYSC 18.2.2 G (3)1 helpful.

   1

In determining whether a UK recognised body is a fit and proper person, the FCA2 may have regard to any relevant factor including, but not limited to, how the UK recognised body and key individuals have complied with any relevant law (see REC 2.4.3 G (9)).

2Articles 29.2 and 44.2 of MiFID provide that the pre-trade transparency requirement can be waived based on market model or the size and type of orders. In particular this obligation can be waived in respect of transactions that are large in scale compared with normal market size for the share or type of share in question. Articles 30.2 and 45.2 of MiFID provide that publication of the details of transactions can be deferred based on their type or size. In particular this obligation can be deferred in respect of transactions that are large in scale compared with the normal market size for that share or that class of shares.

2In determining whether:

1. (1)

   business conducted by means of a UK RIE'sfacilities is conducted so;

   5
2. (2)

   [deleted]5

   5

as to afford proper protection to investors, the FCA5 may, in addition to the matters dealt with in REC 2.7 to REC 2.12, have regard to all the arrangements made by the UK recognised body concerning the operation of its facilities.

2The FCA5 may also have regard to the extent to which the UK recognised body's rules, procedures and the arrangements for monitoring and overseeing the use of its facilities:

1. (1)

   include appropriate measures to prevent the use of its facilities for abusive or improper purposes;

2. (2)

   provide appropriate safeguards for investors against fraud or misconduct, recklessness, negligence or incompetence by users of its facilities;

3. (3)

   provide appropriate information to enable users of its facilities to monitor their use of the facilities;

4. (4)

   include appropriate arrangements to enable users of its facilities to raise queries about any use of those facilities which they are reported to have made;

5. (5)

   include appropriate arrangements to enable users of its facilities to comply with any relevant regulatory or legal requirements; and

6. (6)

   include appropriate arrangements to reduce the risk that those facilities will be used in ways which are incompatible with relevant regulatory or legal requirements;

and in this paragraph "appropriate" should be taken to mean appropriate having regard to the nature and scale of the UK recognised body'sfacilities, the types of persons who will use the facilities and the use which they will make of those facilities.

2In determining whether a UK RIE is ensuring that business conducted by means of its facilities is conducted in an orderly manner (and so as to afford proper protection to investors), the FCA5 may have regard to the extent to which the UK RIE's rules and procedures:

1. (1)

   are consistent with the Code of Market Conduct (see MAR 1);

2. (2)

   prohibit abusive trading practices or the deliberate reporting or publication of false information about trades; and

3. (3)

   prohibit or prevent:

   1. (a)

      trades in which a party is improperly indemnified against losses;

   2. (b)

      trades intended to create a false appearance of trading activity ("wash trades");

   3. (c)

      cross trades executed for improper purposes;

   4. (d)

      improperly prearranged or prenegotiated trades;

   5. (e)

      trades intended to assist or conceal any potentially identifiable trading abuse ("accommodation trades"); and

   6. (f)

      trades which one party does not intend to close out or settle.

2In determining whether a UK RIE is ensuring that business conducted by means of its facilities is conducted in an orderly manner (and so as to afford proper protection to investors), the FCA5 may have regard to whether the UK RIE's arrangements and practices:

1. (1)

   enable members and clients for whom they act to obtain the best price available at the time for their size and type of trade;

2. (2)

   ensure:

   1. (a)

      sufficient pre-trade transparency in the UK RIE's markets taking account of the practices in those markets and the trading systems used; and

   2. (b)

      sufficient post-trade transparency in the UK RIE's markets taking into account the nature and liquidity of the specified investments traded, market conditions and the scale of transactions, the need (where appropriate) to preserve anonymity for members and clients for whom they act, and the needs of different market participants for timely price information;

3. (2A)

   (2) does not apply to a UK RIE's markets for shares admitted to trading on a regulated market. For pre-trade and post-trade transparency for a UK RIE's markets for shares admitted to trading on a regulated market, see in particular REC 2.6.3 UK and REC 2.6.4 UK and REC 2.6.7 EU to REC 2.6.24 EU;

4. (3)

   include procedures which enable the UK RIE to influence trading conditions or suspend trading promptly when necessary to maintain an orderly market; and

5. (4)

   if they include arrangements to support or encourage liquidity:

   1. (a)

      are transparent;

   2. (b)

      are not likely to encourage any person to enter into transactions other than for proper trading purposes (which may include hedging, investment, speculation, price determination, arbitrage and filling orders from any client for whom he acts);

   3. (c)

      are consistent with a reliable, undistorted price-formation process; and

   4. (d)

      alleviate dealing or other identified costs associated with trading on the UK RIE's markets and do not subsidise a market position of a user of its facilities.

