Direct Electronic Access (DEA)
European Union Electricity Market Glossary

 


 

 

Pursuant to Article 4(1)(41) of MiFID II, Direct Electronic Access (DEA) means an arrangement where a member or participant or client of a trading venue permits a person to use its trading code so the person can electronically transmit orders relating to a financial instrument directly to the trading venue and includes arrangements which involve the use by a person of the infrastructure of the member or participant or client, or any connecting system provided by the member or participant or client, to transmit the orders (direct market access) and arrangements where such an infrastructure is not used by a person (sponsored access).

 

 

MiFID II Article 48(7)

 

Member States shall require a regulated market that permits direct electronic access to have in place effective systems procedures and arrangements to ensure that members or participants are only permitted to provide such services if they are investment firms authorised under this Directive or credit institutions authorised under Directive 2013/36/EU, that appropriate criteria are set and applied regarding the suitability of persons to whom such access may be provided and that the member or participant retains responsibility for orders and trades executed using that service in relation to the requirements of this Directive.

 

Member States shall also require that the regulated market set appropriate standards regarding risk controls and thresholds on trading through such access and is able to distinguish and if necessary to stop orders or trading by a person using direct electronic access separately from other orders or trading by the member or participant.

 

The regulated market shall have arrangements in place to suspend or terminate the provision of direct electronic access by a member or participant to a client in the case of non-compliance with this paragraph.

 

International Organization of Securities Commissions (IOSCO), Policies on Direct Electronic Access of February 2009 (p. 7) observes there are divergent understandings of the term “Direct Electronic Access”.

 

Nonetheless, there is general agreement that DEA falls into two key categories: intermediated and non-intermediated.

 

Intermediated DEA generally refers to:

 

(a)  customers being given direct access to the market through a registered intermediary’s system/infrastructure, i.e. "automated order routing;” (AOR) or


(b)  customers of an intermediary being given direct access to the market without going through the intermediary’s system/infrastructure, i.e., “sponsored access" (SA).


In either case, however, the order is sent to the market as the intermediary’s order, i.e., using the intermediary’s trading ID.

 

In the intermediated DEA the intermediary therefore retains full responsibility for the order.

 

According to the said IOSCO document of February 2009, the non-intermediated direct access generally refers to markets providing direct access to non-intermediaries (i.e., parties other than registered brokerage firms), as market-members and in that capacity connecting directly to the market, without going through an intermediary.

 

Credit risk is a key concern raised by DEA arrangements.

 

 

Automated Order Routing (AOR)

 

This describes a situation where an intermediary, who is a market-member, permits its customers to transmit orders electronically to the intermediary’s infrastructure (i.e., system architecture, which may include technical systems and/or connecting systems), where the order is in turn automatically transmitted for execution to a market under the intermediary’s market-member ID (mnemonic). In this case, the intermediary retains the ability to monitor internally and, if necessary, stop an order before it is executed. Such access is often referred to as “automated order routing.”

 

Sponsored Access (SA)

 

This describes a situation where an intermediary, who is a market-member, may permit its customers to use its member ID (mnemonic) to transmit orders for execution directly to the market without using the intermediary’s infrastructure. In this case, the intermediary is not able to use the internal controls applied with respect to AOR (e.g., does not have a real time view and cannot stop an order).

 

International Organization of Securities Commissions (IOSCO), Policies on Direct Electronic Access of February 2009 (p. 10)

 

This is maybe the main cause that, as the IOSCO Report underlines, although the use of DEA continues to increase, the number of DEA customers appears to be relatively small as a percentage of all customers.

 

 

Sponsored access

 

 

Compliance or regulatory risks are more pronounced when a customer that is not a market-member places orders directly on a market in the name of the intermediary, and that credit risks are more pronounced where the customer, who has DEA, is a non-clearing member of the market.

 

The reasons for not permitting “sponsored access” for some DEA providers are, among others, due to the inability of the DEA intermediary under such circumstances to impose sufficient pre-execution risk controls (against orders placed in error, “abnormal activity” alerts, etc.).

