On August 22, the European Commission (Commission) adopted two further delegated regulations (Delegated Regulations) to supplement the amended and restated Markets in Financial Instruments Directive (MiFID II), and the Markets in Financial Instruments Regulation (MiFIR).
The Delegated Regulations adopted by the Commission include the following:
- Organizational Requirements for Investment Firms Engaging in Algorithmic Trading
MiFID II mandates that the European Securities and Markets Authority (ESMA) should specify organizational requirements for investment firms engaging in algorithmic trading, providing direct electronic access (DEA) or acting as general clearing members. This Delegated Regulation confirms these organizational requirements, with requirements for such firms to have clear lines of accountability and to ensure a separation of duties between trading desks and support functions (including risk and compliance). It also specifies testing requirements (prior to the deployment of an algorithm and on an ongoing basis), as well as “kill functionality” requirements, and requirements for an automated surveillance system to monitor algorithmic trading activity for signs of market manipulation, in addition to real-time monitoring, among others. DEA providers and firms acting as general clearing members also will be required to perform due diligence on prospective clients, among other obligations.
- Reporting of Transactions to Competent Authorities
Under MiFIR, investment firms which execute transactions in financial instruments are required to report those transactions to regulators. MiFIR similarly mandates ESMA to specify the data standards, formats and scope of the requirements for transaction reports. This Delegated Regulation further details the fields, contents and format required for transaction reports (in the Annex to the Delegated Regulation), and sets out the meaning of “transaction,” “execution” and “transmission of an order” respectively. Notably, a “transaction” under the finalized Delegated Regulation includes any increase or decrease in the notional amount of a derivative (among others). “Execution” under the Delegated Regulation includes execution on behalf of a client, dealing on one’s own account, making an investment decision in accordance with a discretionary mandate granted by a client and transfers of financial instruments to and from accounts (among others). The Delegated Regulation also confirms that the reporting requirements apply to transactions executed wholly or partly through an investment firm’s branch, and that the requirements apply to authorized EU branches of third-country firms.
The European Council and European Parliament will consider the Delegated Regulations and, once formally approved, they will go into effect 20 days following their publication in the Official Journal of the European Union.