      5

1. (1)

   2The FCA5 accepts that block trading, upstairs trading and other types of specialist transactions (such as the "exchange of futures for physicals" in certain commodity markets) can have a legitimate commercial rationale consistent with the orderly conduct of business and proper protection for investors. They may therefore be permitted under the rules of a UK RIE, subject to any necessary safeguards, where appropriate.

   5
2. (2)

   (1) does not apply to a UK RIE's markets for shares admitted to trading on a regulated market. For pre-trade and post-trade transparency for a UK RIE's markets for shares admitted to trading on a regulated market, see in particular REC 2.6.3 UK and REC 2.6.4 UK and REC 2.6.7EU to REC 2.6.24 EU.

2The FCA5 has exercised its power referred to in REC 2.6.3 UK(3) to waive the pre-trade transparency requirements referred to in REC 2.6.3 UK(1). The waivers granted are those based on market model (see REC 2.6.10 EU1), type of order (see REC 2.6.10 EU2) and transactions which are large in scale (see REC 2.6.13 EU). These waivers apply to all regulated markets and MTFs operated by UK RIEs.

2The FCA5 has exercised its power referred to in REC 2.6.4 UK(3) to permit the deferral of the post-trade transparency requirements referred to in REC 2.6.4 UK(1). This permission is with respect to large transactions (see REC 2.6.17 EU). This permission applies to all regulated markets and MTFs operated by UK RIEs.

4The FCA5 considers that for the purposes of ensuring that published information is reliable, monitored continuously for errors, and corrected as soon as errors are detected (see REC 2.6.24 EU(a)), a verification process should be established which does not need to be external from the organisation of the publishing entity, but which should be an independent cross-check of the accuracy of the information generated by the trading process. This process should have the capability to at least identify price and volume anomalies, be systematic and conducted in real-time. The chosen process should be reasonable and proportionate in relation to the business.

1. (1)

   4In respect of arrangements facilitating the consolidation of data as required in REC 2.6.24 EU(b), the FCA5 considers information as being made public in accordance with REC 2.6.24 EU(b), if it:

   5
   1. (a)

      is accessible by automated electronic means in a machine-readable way;

   2. (b)

      utilises technology that facilitates consolidation of the data and permits commercially viable usage; and

   3. (c)

      is accompanied by instructions outlining how users can access the information.

2. (2)

   The FCA5 considers that an arrangement fulfils the 'machine-readable' criteria where the data:

   5
   1. (a)

      is in a physical form that is designed to be read by a computer;

   2. (b)

      is in a location on a computer storage device where that location is known in advance by the party wishing to access the data; and

   3. (c)

      is in a format that is known in advance by the party wishing to access the data.

3. (3)

   The FCA5 considers that publication on a non-machine-readable website would not meet the MiFID requirements.

   5
4. (4)

   The FCA5 considers that information that is made public in accordance with REC 2.6.24 EU should conform to a consistent and structured format based on industry standards. Regulated markets or market operators operating an MTF can choose the structure that they use.

   5

In assessing whether access to a UK recognised body's facilities is subject to criteria designed to protect the orderly functioning of the market, or of those facilities, and the interests of investors, the FCA3 may have regard to whether:

1. (1)

   the UK recognised body limits access as a member to persons:

   1. (a)

      over whom it can with reasonable certainty enforce its rules contractually;

   2. (b)

      who have sufficient technical competence to use its facilities;

   3. (c)

      whom it is appropriate to admit to membership having regard to the size and sophistication of users of its facilities and the nature of the business effected by means of, or cleared through, its facilities; and

   4. (d)

      (if appropriate) who have adequate financial resources in relation to their exposure to the UK recognised body or its central counterparty;

2. (2)

   [deleted]2

   2
3. (3)

   indirect access to the UK recognised body'sfacilities is subject to suitable criteria, remains the responsibility of a member of the UK recognised body and is subject to its rules; and

4. (4)

   where access is granted to members outside the United Kingdom, there are adequate safeguards against financial crime (see also REC 2.10).

