Download | MiFID II RTS 6 Algo Self-Assessment (Article 9 Annual Self-Assessment and Validation)

In April 2018 Citihub Associate Partner, Stuart English, published a blog highlighting the FCA’s report on algorithmic trading and its relevance for MiFID II RTS 6.

In the six months since the MiFID II enforcement date, firms have begun to consider the best approach for annual self-assessment of algos against the RTS 6 articles. While the articles do not require the submission of the self-assessment, it must be available when requested by the regulator.

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Challenges to Producing a Validation Report
Producing a self-assessment report poses several challenges:

  • There is no template for the actual report, and thus, there is no indication of its content, length or the depth of evidence required;
  • There is no definition of the “risk management function” in any of the MiFID II text. This function is responsible for designing and writing the report;
  • The output from RTS 6 Article 10 Stress Testing must be considered, therefore, this is a tightly coupled dependency;
  • The report must check compliance of the firm’s DEA clients;
  • There is little guidance on how to assess Annex I or the criteria to consider;
  • All elements of RTS 6 should be covered, not a narrow review of algo engine controls.

Citihub Consulting has observed a wide range of potential approaches to MiFID II RTS 6 Article 9 annual self-assessment. These vary from performing an assessment of each algo to taking a thematic approach at the level of a business line. There is a significant risk associated with committing a large amount of effort and investment into the first annual algo self-assessment when there is no guidance from regulators as to the shape of the report – further clarifications might substantially change the approach to reporting in the future.

Citihub Consulting’s Three-Step Approach
We recommend a three-step approach to the RTS 6 self-assessment to mitigate the risk of producing something that greatly exceeds the expectations or objectives of regulators, as well as avoiding producing too little:

1. Systematic and Documented Approach to MiFID II RTS 6 Annex I (Criteria to be Considered)
Determine the scale of your firm using a systematic approach. Identify the relevant factors in RTS 6 Annex I “Criteria to be considered in the investment firm’s self-assessment”. This should give each firm a view of their algo “scale” using objective and defensible criteria.

2. Adjust the Depth of Evidence Based on Algo “Scale” by Annex I Assessment
Use scale to determine the depth of evidence required to support the validation report. If your firm is a complex algo institution, there will be an expectation of greater evidence for stress testing; outsourcing policies; business continuity tests, to name a few. Similarly, if your firm uses a simple set of benchmark algos from a vendor, say once a week, this will reduce the burden of evidence. The assessment of Annex I helps determine “complexity”.

3. Validation Report as a Statement of Compliance to RTS 6
Target a simple, standard validation report for each in-scope MiFID II legal entity. This should describe how your firm remains compliant with RTS 6 and the relevant MiFID II Level 1 articles. For inspiration, look at the RTS 6 compliance responses from vendors such as Bloomberg and Trayport. These set out statements of compliance without detail. Their purpose was to reassure customers that supplied algos were RTS 6 compliant. The objective of your firm’s validation report should be the same. A separate document should store the evidence to back up compliance statements. The depth of evidence would have been determined by your assessment of the Annex I criteria in step 1.

MiFID II RTS 6 Algo Self Assessment Validation Report Sizing Guide


Citihub Consulting’s MiFID II RTS 6 Algo Self-Assessment Report Sizing Guide
In our opinion, how a firm responds to the criteria in Annex I will determine the depth of evidencing to provide in support of an algo assessment. Many of the criteria are ambiguous. Using Citihub Consulting’s own experience, we have considered all the criteria in Annex I and determined our own series of questions. We have documented these for download in a short survey to help firms consider the MiFID II RTS 6 Annex I criteria in an objective, defensible and documented manner. By answering each question in the way that best describes a firm, a respondent should begin to understand the correct level of detail for an algo self-assessment. In our opinion, not all of the Annex criteria will be relevant to all firms. Furthermore, some criteria are best answered through a related proxy question rather than the actual Annex I criteria.

Once the assessment against Annex I is completed, the output should drive the level of evidence you should collate to support compliance statements in the annual self-assessment report.


Download the Self-Assessment Report Sizing Guide.

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The author

Bob Mudhar

Bob Mudhar


Bob manages the firm’s regulatory/compliance & eTrading practices. With more than 25 years’ experience in blue chip investment banking institutions, his career has spanned a variety of business facing technology roles, helping to support, enhance and migrate systems.