 

On a sponsored access basis, the customer’s orders are not visible to the DEA intermediary before execution, other than through supervisory terminals made available by connectivity providers under AOR.

 

Even in North America, where the extent of sponsored access is greater than in many other jurisdictions, a number of intermediaries indicated to IOSCO that they do not permit such access at all.

 

The aforementioned IOSCO report makes comment that the lack of jurisdiction by markets over persons accessing the markets, especially under sponsored access arrangements, may be problematic when such a sponsored access client engages in manipulative trading practices but the responsible intermediary is found to have in place fully adequate policies and supervisory procedures.

 

The concern expressed was that even though market rules may provide that market- members are responsible for their customers’ trading through DEA, it may be difficult to prosecute an intermediary for the underlying violation of the market rules caused by the customer and instead, actions may be taken to sanction the market-member for a lack of supervision of trading.

 

It was the IOSCO's opinion (dated 2009), that "it may be difficult for a market authority to prove that the intermediary had inadequate policies and procedures in place", but it occurs in practice that such enforcement procedures become more and more often.

 

 

Service bureaus

 

 

IOSCO further sheds some light on the activity of “service bureaus” that play a significant role in DEA in some jurisdictions.

 

Service bureaus are technology companies that provide order-routing and connectivity services for both intermediaries and institutional customers.

 

The service bureaus enter into agreements with markets that authorize their electronic connections and are at the electronic front end that directs orders to a particular market.

 

The use of service bureaus by intermediaries can be seen as an outsourcing of functions that are normally performed internally (possibly including pre-trade controls).

 

Service bureaus may be used in both AOR and sponsored access.

 

 

Direct electronic access to an OTF under MiFID

 

 

In the Answer to Question 19 in the Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38 ESMA clarified on 3 October 2017 the issue how the OTF best execution obligations apply when third-party brokers are clients of the OTF or when these brokers provide Direct Electronic Access (DEA) (Article 4(1)(41) of MiFID II).

 

According to ESMA, when an investment firm or a market operator operating an OTF receives orders or indications of interest from a broker acting on behalf of its own clients, the operator of the OTF should be implementing its own best execution policy when executing the order from the broker orders as it owes its user clients (the broker) the duty of best execution.

 

The broker should determine that the OTF it selects allows it to comply with its best execution obligations towards its own clients.

To that end, the broker should conduct a performance assessment of the OTF including how discretion is exercised.

 

In the specific case of DEA to an OTF, the DEA order is entered in the OTF client’s name (the broker) and the OTF operator should execute the DEA order as it would for any OTF client order.

 

Alternatively, the operator of the OTF may decide not to permit DEA to its system.

 

ESMA also notes that a DEA order could be considered as a client specific instruction to the broker providing the DEA arrangement to its clients.

 

Internal regulations of ICE Futures Europe envision that DEA providers should consider the authorisation status of their clients (Guidance ICE Futures Europe and ICE Endex Guidance on Member Requirements under MiFID II of June 2017).

 

Pursuant to the Consultation Paper of the Financial Conduct Authority on Markets in Financial Instruments Directive II Implementation (CP15/43) of December 2015 (p. 120, 121), a firm which permits direct electronic access to an OTF it operates must:

 

(1) not permit members or participants of the OTF to provide such services unless they are:

(a) investment firms authorised under MiFID; or

(b) CRD credit institutions; or

(c) third country investment firms; or

(d) overseas firms registered in accordance with article 46 of MiFIR;

 

(2) set, and apply, criteria for the suitability of persons to whom direct electronic access services may be provided;

 

(3) ensure that the member or participant of the OTF retains responsibility for adherence to the requirements of MiFID in respect of orders and trades executed using the direct electronic access service;

 

(4) set standards for risk controls and thresholds on trading through direct electronic access;

 

(5) be able to distinguish and if necessary stop orders or trading on that trading venue by a person using direct electronic access separately from:

(a) other orders;

(b) trading by the member or participant providing the direct electronic access; and

 

(6) have arrangements to suspend or terminate the provision of direct electronic access on that market by a member or participant in the case of any non-compliance with this rule.