2 REC 2.7.3 G does not apply to a UK RIE's arrangements to grant access to investment firms or credit institutions.

The FCA3 may have regard to the arrangements made to permit electronic access to the UK recognised body's facilities and to prevent and resolve problems likely to arise from the use of electronic systems to provide indirect access to its facilities by persons other than its members, including:

1. (1)

   the rules and guidance governing members' procedures, controls and security arrangements for inputting instructions into the system;

2. (2)

   the rules and guidance governing the facilities members provide to clients to input instructions into the system and the restrictions placed on the use of those systems;

3. (3)

   the rules and practices to detect, identify, and halt or remove instructions breaching any relevant restrictions;

4. (4)

   the quality and completeness of the audit trail of any transaction processed through an electronic connection system; and

5. (5)

   procedures to determine whether to suspend trading by those systems or access to them by or through individual members.

In determining whether there are satisfactory arrangements for securing the timely discharge of the rights and liabilities of the parties to transactions, the FCA3 may have regard to the UK recognised body's:

1. (1)

   rules and practices relating to clearing and settlement including its arrangements with another person for the provision of clearing and settlement services;3

2. (2)

   arrangements for matching trades and ensuring that the parties are in agreement about trade details;

3. (3)

   where relevant,3 arrangements for making deliveries and payments, in all relevant jurisdictions;

   3
4. (4)

   procedures to detect and deal with the failure of a member to settle in accordance with its rules;

5. (5)

   arrangements for taking action to settle a trade if a member does not settle in accordance with its rules;

6. (6)

   arrangements for monitoring its members' settlement performance; and

7. (7)

   (where appropriate) default rules and default procedures.

A UK recognised body will not be regarded as failing to comply with the recognition requirement merely because it is unable to arrange for a specific transaction to be settled.

In determining whether a UK recognised body has satisfactory arrangements for recording the transactions effected on its facilities,3 or cleared or to be cleared by another person3 by means of, its facilities, the FCA3 may have regard to:

1. (1)

   whether the UK recognised body has arrangements for creating, maintaining and safeguarding an audit trail of transactions for at least three years (five years in respect of transactions carried out by members who are not incorporated in the United Kingdom if the UK recognised body is a regulated market); and

2. (2)

   the type of information recorded and the extent to which the record includes details for each transaction of:

   1. (a)

      the name of the investment (and, if relevant, the underlying asset) and the price, quantity and date of the transaction;

   2. (b)

      the identities and, where appropriate, the roles of the counterparties to the transaction;

   3. (c)

      if the UK recognised body's rules make provision for transactions or clearing facilitation services3 to be effected, in more than one type of facility, or under more than one part of its rules, the type of facility in which, or the part of its rules under which, the transaction or clearing facilitation service3 was effected; and

      33
   4. (d)

      the date and manner of settlement of the transaction.

In determining whether a UK recognised body's measures are appropriate to reduce the extent to which its facilities can be used for a purpose connected with market abuse or financial crime, to facilitate their detection and to monitor their incidence, the FCA3 may have regard to:

1. (1)

   whether the rules of the UK recognised body enable it to disclose any information to the FCA,3 or other appropriate bodies involved in the detection, prevention or pursuit of market abuse or financial crime in the United Kingdom or overseas; and

   3
2. (2)

   whether the arrangements, resources, systems, and procedures of the UK recognised body enable it to:

   1. (a)

      monitor the use made of its facilities so as to obtain information regarding possible patterns of normal, abnormal or improper use of those facilities;

   2. (b)

      detect possible instances of market abuse and financial crime, for example, by detecting suspicious patterns in the use of its facilities;

   3. (c)

      communicate information about market abuse and financial crime promptly and accurately to appropriate organisations; and

   4. (d)

      cooperate with all relevant bodies in the prevention, investigation and pursuit of market abuse and financial crime.

The law on market abuse and financial crime, including Part VI of the Criminal Justice Act 1988 and the Money Laundering Regulations, applies to UK recognised bodies. This recognition requirement (and this guidance) does not restrict, diminish or alter the obligations contained in that legislation.

In determining whether a UK recognised body has made satisfactory arrangements for the safeguarding and administration of assets belonging to the users of its facilities, the FCA3 may have regard to:

1. (1)

   the level of protection which the arrangements provide against the risk of theft or other types or causes of loss;

2. (2)

   whether the arrangements ensure that assets are only used or transferred in accordance with the instructions of the owner of those assets or in accordance with the terms of the agreement by which the UK recognised body undertook to safeguard and administer those assets;

3. (3)

   whether the arrangements ensure that the assets are not transferred to the UK recognised body or to any other person to settle the debts of the owner (or other person with the appropriate rights over the assets) except in accordance with valid instructions from a person entitled to give those instructions, or in accordance with the terms of the agreement by which the UK recognised body undertook to safeguard and administer those assets;

