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15 April 2015

Good Practice & Guidance

Further to the FCA’s General Consultation 14/9 last December, they have today released their finalised guidance on Multi-lateral Trading Facilities (MTFs) to help develop industry understanding of good practice in this area.

The regulator’s finalised guidance sets out the key requirements of Market Conduct for MTFs as detailed in MAR 5 of the FCA handbook, as well as the FCA’s Observations of Good Practice within the industry relating to MTF operator rulebooks.

Whilst the guidance summarises the consultation feedback it also amends the “Dear CEO” letter that was contained with the consultation to reflect internal re-organisation at the FCA effective since January.

Key Guidance Areas:

The Regulator covered the following topics in their Finalised Guidance in relation to MTF Market Conduct & good practice observations:

MTF Rulebook - Transparency
Finalisation (Settlement) of Transactions
Participant Eligibility & Access Criteria
Instrument Eligibility Criteria
Monitoring Compliance with MTF Rules
Reporting Requirements

MTF Rulebook Requirements:

Trading Process Requirements in MAR 5.3.1 were focussed on in particular whereby any firm operating a Multi-lateral Trading Facility “must have transparent and non-discretionary rules and procedures for fair and orderly trading”.

What is clear from the guidance is that the FCA expects an MTF operator to have a rulebook in place and that should be publicly available on operator’s website.

The FCA have provided a non-exhaustive list of key sections that should be included within the MTF’s rulebook, these being:

procedures for consultation, communication and implementation of rule changes;
participant eligibility criteria;
participant obligations;
instrument eligibility criteria;
fair and orderly trading rules;
market abuse prohibition rules;
post-trade obligations;
compliance, monitoring & sanctions;
definitions / glossary of terms; and
co-operation with regulators

The FCA have also clarified that there is scope for commercial provisions, that are not part of the rules, to sit within a document library of supporting information, the publication of which is able to be to made to a closed participant user group only, unlike the MTF rulebook which should be openly available and transparent to the public.

MTF Guidance Overview:

The Guidance from the FCA confirmed that an MTF operator:

require explicit acknowledgement during the on-boarding process (e.g. via a user agreement or equivalent) that participants have read, understood and will abide by the MTF rulebook;
that also offers non-MTF transactional services, should ensure user agreements demonstrate clear delineations between MTF and non-MTF business so participants know when the MTF’s rules apply and when they do not;
ensure transparency to participants of proposed or implemented changes to the MTF rulebook;
seek to ensure that the rulebook governance and change process is well understood by stakeholders;
look to undertake at least an annual review of their MTF rulebook to ensure it is consistent with relevant regulatory and legislative requirements;
ensure that its fees and incentive schemes relating to access to and execution on the MTF should be based on objective criteria. In particular fees and incentive schemes should not encourage trading for improper purposes and should not distort or reduce the effectiveness of the price formation process;
be able to demonstrate that they have considered the good practice observations when determining their approach to compliance with FCA Handbook requirements;
should provide detail of the arrangements it has in place to facilitate efficient settlement such as post-trade confirmation and established connections to post-trade infrastructure providers;
must regularly monitor compliance with all aspects of the FCA rulebook e.g. participant eligibility criteria, trading and settlement rules and anti-market abuse rules;
should have rules and market control arrangements which enable it to provide for and maintain fair and orderly trading;
should have rules and market control arrangements that seek to address the identified potential disorderly conditions through both preventative provisions and re-active market control provisions where appropriate;
should undertake regular assessments as to the types of market abuse that could occur on the MTF; and
ensure it has appropriate monitoring and surveillance arrangements to monitor transactions undertaken on the MTF and report any activity such as significant rule breaches, disorderly trading conditions and potential market abuse to the FCA.

Conflicts of Interest:

Furthermore, the FCA expect that staff of an MTF operator understand the applicable internal identification, escalation and reporting process of the firm and that due consideration be given for members of personnel that may face conflicts between their reporting obligations and the commercial objectives of the firm.

As such, MTF’s should ensure that they have internal policies and procedures that do not discourage fulfilment of reporting obligations in situations when there is conflict with commercial objectives.