News and Views MiFID II Special Edition 2016

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Global Trustee and Fiduciary Services News and Views | MiFID II Special Edition 2016 17
DEA providers must ensure that their
systems enable them to monitor client orders
and automatically block orders that lack
appropriate authority for DEA or breach
the risk management thresholds of the DEA
provider. Providers are also required to have
the ability to stop DEA client order flows and
to suspend or withdraw services to any client
where the provider thinks that continued
access would be inconsistent with its rules and
procedures for fair and orderly trading and
market integrity.
In terms of client onboarding, the RTS
set minimum standards for due diligence
assessment by providers of prospective DEA
clients. These are detailed and extensive
covering, among other things, the client’s
governance and ownership structure, the
strategies the client will undertake, the client’s
operational set-up, including trading software,
historical trading patterns, and the ability of
the client to meet its financial obligations to
the provider. For existing clients, DEA providers
will have to repeat due diligence assessments
on an ongoing basis so there’s no get-out-of-
jail-free card for asset managers who already
receive these services.
High-frequency algorithms
Firms engaged in HFT will have to keep written
records for five years of all submitted orders
(whether executed or cancelled) in accordance
with the format prescribed in the tables to the
Annexes to the RTS.
UK implementation
UK implementation of MiFID II’s rules on
algorithmic trading began with a consultation
by the Financial Conduct Authority (FCA) in
December 2015, followed in March 2016 with
proposals from the Prudential Regulation
Authority (PRA). Prior to MiFID II, there was
no part of the UK regulatory framework that
specifically addressed algorithmic trading or
HFT, and for PRA firms, new UK rules will be
found in a new “Algorithmic Trading” part of
the PRA rulebook, while the FCA’s transposition
of the directive’s requirements will be found in
a new chapter 7A of the FCA handbook.
For firms subject to supervision by the PRA,
the new rules focus predominantly on risks
to the firm arising from algorithmic trading
activities. By contrast, the FCA rules focus
mainly on the prevention of market abuse and
disorderly markets. The RTS themselves
are directly applicable in the UK and other
member states, and both FCA and PRA rules
will cross-refer extensively to the RTS.
Conclusion
For asset managers engaged in HFT and
algorithmic trading, the new MiFID II regime
will mark a step-change in the regulatory
environment. DEA providers and asset
managers making use of DEA may have to
significantly overhaul their internal systems
and processes to comply with the new rules.
First and foremost, all firms will need to
identify where they may be engaged in HFT
and algorithmic trading (which is easier
said than done) and consider the potential
compliance, reporting, disclosure and other
obligations to which they will be subject.
Delay to the application of MiFID II until
January 2018 may provide firms with a
little more breathing room to analyse and
implement, but, given the scale of the task,
particularly for heavy users of algorithmic
strategies or for those firms perhaps
inadvertently caught by the rules, every
minute of implementation time will be needed,
particularly bearing in mind the fact that
firms will not properly be able to progress
implementation plans unless, and until, the
relevant RTS are published in the Official
Journal and enter into force and relevant
member states complete their national
transpositions of the directive.
Peter Chapman
Senior Associate
Clifford Chance LLP
Sean Kerr
Senior Professional Support Lawyer
Clifford Chance LLP
1 European Council Press release, from
in-financial-instruments/?utm_source=dsms-auto&utm_
medium=email&utm_campaign=Markets+in+financial+instru
ments%3a+One-year+delay+enacted, last accessed on
25 August 2016.
2 Findings Regarding the Market Events of 6 May 2010.
United States SEC and CFTC Report, from https://www.
sec.gov/news/studies/2010/marketevents-report.pdf, last
downloaded on 25 August 2016.