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Part 1: HFT coders – ready for judgement?

By Sam Tyfield and JWG.

It has been widely rumoured that the level 2 MiFID II will define the high frequency algorithmic trading technique (HFATT) as one which has a high message intraday rate in which there is a minimum of four messages being sent  per second for all instruments traded on a trading venue.  In part one of this article, we focus on the consultation paper published by the FCA, CP 15/22 (a copy of which is here – I don’t recommend printing it as it’s 414 pages long!).

It deals with, among other things, extending the certification regime to wholesale market activities, which should come as no surprise to the more long suffering readers of Sam’s previous articles.  The first bit of good news is that the FCA and PRA have determined that these proposals deal only with banks and other PRA-regulated firms, not sole-regulated FCA investment firms.  Nonetheless, we think it is important for all investment firms to be aware of these changes knocking about in light of incoming rules about (for example) algo trading and systems and controls, and because the FCA states (see page 9) that:

In its final report, the Fair and Effective Markets Review made proposals for legislative change to enable the extension of the SMR [Senior Managers Regime] and the Certification Regime to areas of fixed income, commodity and currency markets.  We would consult as appropriate on any extension of the new accountability regime, once the nature of any such legislative change became known.

And, as we know, the FEMR report called for the extension of the SMR to inter-dealer brokers and asset managers and other MiFID investment firms, hedge funds under the AIFMD and fund managers under UCITS.  FEMR also hinted that HM Treasury and the FCA may want to consider whether firms active in financial markets other than FICC should also be included.

There are two additional categories of ‘significant harm’ functions which will fall within the certification regime:

  • Individuals dealing with clients; and
  • Individuals with responsibility for:
    1. Approving deployment of a trading algo “or a material part of one
    2. Approving the deployment of a “material amendment” to a trading algo or a “material part of one” or “the combination of trading algos” (?)
    3. Monitoring or deciding whether or not the use or deployment of a trading algo is or remains compliant with the firm’s obligations”.

The second sub-category above “will include individuals responsible for all algos that are in production and operationally capable of trading, regardless of whether they are actually engaging in trades at any given point”.

The definition of “algo trading” is specifically not limited to HFT.

The final bit of good news is that, provided the individual who would otherwise fall within one of these categories is not based in the UK, or is not dealing with clients based in the UK, they are not within scope of the rules unless that person is also a “material risk-taker” (which, for PRA firms, basically includes Remuneration Code staff), in which case it doesn’t matter where they (or the clients) are based.

In conclusion, therefore, if you are a PRA-regulated firm, then all of the above will apply to you and your staff (eventually, subject to consultation) and if you are not, this is a sign of things to come …  And did we mention the criminal sanctions?

To follow the full MiFID II debate, join our LinkedIn Group.

 

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