4. (4)

   whether the arrangements include satisfactory procedures to ensure that any rights arising in relation to the assets held as a result of any actions by the issuers of those assets (or other relevant persons) are held, transferred or acted upon in a timely and accurate manner in accordance with the instructions of the owner of those assets or in accordance with the terms of the agreement by which the UK recognised body undertook to safeguard and administer those assets;

5. (5)

   whether there are adequate arrangements to ensure the proper segregation of assets belonging to the UK recognised body (or to undertakings in the same group) from those belonging to the users of its facilities for the safeguarding and administration of assets;

6. (6)

   whether the arrangements include satisfactory procedures for the selection, oversight and review of custodians or sub-custodians used to hold the assets;

7. (7)

   whether the agreements by which the UK recognised body undertakes to safeguard and administer assets belonging to users of its facilities include appropriate information regarding the terms and conditions of that service and the obligations of the UK recognised body to the user of the service and of the user of the service to the UK recognised body;

8. (8)

   whether the records kept of those assets and the operation of the safeguarding services provide sufficient accurate and timely information:

   1. (a)

      to identify the legal and beneficial owners of the assets and of any persons who have charges over, or other interests, in the assets;

   2. (b)

      to record separately any additions, reductions and transfers in each account of assets held for safeguarding or administration; and

   3. (c)

      to identify separately the assets owned by (or, where appropriate, on behalf of) different persons, including, where appropriate, the assets owned by members of the UK recognised body and their clients;

9. (9)

   the frequency of reconciliation of the assets held by (or on behalf of) the UK recognised body with the accounts held with the UK recognised body by the users of its safeguarding and administration services and the extent of the arrangements for resolving a shortfall identified in any reconciliation; and

10. (10)

    the frequency with which statements of their holdings are provided to the users of the safeguarding and administration services, to the owners of the assets held and other appropriate persons in accordance with the terms of the agreement by which the UK recognised body undertook to safeguard and administer those assets.

Where a UK recognised body arranges for other persons to provide services for the safeguarding and administration services of assets belonging to users of its facilities, it will also need to satisfy the recognition requirement in Regulation 6 of the Recognition Requirements Regulations (see REC 2.2).

In determining whether appropriate arrangements have been made to make relevant information available to persons engaged in dealing in specified investmentsadmitted to trading on the UK RIE, the FCA5 may have regard to:

1. (1)

   the extent to which members and clients for whom they act are able to obtain information about those specified investments, either through accepted channels for dissemination of information or through other regularly and widely accessible communication media, to make a reasonably informed judgment about the value and the risks associated with those specified investments in a timely fashion;

2. (2)

   what restrictions, if any, there are on the dissemination of relevant information to the UK RIE's members and clients for whom they act; and

3. (3)

   whether relevant information is or can be kept to restricted groups of persons in such a way as to facilitate or encourage dealing in contravention of the Code of Market Conduct (see MAR 1).

UK RIEs do not need to maintain their own arrangements for disseminating news or information about specified investments (or underlying assets) to their members where they have made adequate arrangements for other persons to do so on their behalf or there are other effective and reliable arrangements for this purpose.

4In determining whether a UK RIE has clear and transparent rules concerning the admission of financial instruments to trading on any multilateral trading facility operated by it, the FCA5 considers that it is reasonable that the rules be based on criteria designed to promote fair and orderly trading (see REC 2.6.2 UK). In determining whether the rules are based on such criteria, the FCA5 may have regard to:

1. (1)

   whether there is a sufficient range of persons already holding the financial instrument (or, where relevant, the underlying asset) or interested in dealing in it to bring about adequate forces of supply and demand;

2. (2)

   the extent to which there are any limitations on the persons who may hold or deal in the financial instrument, or the amounts of the financial instrument which may be held; and

3. (3)

   whether the UK RIE has adequate procedures for obtaining information relevant for determining whether or not to suspend or discontinue trading in that financial instrument.

In determining whether a UK recognised body is able and willing to promote and maintain high standards of integrity and fair dealing in the carrying on of regulated activities, the FCA4 may have regard to the extent to which the UK recognised body seeks to promote and encourage, through its rules, practices and procedures, conduct in regulated activities which is consistent with the Code of Market Conduct (see MAR 1) and with any other codes of conduct, rules or principles relating to behaviour in regulated activities which users of the UK3financial system would normally expect to apply to the regulated activity and the conduct in question.

