At first glance, PRA regulatory measures are of little interest to the buy-side. However, the PRA’s first consultation paper (CP 9/16) on the implementation of Recast MiFID (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) is worth noting for its impact on sell-side firms with whom the buy-side interact.
Status of MiFID II
To recap: MiFID II is due to come into force on the 3rd of January 2018 – the result of a proposed one year delay although the legislative amendment has yet to be adopted by the European Parliament and Council. There is no proposed extension to national transposition – technically, the 3rd July 2016 deadline is still in effect.
PRA Approach to Implementation
The PRA notes that in some areas its existing rules are sufficient to transpose MiFID II. However it has identified several MiFID II provisions that will require Rulebook changes. The delay means that it is not possible at this time to set out all of its proposals. It intends to consult further in this regard. In addition, to ensure clarity and proportionate regulatory approach, it has aligned its proposals closely to those of the FCA. However, as the PRA is publishing these proposals and draft instruments without the benefit of the Level 2 delegated acts being finalised, it may incorporate changes to them later on to reflect the delegated acts.
Currently, there are no PRA rules on algorithmic trading. A new Algorithmic Trading Part of the PRA Rulebook, to be read alongside the existing rules on systems and controls, will be created to transpose the MiFID II requirements. These will apply to Capital Requirements Regulation firms, including credit institutions, which engage in algorithmic trading or provide direct electronic access to a trading venue.
The PRA’s proposals, whilst largely mirroring the FCA’s, are focused on the safety and soundness of firms rather than preventing market abuse or disorderly markets. The supervision of algorithmic trading undertaken by dual regulated firms requires further clarification, something which both the FCA and the PRA are working together to achieve.
The PRA proposes that firms undertaking algorithmic trading:
- ensure that their trading systems: (i) are resilient and have sufficient capacity; (ii) are subject to appropriate trading thresholds and limits; and (iii) prevent the sending of erroneous orders or contribute to a disorderly market;
- be required to put in place fully tested and monitored business continuity plans in the event of system failure; and
- keep records on: (i) the nature of their algorithmic trading strategies; (ii) details of trading parameter or limits; and (iii) details on the testing of firms’ systems.
There are further proposed record keeping requirements for high frequency trading. High frequency traders must follow the rules for algorithmic traders and for high frequency traders.
Direct Electronic Access
The PRA sets out proposals to transpose requirements in Article 17(5) of the MiFID II Directive relating to direct electronic access to trading venues. Under these proposals firms will be required to:
- put in place systems and controls;
- review suitability of clients using the service;
- prevent clients from exceeding appropriate pre-set trading and credit thresholds;
- prevent trading by clients that may cause risks to the firm; and
- keep appropriate records.
The PRA indicates that existing MiFID passports will remain valid but dual regulated firms wishing to passport any of the additional activities or investment types introduced under MiFID II will need to notify the PRA using the existing procedures for a change of particulars. However, the PRA is proposing to delete its existing notification forms and link directly to new forms, to be approved by the European Commission, and published by ESMA.
The consultation paper also sets out the PRA’s proposal to extend its current CRD IV passport notification declaration form to notifications under MiFID II with minor changes to the declaration. The PRA will continue to process applications using the existing forms where firms want to passport MiFID II activities under their CRD passport.
The PRA plans to publish a further consultation paper in due course to cover the remaining areas where changes are needed to its rules, including:
- Article 16 on organisational requirements;
- provisions of MiFIR superseding PRA Rulebook provisions; and
- granting authorisations for new regulated activities.
Comments on the proposals are due by 27 May 2016.