RegTech Intelligence 
The long anticipated and much discussed new German high-frequency trading (HFT) law is now formally with us. In brief, Germany has introduced an authorisation regime for entities conducting HFT, but with significant extra-territorial consequences. The law has been passed by the Bundesrat and waits to be signed into law by the German President (probably at the beginning of April).
Yesterday, 25th March, BaFin published a FAQ (in German), an unofficial translation of which is cut and pasted below. The latest word is that, contrary to previous thinking, there will be no official translation of the law. However, a number of industry organisations are working on producing “semi-official” translations.
There is much in the law which requires clarification and BaFin is working on this and is in discussions with other EU regulators, particularly the FSA.
The FAQs focus primarily on the licensing requirements, although there are significant further requirements on direct and indirect member firms of German exchanges and MTFs. Bearing in mind the transition periods for authorisation/licensing and the fact that a consolidated law has yet to be published, these issues will crystallise in the coming weeks.
For now, however, the focus is on the licensing requirements. The firms for which the licensing requirements will be most problematic can be broken down into three categories:
• Non-EU firms which may or may not be the subject of local regulatory authorisation or members of Self-Regulatory Organisations (SROs) (e.g. the CME);
• EU firms which are not authorised or regulated as they fall within an exemption under MiFID (e.g. principal trading firms);
• EU firms which are authorised and regulated but with a lesser authorisation (e.g. those that are ‘trading as agent’).
There remains a significant amount of uncertainty as to how each of these categories of firms will fall to be treated by BaFin and whether there will be a different treatment for those which trade F&O and cash. At present, it seems unlikely that membership of non-EU SROs will be considered acceptable for passporting/equivalence purposes.
It is important to note also that if members of the second or third category of firm have non-EU affiliates which are direct or indirect members of German venues, it remains an open question whether those firms can provide services to their affiliates, or route trades through their systems back-to-back on the affiliates’ behalf keeping the non-EU affiliate out of the ‘German legal net’.
Given the state of play regarding the detail of the law, it is also unclear at this stage whether changing the nature of a firm’s trading – and its relationship with its general clearing members (GCM)/futures commodities merchant (FCM) – may provide a workable alternative (e.g. going down the CfDs/swaps route).
Whilst it may not be a practical solution for all, it should be considered that, under the UK rules, it is possible to become an Appointed Representative of another, authorised firm (i.e. to place a firm under another’s regulatory umbrella), which makes that regulatory status passport-able.
Below is an unofficial translation of BaFin’s FAQ. This has been produced with the use of Google Translate and is not intended to be relied upon in any way.
1) When will the license requirement for the high-frequency trading, as defined, come into effect?
The high-frequency trading law takes effect on the day following its publication. With respect to the licensing requirement, however, the law provides for transitional periods for the application for a license before (see § 64p Kreditwesengesetz, KWG). For submitting a license application, a transitional period of six months is provided. For companies that do not reside within the country, and are not an undertaking within the meaning of § 53b para 1 sentence 1 and 2 KWG, a transition period of nine months is provided.
[Author’s note: it is assumed that firms will satisfy the licensing requirement if, during the 9-month period, they make an application for licensing. My view is that the law anticipates an application for licensing by BaFin, rather than an application for licensing by another EU regulatory body, so what will be achieved during this 9-month period remains an open question.]
2. When will the follow-up requirements apply under the Banking Act (i.e. capital requirements, reporting requirements, organisational requirements, etc.)?
With regard to the follow-up requirements, BaFin will not pursue a plan before receipt of a complete permit application – even retroactively. For submitting a request for such a permit under § 64p KWG, a transition period of six months and nine months is provided.
[Author’s note: see comment on FAQ 1 above.]
3. When will the follow-up requirements apply under the Wertpapierhandelsgesetz (WpHG)?
In the future, for companies that fall – due to the licensing requirements – under the obligations of the Securities Trading Act, the BaFin will also not pursue a plan before receipt of a complete permit application – even retroactively.
4. Are transitional provisions provided for businesses that have qualified for a passport?
Yes. When companies that are resident in a country of the European Economic Area (EEA), (see MiFID Annex I, Section A, No. 3) already have a license for trading for dealing on its own account and make use of the European passport, BaFin also allows a transitional period of six months for notifying bodies.
Companies that are resident in an EEA country, that have acquired the permission to trade on their own account (see MiFID Annex I, Section A, No. 3) and have already taken appropriate action on the basis of the passport in Germany, can continue the high-frequency trading without any further application being made. In this case, it is required that the home supervisor in the case of cross-border activity has issued a notification under Article 31 of MiFID or, in the case of the exercise of high-frequency trading through a branch, a notification under Article 32 of MiFID to BaFin.
5. Will a trading participant, which already operates high-frequency trading in Germany, but will in future fall under the licensing requirements and does not currently have a license has, be punishable if he continues to conduct high-frequency trading in Germany?
No, a trading participant does not immediately face prosecution if he continues to conduct high-frequency trading in Germany. The transition periods are used to allow market participants to adapt to the new legal requirements. Therefore, there are no immediate legal consequences if a member continues to conduct high frequency trading. Provided, however, that market participants that fall under the license requirement submit an application for a license within the transition period of six months or nine months.
6. For investment services companies, investment companies and self-managed investment companies, do the organisational requirements apply pursuant to § 33 Section 1a WpHG (in conjunction with § 9 para 1 Investment Act)?
Article 7 of the high-frequency Trading Act provides that these organisational requirements take effect six months after the high frequency trading law comes into force. For investment services companies, investment companies and self-managed collective investment funds, there is now also a transition period of six months.
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