In assessing the ability of a UK recognised body to cooperate with the FCA4 and other appropriate bodies, the FCA4 may have regard to the extent to which the constitution and rules of the UK recognised body and its agreements with its members enable it to obtain information from members and to disclose otherwise confidential information to the FCA4 and other appropriate bodies.

In assessing the willingness of a UK recognised body to cooperate with the FCA4 and other appropriate bodies, the FCA4 may have regard to:

1. (1)

   the extent to which the UK recognised body is willing to provide information about it and its activities to assist the FCA4 in the exercise of its functions;

   4
2. (2)

   the extent to which the UK recognised body is open with the FCA4 or other appropriate bodies in regulatory matters;

   4
3. (3)

   how diligently the UK recognised body investigates or pursues enquiries from the FCA4 or other appropriate bodies; and

   4
4. (4)

   whether the UK recognised body participates in appropriate international fora.

For the purpose of this section, 'information' includes information held about large positions held by members of a UK recognised body.

In determining whether a UK recognised body has appropriate procedures for it to make rules, for keeping its rules under review and for amending them, the FCA3 may have regard to:

1. (1)

   the arrangements made for taking decisions about making and amending rules in the UK recognised body, including the level at which the decisions are taken and any provision for the delegation of decisions by the governing body;

2. (2)

   the arrangements made for determining whether or not it is appropriate to consult members or other users of the UK recognised body's facilities;

3. (3)

   the procedures for consulting members and other users of its facilities in appropriate cases; and

4. (4)

   the arrangements for notifying members (and other appropriate persons) of rule changes.

1. (1)

   In determining whether a UK recognised body's procedures include procedures for consulting users of its facilities in appropriate cases, the FCA3 may have regard to whether those procedures include provision for consulting users of those facilities before changes are made to any rules relating to its regulatory functions.

   3
2. (2)

   In the FCA's3 view, a UK recognised body's procedures may not need to contain provision for consulting users of its facilities before making minor changes to any rules of an administrative or commercial character.

   3

1. (1)

   In determining whether a UK recognised body's procedures for consulting members and other users of its facilities are appropriate, the FCA3 may have regard to the range of persons to be consulted by the UK recognised body under those procedures.

   3
2. (2)

   In the FCA's3 view, consultation with a smaller range of persons may be appropriate where limited, technical changes to a UK recognised body's rules are proposed.

   3
3. (3)

   In the FCA's3 view, a UK recognised body's procedures may include provision to restrict consultation where it is essential to make a change to the rules without delay in order to ensure continued compliance with the recognition requirements or other obligations under the Act.

   3

In determining whether a UK recognised body's procedures for consulting members and other users of its facilities are appropriate, the FCA3 may have regard to the extent to which the procedures include:

1. (1)

   informal discussions at an early stage with users of its facilities or appropriate representative bodies;

2. (2)

   publication to users of its facilities of a formal consultation paper which includes clearly expressed reasons for the proposed changes and an appropriately detailed assessment of the likely costs and benefits;

3. (3)

   adequate time for users of its facilities to respond to the consultation paper and for the UK recognised body to take their responses properly into account;

4. (4)

   adequate arrangements for making responses to consultation available for inspection by users of its facilities, unless the respondent requests otherwise;

5. (5)

   adequate arrangements for ensuring that the UK recognised body has proper regard to the representations received; and

6. (6)

   publication, no later than the publication of the amended rules, of a reasoned account of the UK recognised body's decision to amend its rules.

In determining whether a UK recognised body has effective arrangements for monitoring and enforcing compliance with its rules (including3 its settlement arrangements), the FCA3 may have regard to:

1. (1)

   the UK recognised body's ability to:

   1. (a)

      monitor and oversee the use of its facilities;

   2. (b)

      assess its members' compliance with its rules (and settlement arrangements, where appropriate);

   3. (c)

      assess the significance of any non-compliance;

   4. (d)

      take appropriate disciplinary action against members in breach of its rules (and settlement arrangements, where appropriate);

   5. (e)

      suspend a member's access to its facilities;

   6. (f)

      refer members' or others' conduct to other appropriate authorities for possible action or further investigation;

   7. (g)

      retain authority over a member for at least one year after he has ceased to be a member;

   8. (h)

      where appropriate, enforce its rules (and settlement arrangements, where appropriate) against users (other than members) of its facilities; and

   9. (i)

      take action against suppliers of services to members (for example, warehouses) whose performance or conduct may be critical to ensuring compliance with its rules (and settlement arrangements, where appropriate);

2. (2)

   the position, management and resources of the departments responsible for monitoring and overseeing the use of the UK recognised body'sfacilities and for enforcing compliance with its rules (and settlement arrangements, where appropriate); and

3. (3)

   the arrangements made for the determination of disciplinary matters including the arrangements for disciplinary hearings and the arrangements made for appeals from the UK recognised body's decisions in those matters.