 

 

DEA agreements

 

 

The aforementioned IOSCO Report of 2009 indicates that most intermediaries enter into written contractual agreements with their DEA customers, the purpose of which is to restrict, condition or otherwise control how their customer utilizing their infrastructure may transmit orders, as well as to seek to ensure compliance by their DEA customers with market rules.

 

Some of the key terms and conditions contained in such contracts include the following:

 

- provisions that address the respective rights and liabilities of the parties such as statements that the customer accepts all liabilities resulting from DEA use (including use of identification codes, settlement and delivery);


- provisions relating to the security (physical and IT security) of the infrastructure (user identity, passwords, authentication codes, etc.), to avoid unauthorized system access;


- limits that are expressed as a notional amount for each customer above which the orders are rejected by the system, as well as by reference to the maximum amount per order/per user;


- warranties, indemnities, charges and customer/product specific conventions;


- conditions (such as for entering orders, error trade policies, etc.) and restrictions such as the right to suspend the service, to reject or cancel orders, etc.;


- use of specific standard format for order routing such as SWIFT or FIX;


- a requirement to have knowledge of trading rules and applicable laws and regulations or a requirement to comply with these;


- a requirement that the customer's users are authorized, qualified and competent.


These terms and conditions are usually standard in terms of restrictions, conditions and controls although most intermediaries clarify that they are adapted to the business relationship with the customer and the type of service provided (dealing services, clearing services, prime brokerage).

 

 

 

Article 17(5) MiFID II

  

An investment firm that provides direct electronic access to a trading venue shall have in place effective systems and controls which ensure a proper assessment and review of the suitability of clients using the service, that clients using the service are prevented from exceeding appropriate pre-set trading and credit thresholds, that trading by clients using the service is properly monitored and that appropriate risk controls prevent trading that may create risks to the investment firm itself or that could create or contribute to a disorderly market or could be contrary to Regulation (EU) No 596/2014 or the rules of the trading venue. Direct electronic access without such controls is prohibited.

 

An investment firm that provides direct electronic access shall be responsible for ensuring that clients using that service comply withthe requirements of this Directive and the rules of the trading venue. The investment firm shall monitor the transactions in order to identify infringements of those rules, disorderly trading conditions or conduct that may involve market abuse and that is to be reported to the competent authority. The investment firm shall ensure that there is a binding written agreement between the investment firm and the client regarding the essential rights and obligations arising from the provision of the service and that under the agreement the investment firm retains responsibility under this Directive.

 

An investment firm that provides direct electronic access to a trading venue shall notify the competent authorities of its home Member State and of the trading venue at which the investment firm provides direct electronic access accordingly.

 

The competent authority of the home Member State of the investment firm may require the investment firm to provide, on a regular or ad-hoc basis, a description of the systems and controls referred to in first subparagraph and evidence that those have been applied.

 

The competent authority of the home Member State of the investment firm shall, on the request of a competent authority of a trading venue in relation to which the investment firm provides direct electronic access, communicate without undue delay the information referred to in the fourth subparagraph that it receives from the investment firm.

 

The investment firm shall arrange for records to be kept in relation to the matters referred to in this paragraph and shall ensure that those records be sufficient to enable its competent authority to monitor compliance with the requirements of this Directive.

 

 

 

 

Commission Delegated Regulation (EU) 2017/565 of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

Article 20
Direct electronic access
(Article 4(1)(41) of Directive 2014/65/EU)


1. A person shall be considered not capable of electronically transmitting orders relating to a financial instrument directly to a trading venue in accordance with Article 4(1)(41) of Directive 2014/65/EU where that person cannot exercise discretion regarding the exact fraction of a second of order entry and the lifetime of the order within that timeframe.

 

2. A person shall be considered not capable of such direct electronic order transmission where it takes place through arrangements for optimisation of order execution processes that determine the parameters of the order other than the venue or venues where the order should be submitted, unless these arrangements are embedded into the clients' systems and not into those of the member or participant of a regulated market or of an MTF or a client of an OTF.

