Mifid Ii Surveillance Requirements

ESMA`s proposals for regulatory technical standards and delegated acts, as set out in the and the CP, are mainly based on existing regulatory guidance, such as its 2012 Guidelines on systems and controls in an automated trading environment. When assessing the organisational requirements for trading venues and investment firms to be laid down in regulatory technical standards, ESMA proposes to respect the principle of proportionality and to take into account the nature, scale and complexity of transactions. Investment firms should carry out a detailed self-assessment in order to determine the level of operational requirements that should apply to them. For some algorithmic traders and trading platforms, many technical proposals are considered business as business as usual. Organizational requirements include testing algorithms before deploying them in controlled environments that are not powered on and at regular intervals, and careful introduction of algorithms developed in real-world environments. Investment firms should monitor their systems, processes and procedures to detect any negative impact of algorithms and to be able to cancel all outstanding orders on all trading venues by means of a “stop button”. Investment firms and trading venues have IT environments that comply with internationally defined standards, are compatible with their business and risk management strategy, a reliable IT organisation and effective IT security management. Where investment firms acquire IT systems, appropriate tests shall be carried out to assess their security and reliability. When investment firms outsource or procure information technology, they must ensure that their legal and regulatory requirements are met by the provider. A firm engaged in algorithmic trading must have effective systems and risk controls in place to ensure that its trading systems are resilient and have sufficient capacity, are subject to appropriate thresholds and restrictions that prevent erroneous orders from being sent, do not operate in a way that contributes to market disruption and cannot be used for purposes contrary to the rules of a trading venue.

to which it is connected. Organizations must put in place effective business continuity arrangements to deal with system failures and ensure that their systems are tested and monitored. Organizational requirements for different types of entities are specified in regulatory technical standards. While many companies prohibit the use of Facebook, Twitter and others on their internal devices, the fact that many employees use these networks on their phones has made the application difficult. As a result, access is increasingly granted provided that accounts are verified beforehand and content can be retrieved as part of the company`s monitoring programs. The devil is in the details There are 28 regulatory technical standards (RTS) issued by the European Securities and Markets Authority under MiFID 2. These regulatory technical standards are the legal language of EU financial law, which have been transformed into technical labour standards that industry can apply in practice. We will focus on those that deal specifically with trade surveillance and highlight the impact of MiFID 2 on the trade surveillance function in general. Although the Regulation can be interpreted in different intensity measures, most market participants use automated monitoring solutions to mitigate the risk of market manipulation or misconduct. This is mainly due to the fact that regulated firms must also comply with the Market Abuse Regulation (MAR), which regulates insider dealing, illegal disclosure of inside information and market manipulation. The MAR Regulation also draws attention to the need to take steps to prevent and detect this type of abuse.

Current trade monitoring regulations have been in place for several years, so many regulators are focusing on compliance and enforcement. Recent areas of regulatory interest include: Recital 144 – Existing recordings of telephone conversations and traffic recordings of investment firms executing and documenting the execution of transactions are essential and sometimes constitute the only evidence to detect and prove the existence of market abuse and compliance with investor protection and other requirements of firms. EU Benchmarks Regulation – Companies that provide data to benchmarks must monitor for suspicious business entries. The required content of a market-making agreement would be principles-based, not hard-coded conditions. However, ESMA suggests that there would be a minimum set of required parameters (e.g. a minimum presence of 80-90% of trading hours, a maximum spread, a minimum quote size) without making a final proposal on what these parameters should look like. ESMA shall propose organisational requirements that should be imposed on investment firms participating in a market-making arrangement, including ensuring adequate oversight of the market-making strategy and allowing investment firms to take appropriate action in the event of unforeseeable behaviour of the strategy that could have a negative impact on the market. While MiFID applies exclusively to equity products, MiFID II extends to other asset classes and has more specific and extensive requirements for the execution of reporting and record keeping.

For the first time, products such as bonds and OTC derivatives will be subject to certain reporting requirements to ensure price transparency and prudential supervision. Records must be retained whether or not these conversations or communications lead to the conclusion of a transaction. Companies must ensure that telephone recording and electronic communications requirements are fully complied with. These records can (1) be evidence of the development of business-customer relationships, (2) verify compliance with regulatory obligations, (3) detect and prove the existence of market abuse. Trade monitoring or market abuse monitoring involves the collection of trade data and its subsequent monitoring and analysis in order to detect potential market abuse and other forms of financial crime, such as fraudulent transactions. While legal definitions of market abuse may vary from country to country, in the UK this includes insider dealing, illegal disclosures, market manipulation and attempted manipulation. If you process millions of updates per second and need your systems to meet your market surveillance obligations or other regulatory audits, you should contact us. Contact us here: sales@chronicle.software.

In this article, we look at some of the areas that need to be examined where communications oversight plays an important role in MiFID II regulation as a whole. The technical standards to be developed for algorithmic trading will include specific requirements for direct market access and sponsored access. Investment firms offering direct electronic access are responsible for the trading of their clients and are therefore required to exercise due diligence vis-à-vis potential users of direct electronic access, including an analysis of all algorithms to be used by the client. Sponsored access controls shall be at least equivalent to those of direct market access, including the application of all normal pre-trade controls to their clients` trade flows, such as setting appropriate trading limits and credit thresholds. Nude or unfiltered access to a trading venue is prohibited by MiFID II. However, the EU`s General Data Protection Regulation (GDPR), which is enforced in the UK under the ePrivacy and Electronic Communications Regulation (PECR) and the Data Protection Act (DPA), threatens heavy penalties for misuse of personal data. The monitoring and storage of communications-related data will have an additional regulatory layer under the future EU ePrivacy Regulation. Regulatory requirements for trade monitoring are becoming increasingly demanding to ensure that ever-evolving market abuse tactics are both detected and prevented. For businesses, this means that a holistic approach to trade monitoring is more important than ever. Companies must do their part to prevent market abuse and ensure that they fully comply with regulatory requirements for market oversight.

The current Covid-19 pandemic has further increased complexity. Due to remote work, the ability to collect data from a variety of locations and sources is more important than ever. At the same time, changing working conditions raise concerns about companies` ability to cope with the new challenges of market abuse. Trade monitoring programs need to be flexible enough to keep pace. To avoid the pitfalls of many existing monitoring solutions, companies need to back up their monitoring efforts with a deterministic system that captures all data entries in a trading application, but also reads all output data. The platform must also combine comprehensive monitoring capabilities with latency monitoring and robust failover. This raises the question of whether the regulations should allow for the transmission of cost details after the transaction and whether tape requirements are necessary tools to reduce the mis-selling of telephones. MiFID II introduces stricter regulation and supervision of algorithmic trading and imposes new detailed requirements on algorithmic traders (in some cases, even if they are exempt from MiFID II authorisation) and the trading venues on which they trade (including regulated markets (RMs), multilateral trading facilities (MTFs) and organised trading facilities (OTFs)).

Strengthening trade supervision is at the heart of MiFID 2, as investor welfare is at the heart of EU financial regulatory considerations. That means more transparency, and in the age of big data, that means collecting as much data as possible for all things trade-related.

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