In assessing whether the procedures made by a UK recognised body to investigate complaints about the users of its facilities are satisfactory, the FCA3 may have regard to:

1. (1)

   whether these procedures include arrangements which enable the UK recognised body to:

   1. (a)

      acknowledge complaints promptly;

   2. (b)

      consider and investigate these complaints objectively, promptly and thoroughly;

   3. (c)

      provide a timely reply to the complainant; and

   4. (d)

      keep adequate records of complaints and investigations;

2. (2)

   the arrangements made to enable a person who is the subject of a complaint to respond in an appropriate manner to that complaint; and

3. (3)

   the documentation of these procedures and the arrangements made to ensure that the existence of these procedures is brought to the attention of persons who might wish to make a complaint.

In assessing whether the arrangements include procedures for the fair, independent and impartial resolution of appeals against decisions of a UK recognised body, the FCA3 may have regard to at least the following factors:

1. (1)

   the appeal procedures of the UK recognised body, including the composition and roles of any appeal committees or tribunals, and their relationship to the governing body;

2. (2)

   the arrangements made to ensure prompt hearings of appeals from decisions made by the UK recognised body;

3. (3)

   the format, organisation and rules of procedure of those hearings;

4. (4)

   the arrangements made to select the persons to preside over those hearings and to serve as members of any appeal tribunal;

5. (5)

   the provision for determining whether or not such hearings should be in public;

6. (6)

   the provision made to enable an appellant to be aware of the procedure at any appeal hearing and to have the opportunity to prepare and present his case at that hearing;

7. (7)

   the provision made for an appeal tribunal to give an explanation of its decision;

8. (8)

   the provision for publicity for any appeals or for determining whether or not publicity should be given to the outcome of any appeal.

In assessing whether a UK recognised body's arrangements include appropriate provision for ensuring the application of any financial penalties in ways described in the recognition requirement, the FCA3 may have regard to:

1. (1)

   the UK recognised body's policy regarding the application of financial penalties;

2. (2)

   the arrangements made for applying that policy in individual cases;

but the FCA3 does not consider that it is necessary for UK recognised bodies to follow any specific policy in order to meet this recognition requirement.

In determining whether a UK recognised body has effective arrangements for the investigation and resolution of complaints arising in connection with the performance of, or failure to perform, any of its regulatory functions, the FCA3 may have regard to the extent to which the UK recognised body's resources and procedures enable it to:

1. (1)

   acknowledge complaints promptly;

2. (2)

   make an objective, prompt and thorough initial investigation of complaints;

3. (3)

   provide a timely reply to the complainant after that initial investigation;

4. (4)

   inform the complainant of his right to apply to the UK recognised body'scomplaints investigator; and

5. (5)

   keep adequate records of complaints and investigations.

In determining whether a UK recognised body's arrangements for the investigation of complaints include appropriate arrangements for the complaint to be fairly and impartially investigated by an independent person (a "complaints investigator"), the FCA3 may have regard to:

1. (1)

   the arrangements made for appointing (and removing) a complaints investigator, including the terms and conditions of such an appointment and the provision for remuneration of a complaints investigator;

2. (2)

   the complaints investigator's access to, and relationship with, the UK recognised body'sgoverning body and key individuals;

3. (3)

   the arrangements made for giving complainants access to the complaints investigator;

4. (4)

   the facilities made available to the complaints investigator to enable him to pursue his investigation and prepare his report and recommendations, including access to the UK recognised body's records, key individuals and other staff (including, where appropriate suppliers, contractors or other persons to whom any functions have been outsourced and their staff); and

5. (5)

   the arrangements made for the UK recognised body to consider the complaints investigator's report and recommendations.

1In determining whether a UK RIE operating a multilateral trading facility complies with those requirements of Chapter I of Title II of MiFID and the MiFID implementing Directive which are applicable to a market operator operating such a facility, the FCA2 will have regard to the compliance of the UK RIE with equivalent recognition requirements.

The text of part of regulation 3 (Interpretation) of and 3Parts II and IV of the Schedule to the Recognition Requirements Regulations is set out below.