 

Recitals 20, 25 - 27

 

(20) For reasons of clarity and legal certainty and to ensure a uniform application, it is appropriate to provide supplementary provisions in relation to the definitions in relation to algorithmic trading, high frequency algorithmic trading techniques and direct electronic access. In automated trading, various technical arrangements are deployed. It is essential to clarify how those arrangements are to be categorised in relation to the definitions of algorithmic trading and direct electronic access. The trading processes based on direct electronic access are not mutually exclusive to those involving algorithmic trading or its sub-segment high frequency algorithmic trading technique. The trading of a person having direct electronic access may therefore also fall under the algorithmic trading including the high frequency algorithmic trading technique definition.

...

(25) The definition of direct electronic access should be further specified. The definition of direct electronic access should not encompass any other activity beyond the provision of direct market access and sponsored access. Therefore, arrangements where client orders are intermediated through electronic means by members or participants of a trading venue such as online brokerage and arrangements where clients have direct electronic access to a trading venue should be distinguished.

 

(26) In case of order intermediation, submitters of orders do not have sufficient control over the parameters of the arrangement for market access and should therefore not fall within scope of direct electronic access. Therefore, arrangements that allow clients to transmit orders to an investment firm in an electronic format, such as online brokerage, should be not be considered direct electronic access provided that clients do not have the ability to determine the fraction of a second of order entry and the life time of orders within that time frame.

 

(27) Arrangements where the client of a member or participant of a trading venue, including the client of a direct clients of organised trading facilities (OTFs), submit their orders through arrangements for optimisation of order execution processes that determine parameters of the order other than the venue or venues where the order should be submitted through SORs embedded into the provider's infrastructure and not on the client's infrastructure should be excluded from the scope of direct electronic access since the client of the provider does not have control over the time of submission of the order and its lifetime. The characterisation of direct electronic access when deploying smart order routers should therefore be dependent on whether the smart order router is embedded in the clients' systems and not in that of the provider.

 

 

 

 

Direct Electronic Access

 

"'Direct Electronic Access' means an arrangement where a member or participant or client of a trading venue permits a person to use its trading code so that the person can electronically transmit orders relating to a financial instrument directly to the trading venue and includes arrangements which involve the use by a person of the infrastructure of the member or participant or client, or any connecting system provided by the member or participant or client, to transmit the orders (direct market access) and arrangements where such an infrastructure is not used by a person (sponsored access)."

 

Unless clearly delineated, Direct Electronic Access (DEA) may qualify as infrastructure intended to minimise network and other types of latencies in the sense of the definitions of 'algorithmic trading' and 'high-frequency algorithmic trading' under Articles 4(1)(39) and 4(1)(40). It is therefore necessary to further clarify the distinction of DEA and in particular where a particular use of DEA may trigger the obligation to comply with provisions of MiFID II/MiFIR.

 

ESMA's technical advice:

 

ESMA in its technical advice identified the ability to exercise discretion regarding the exact fraction of a second of order entry and the lifetime of the orders within that timeframe as the critical element to qualify an activity as DEA. Where the submitter of the order does not have control over those parameters, the arrangement would be out of scope of DEA, this also holds for systems that allow clients to transmit orders to an investment firm in an electronic format (online brokerage). Nevertheless the investment firm would conduct algorithmic trading when submitting those client orders if it uses smart order routers and in that case, it should be compliant with Article 17 of MIFID II.

 

With regard to the distinction between DEA, SORs (smart order routers) and AORs (automated order routers) ESMA considers that:

 

- SORs are algorithms used for the optimisation of order execution processes and may determine parameters of the order other than the venue(s) where the order should be submitted. SORs fall within the definition of 'algorithmic trading' and the relevant MiFID II articles should apply to them and not those on DEA.

