In other words, dealing on own account takes place when a firm puts its own books at risk (ESMA Consultation Paper Guidelines on transaction reporting, reference data, order record keeping & clock synchronisation, 23 December 2015, ESMA/2015/1909, p. 49).
Dealing on own account is included in the catalogue of investment services and activities in Section A of the Annex I of MiFID II (point 3), however, the specific exemption is available (see Dealing on own account exemption under MiFID II).
FCA, The Perimeter Guidance Manual, Chapter 13, Guidance on the scope of MiFID and CRD IV, Release 13, Feb 2017, p. 10, 11
Dealing on own account is trading against proprietary capital resulting in the conclusion of transactions in one or more MiFID financial instruments. In most cases, if you were a firm who was dealing for own account under the ISD, the FCA would expect you to be dealing on own account for the purposes of MiFID if you continue to perform the same activities.
Dealing on own account involves position-taking which includes proprietary trading and positions arising from market-making. It can also include positions arising from client servicing, for example where a firm acts as a systematic internaliser or executes an order by taking a market or 'unmatched principal' position on its books.
Dealing on own account may be relevant to firms with a dealing in investments as principal permission in relation to MiFID financial instruments, but only where they trade financial instruments on a regular basis for their own account, as part of their MiFID business. We do not think that this activity is likely to be relevant in cases where a person acquires a long term stake in a company for strategic purposes or formost venture capital or private equity activity. Where a person invests in a venture capital fund with a view to selling its interests in the medium to long term only, in our view he is not dealing on own account for the purposes of MiFID.
In our view, where you are a firm which meets all of the conditions of article 29(2) of CRD (see Q61) or article 5.2 of the recast CAD, as applicable under the CRD and the EU CRR to certain firms (see Q58A), you will not be dealing on own account. Where you bid for your own account on an auction platform for a financial instrument, you may be dealing on own account.
MiFID II confirms that dealing on own account captures back-to-back trading (FCA, MiFID II – Application and notification user guide, January 2017, p. 21).
The category of dealing on own account can be divided under MiFID II into two sub-categories:
- matched principal trading (which is in the first place a form of dealing on own account - "If a firm executes client orders by standing between clients on a matched principal basis (back-to-back trading), it is both dealing on own account and executing orders on behalf of clients (Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015, CP15/43, p. 262));
- "principal capacity" - being a flag covering all, other than matched principal trading, forms of dealing on own account.
As the UK FCA explains (Perimeter Guidance Manual (Chapter 13, Guidance on the scope of MiFID and CRD IV, Release 13, Feb 2017, p. 10, 11), dealing on own account involves position-taking which includes proprietary trading and positions arising from market-making.
It can also include positions arising from client servicing, for example where a firm acts as a systematic internaliser or executes an order by taking a market or 'unmatched principal' position on its books.
The European Banking Authority (EBA) observed in the Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20 (p. 19):
"Investment firms that do not hold client money and securities, only dealing on own account (MiFID activity A3) with no external clients, are currently captured under the full treatment in the CRD IV framework. Although trading for own account carries high risks when conducted within a banking group (due to contagion risk), the situation should be assessed differently for standalone firms. The insolvency of a firm without external clients generally affects only the owners of the firm (and, to some extent, the firm's counterparties and creditors). Under the broad financial stability objective set for prudential regulation, only when such firms are of a significant size and level of interconnectedness (with risks of adverse material impact upon other market participants and market confidence as a whole) should a case be considered."
It was also added: "Under the MiFID, firms dealing for their own account are exempt from being authorised and hence are not deemed to be investment firms for the purposes of the CRR. Under MiFID II, some of these proprietary trading firms will be required to be authorised and will be deemed to be 'investment firms', and may thus have to apply the CRR in full" (p. 35).
Reporting for dealing on own account under MiFID II
Dealing on own account capacity is flagged by the designation "DEAL" within the MiFID II reporting framework (Field 29 (Trading capacity) of the Table 2 in the Annex to the Commission Delegated Regulation (EU) of 28.7.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities).
ESMA's Guidelines of 10 October 2016 (Transaction reporting, order record keeping and clock synchronisation under MiFID II, 10 October 2016, ESMA/2016/1452, p. 15) underline that the investment firm in the DEAL capacity may be acting purely to action its own proprietary trades or may be acting on own account with a view to filling orders that it has received from a client.
In the latter case, the trading time and date for the client side report may be the same as for the market side report or could be later and the price of the market side and client side report could be the same or could differ.
The aforementioned ESMA's Guidelines of 10 October 2016 stress that investment firms dealing on own account are acting directly themselves and cannot 'transmit orders' in the meaning of Article 4 of the said Commission Delegated Regulation of 28.7.2016, as any orders they submit to another firm or investment firm are their own orders rather than being transmission of an order received from a client or resulting from a decision to acquire or dispose of a financial instrument for a client under a discretionary mandate.
That said, where an investment firm is acting on own account (Field 29 = 'DEAL''), Field 25 (Transmission of order indicator) should be populated with 'false' (ESMA's Guidelines Transaction reporting, order record keeping and clock synchronisation under MiFID II, 10 October 2016, ESMA/2016/1452 (p. 21, 23)).
The said designation 'DEAL' for 'dealing on own account' trading capacity is also used within the trading venue's data under the Commission Delegated Regulation (EU) 2017/580 of 24.6.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the maintenance of relevant data relating to orders in financial instruments (Field 7 (Trading capacity) in the Table 2 in the Annex to Regulation).
If the order submission results from the member or, participant of the trading venue is dealing on its own account under Article 4(6)of MiFID II the said Field 7 should be populated with "DEAL". According to the description, the said Field indicates:
"whether the order submission results from the member or, participant of the trading venue is carrying out matched principal trading under Article 4(38) of Directive 2014/65/EU, or dealing on its own account under Article 4(6) of Directive 2014/65/EU.
Where the order submission does not result from the member or participant of the trading venue carrying out matched principal trading or dealing on its own account, the field shall indicate that the transaction was carried out under any other capacity".
MiFID II, Article 4(1)(6), Annex I Section A3
Commission Delegated Regulation (EU) 2017/580 of 24 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the maintenance of relevant data relating to orders in financial instruments, OJ L 87, 31.3.2017, p. 193–211