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Global Trustee and Fiduciary Services News and Views | MiFID II Special Edition 2016
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execution “throttles” that can automatically
disable new orders in a system once a
predefined level has been hit.
Following the deployment of a new algorithm,
the RTS require ongoing testing of the
algorithm through stress-testing, control and
review requirements for the introduction of
material changes, plus a series of measures
to ensure the resilience of the algorithm.
Of these, perhaps the most important is a
kill functionality that lets the firm running
an algo immediately cancel all unexecuted
orders in an emergency scenario. This feature
is intended to reduce the likelihood and
severity of market disruption caused by a
malfunctioning algo. Separately, firms are
also required to maintain written business
continuity plans to enable them to deal
with disruption events such as systems
unavailability, data centre shut-down, or loss
or alteration of critical data and documents.
The RTS require firms to operate automated
monitoring and surveillance systems designed
to detect market manipulation, and to subject
these surveillance systems to annual reviews
to ensure that they remain fit for purpose.
Post-trade control rules require firms to
continually assess and monitor their own
market and credit risks in terms of effective
exposures. For derivatives, these post-trade
controls have to include controls on maximum
long and short positions, with trading
limits appropriate to the types of financial
instruments involved in the strategy.
Finally, for algo operators, the RTS require
robust IT security arrangements to minimise
the risk of attack against IT systems.
These controls have to include identity and
access management protocols and impose
restrictions on the number of persons with
critical user access to relevant systems.
The upshot of all this is that asset managers
wishing to continue algo-trading activities
will need to meet some heavyweight
compliance obligations.
The RTS also require
a firm’s compliance
function to have a
general understanding
of how the firm’s
algorithms operate.