 

- AOR encompass those functionalities that determine the trading venue(s) where the order should be submitted without changing any trading parameter of the order (an SOR would be able to do the same, but also modify parameters of the order, in particular the time of submission of orders). Use of an AOR as described does not qualify or disqualify the provision of DEA in case it is embedded in DEA systems. Use of an AOR in isolation should not be considered as DEA.

 

Assessment of IA need:

 

The definition of DEA is needed to clarify when an investment firm carries out algorithmic trading according to Article 17 and has to fulfil the relevant requirements of the Directive. ESMA reached a compromise on a solution to a technical issue. It is therefore the Commission's view that it is not proportionate to subject this solution to a technical problem to further impact assessment.

 

Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 72, 73

 

 

 

 

MiFID II reporting for DEA

 

 

When it comes to MiFID reporting, DEA provider should report as acting in a matched principal (MTCH) or "any other capacity" (AOTC) (Guidelines Transaction reporting, order record keeping and clock synchronisation under MiFID II, 10 October 2016, ESMA/2016/1452, p. 21).

 

Annex to 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 envisions that information on DEA must be an element of the content of the order details to be maintained at the disposal of the competent authority (this is effected in the Field 2 of the respective format where if the order was submitted to the trading venue using DEA as defined in Article 4(1)(41) of MiFID II, the parameter value should be "true" and - in the opposite case - "false").

 

Moreover, in case of DEA, the identity of the DEA provider should be put in the Field 1 (Identification of the entity which submitted the order), which, in principle, should indicate the identity of the member or participant of the trading venue.

 

The similar case is for the Field 3 (Client identification code), which is designed to indicate the code used to identify the client of the member or participant of the trading venue. Also in the Field 3 in case there is DEA, the code of the DEA user is required to be used.

 

The practical ambiguity appeared whether an investment firm using DEA services provided by an intermediary firm (such as a broker) should list:

 

- the execution venue selected via the DEA arrangement (under the reporting obligation envisioned in the Commission Delegated Regulation (EU) 2017/576 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution (RTS 28) or


- the broker providing the DEA service (in the report to be published pursuant to Article 65(6) of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.

 

ESMA referred to this issue in the Questions and Answers on MiFID II and MiFIR investor protection and intermediaries topics (ESMA35-43-349, Answer 17 updated on 3 October 2017).

 

ESMA refers firstly  to Article 4(1)(41) of MiFID II, which defines DEA as arrangements where a member or participant or client of a trading venue permits a person to use its trading code.

 

On this basis ESMA considers that the provider of DEA is the firm executing orders.

 

As such, an investment firm using DEA services to specifically direct an order to a particular venue are expected to list the intermediary firm providing that service for the purposes of the report to be published under the said Article 65(6) of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016.

 

The above report is consistent with the report required under the aforementioned RTS 28.

 

In these instances, the investment firm would be considered as giving a specific instruction to the intermediary providing DEA regarding the choice of the execution venue.

 

Correspondingly, the intermediary providing DEA service would still have an obligation to include trades executed via such access arrangements in its RTS 28 reports, although these trades could be classified as “directed orders” given the venue on which orders are executed is specified by the client (as set out in Article 2(c) of RTS 28).

 

This differs from a situation where the intermediating broker retains discretion over some parameters of the execution of the order, particularly, the venue destination, including where a broker’s smart order router determines where an order is executed.

 

While transactions are intermediated by the broker providing the DEA service, ESMA also recognises that the objective of the report to be published under Article 65(6) of the Delegated Regulation (EU) 2017/565 is to help clients understand the execution practices of investment firms transmitting or placing orders via DEA services and directing the choice of execution venues (as outlined above), and this objective is best served by the provision of information about the execution venues orders are routed to (where the investment firm is exercising discretion over the choice of execution venue).

 

In order to ensure that the report provides a complete picture of the investment firm’s order routing arrangements, ESMA considers that the investment firms should also disclose the identity of the main venues it commonly selects via DEA arrangements and the existence of any close links and specific arrangements with such execution venues, in its summary of execution quality (which, as required by Article 65(6) of the Delegated Regulation (EU) 2017/565, must be consistent with the information to be provided in accordance with Article 3(3) of RTS 28).

