Rigorous regulatory stance on the DEA sub-delegation |
Legal Alert | ||
Monday, 02 April 2018 00:00 | ||
DEA provider must have access to information on its DEA clients, irrespective of DEA clients’ jurisdiction or their authorisation status - ESMA underlined this once more in an interpretation of 28 March 2018.
On 28 March 2018 ESMA updated the answer to the Question 23 in Questions and Answers on MiFID II and MiFIR market structures topics (ESMA70-872942901-38), which relates to the MiFID II legal requirements resting upon providers of the direct electronic access to the trading venue (DEA).
What is commented upon: Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38 updated on 28 March 2018, Question 23 Article 17(5) of MiFID II The earlier version of the said answer to the Question 23 (dated 3 October 2017) had the following wording:
“Are the suitability checks and controls a DEA provider should perform on clients using the service also applicable in case of clients that are not investment firms authorised in the EU?
Yes, 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.”
In the edition of 28 March 2018 ESMA has retained all existing text, which is supplemented now with an answer to the additional question:
“Where a DEA client extends its access to its own clients, is the DEA provider responsible for the conduct of these sub-delegated clients?”.
The ESMA‘s stance as regards this issue is as follows:
- Ii order to fulfil its responsibility, the DEA provider must have access to information on its DEA clients, irrespective of DEA clients’ jurisdiction or their authorisation status;
- a DEA provider may not provide services to its clients, including sub-delegated clients, unless all information can be made available to the competent authority of the trading venue for its supervisory and enforcement purposes;
- the DEA provider should also clarify in the binding written agreement that the DEA service will be suspended or withdrawn from the client if the provider is not satisfied that continued access would be consistent with its rules and procedures for fair and orderly trading and market integrity - this includes a situation where the client fails to supply a reasonable explanation for a suspicious trading pattern or inappropriate trading behaviour that may involve market abuse;
- where a DEA sub-delegation is allowed, the DEA provider should require its DEA clients to have a provision to enable the DEA provider to have access to information on their sub- delegated clients’ trading activities for the express purpose of enabling the DEA provider to provide information to the competent authority of the trading venue;
- trading venues must observe Article 22(3) of RTS 7 (Commission Delegated Regulation (EU) 2017/584 of 14 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying organisational requirements of trading venues) when permitting sponsored access, and where appropriate direct market access (DMA), to their members and participants (the said provision stipulates that trading venues must be able to suspend or withdraw the provision of sponsored access to clients having infringed MiFIDII/MiFIR, Market Abuse Regulation (MAR) or the trading venue's internal rules);
- trading venues should clearly state in their rules the circumstance in which the trading venue suspends or terminates the provision of DEA, for example, where the conduct of a DEA client is reasonably suspected to be abusive.
It my be useful to recall that according to the aforementioned 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.”
The provisions referred to by ESMA in the above interpretation i.e. Articles 19 - 23 of the 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 are quoted below:
“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.
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.
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:
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.
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.
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