 

 

Requirements for DEA providers offering indirect clearing services

 

 

DEA providers which also offer indirect clearing services for the purposes of MiFID and the EMIR Regulation must ensure that they comply with rules applying to indirect clearing under:

- MiFIR Article 30,

- EMIR Article 4, and

- the relevant level 2 measures.

 

 

Algorithmic trading requirements for DEA

 

 

Algorithmic trading requirements for DEA are stipulated in Articles 19 - 23 (Chapter III) of the Commission Delegated Regulation (EU) 2017/589 of 19 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the organisational requirements of investment firms engaged in algorithmic trading (RTS 6 - see below).

 

On 3 October 2017 ESMA underlined (Answer 23, Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-3) that the suitability checks and controls a DEA provider should perform on clients using the service are also applicable in case of clients that are not investment firms authorised in the EU.

 

ESMA stressed the obligations that fall on a DEA provider as per Article 17(5) of MiFID II and as specified in RTS 6 apply regardless whether the client is an authorised EU investment firms or not.

 

In particular, all clients accessing an EU trading venue through the sub-delegated DEA should be subject to the controls and suitability checks of Article 17(5) of MiFID II as well as provisions of Articles 19 to 23 of RTS 6.

 

 

 

Commission Delegated Regulation (EU) 2017/589 of 19 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the organisational requirements of investment firms engaged in algorithmic trading

 

Recitals 13 - 15

 

(13) An investment firm providing direct electronic access (‘DEA provider’) should remain responsible for the trading carried out through the use of its trading code by its DEA clients. A DEA provider should therefore establish policies and procedures to ensure that trading of its DEA clients complies with the requirements applicable to that provider. That responsibility should constitute the principal factor for establishing pre-trade and post-trade controls and for assessing the suitability of prospective DEA clients. A DEA provider should therefore have sufficient knowledge about the intentions, capabilities, financial resources and trustworthiness of its DEA clients, including, where publicly available, information about the prospective DEA clients' disciplinary history with competent authorities and trading venues.

 

(14) A DEA provider should comply with the provisions of this Regulation even where it is not engaged in algorithmic trading, since its clients may use the DEA to engage in algorithmic trading.

 

(15) Due diligence assessment of prospective DEA clients should be adapted to the risks posed by the nature, scale and complexity of their expected trading activities and to the DEA being provided. In particular, the expected level of trading and order volume and the type of connection offered to the relevant trading venues should be assessed.

 

CHAPTER III
DIRECT ELECTRONIC ACCESS

 

Article 19

General provisions for DEA

(Article 17(5) of Directive 2014/65/EU)

 

A DEA provider shall establish policies and procedures to ensure that trading of its DEA clients complies with the trading venue's rules so as to ensure that the DEA provider meets the requirements in accordance with Article 17(5) of Directive 2014/65/EU.


Article 20

Controls of DEA providers

(Article 17(5) of Directive 2014/65/EU)

 

1. A DEA provider shall apply the controls laid down in Articles 13, 15 and 17 and the real-time monitoring laid down in Article 16 to the order flow of each of its DEA clients. Those controls and that monitoring shall be separate and distinct from the controls and monitoring applied by DEA clients. In particular, the orders of a DEA client shall always pass through the pre-trade controls that are set and controlled by the DEA provider.


2. A DEA provider may use its own pre-trade and post-trade controls, controls provided by a third party or controls offered by the trading venue and real time monitoring. In all circumstances, the DEA provider shall remain responsible for the effectiveness of those controls. The DEA provider shall also ensure that it is solely entitled to set or modify the parameters or limits of those pre-trade and post-trade controls and real time monitoring. The DEA provider shall monitor the performance of the pre-trade and post-trade controls on an on-going basis.


3. The limits of the pre-trade controls on order submission shall be based on the credit and risk limits which the DEA provider applies to the trading activity of its DEA clients. Those limits shall be based on the initial due diligence and periodic review of the DEA client by the DEA provider.


4. The parameters and limits of the controls applied to DEA clients using sponsored access shall be as stringent as those imposed on DEA clients using DMA.


Article 21

Specifications for the systems of DEA providers

(Article 17(5) of Directive 2014/65/EU)

 

1. A DEA provider shall ensure that its trading systems enable it to:


(a) monitor orders submitted by a DEA client using the trading code of the DEA provider;


(b) automatically block or cancel orders from individuals which operate trading systems that submit orders related to algorithmic trading and which lack authorisation to send orders through DEA,;


(c) automatically block or cancel orders from a DEA client for financial instruments which that client is not authorised to trade, using an internal flagging system to identify and block single DEA clients or a group of DEA clients;


(d) automatically block or cancel orders from a DEA client that breach the risk management thresholds of the DEA provider, applying controls to exposures of individual DEA clients, financial instruments or groups of DEA clients;


(e) stop order flows transmitted by its DEA clients;


(f) suspend or withdraw DEA services to any DEA client where the DEA provider is not satisfied that continued access would be consistent with its rules and procedures for fair and orderly trading and market integrity;


(g) carry out, whenever necessary, a review of the internal risk control systems of DEA clients.


2. A DEA provider shall have procedures to evaluate, manage and mitigate market disruption and firm-specific risks. The DEA provider shall be able to identify the persons to be notified in the event of an error resulting in violations of the risk profile or in potential violations of the trading venue's rules.


3. A DEA provider shall at all times be able to identify its different DEA clients and the trading desks and traders of those DEA clients, who submit orders through the DEA provider's systems, by assigning a unique identification code to them.


4. A DEA provider allowing a DEA client to provide its DEA access to its own clients (‘sub-delegation’) shall be able to identify the different order flows from the beneficiaries of such sub-delegation without being required to know the identity of the beneficiaries of such arrangement.


5. A DEA provider shall record data relating to the orders submitted by its DEA clients, including modifications and cancellations, the alerts generated by its monitoring systems and the modifications made to its filtering process.


Article 22

Due diligence assessment of prospective DEA clients

(Article 17(5) of Directive 2014/65/EU)

 

1. A DEA provider shall conduct a due diligence assessment of its prospective DEA clients to ensure that they meet the requirements set out in this Regulation and the rules of the trading venue to which it offers access.


2. The due diligence assessment referred to in paragraph 1 shall cover:


(a) the governance and ownership structure of the prospective DEA client;


(b) the types of strategies to be undertaken by the prospective DEA client;


(c) the operational set-up, the systems, the pre-trade and post-trade controls and the real time monitoring of the prospective DEA client. The investment firm offering DEA allowing DEA clients to use third-party trading software for accessing trading venues shall ensure that the software includes pre-trade controls that are equivalent to the pre-trade controls set out in this Regulation.


(d) the responsibilities within the prospective DEA client for dealing with actions and errors;


(e) the historical trading pattern and behaviour of the prospective DEA client;


(f) the level of expected trading and order volume of the prospective DEA client;


(g) the ability of the prospective DEA client to meet its financial obligations to the DEA provider;


(h) the disciplinary history of the prospective DEA client, where available.


3. A DEA provider allowing sub-delegation shall ensure that a prospective DEA client, before granting that client access, has a due diligence framework in place that is at least equivalent to the one described in paragraphs 1 and 2.


Article 23

Periodic review of DEA clients

(Article 17(5) of Directive 2014/65/EU)

 

1. A DEA provider shall review its due diligence assessment processes annually.


2. A DEA provider shall carry out an annual risk-based reassessment of the adequacy of its clients' systems and controls, in particular taking into account changes to the scale, nature or complexity of their trading activities or strategies, changes to their staffing, ownership structure, trading or bank account, regulatory status, financial position and whether a DEA client has expressed an intention to sub-delegate the access it receives from the DEA provider.

 

 

 

 

 

 

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Last Updated on Thursday, 12 October 2017 19:53
 

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