On the 28th of September 2015 the European Securities Market Authority (ESMA) submitted final draft technical standards for MiFID II to the European Commission, including details of algo control provisions outlined in Article 17 of the Directive’s Level I text. Although Article 17 is entitled ‘Algorithmic Trading’ it has implications that are far broader, given that much of its requirements relate to what ESMA has defined as ‘trading systems.’
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This paper summarises key requirements contained in Article 17 (along with its corresponding regulatory technical standards), explains the implications of those requirements, and outlines challenges that firms may face in complying.
Specifically, the paper will:
- Explain MiFID II’s algo control requirements in the context of the global regulatory backdrop, including the SEC’s Reg SCI and MAS’s TRM Guidelines
- Provide an overview of the Level I text relevant to algo and trading system controls, along with an explanation of the Directive’s scope and the ‘proportionality principle.’
- Provide a more detailed overview of Level II text contained within the recently issued final draft Regulatory Technical Standards (RTS 6), covering the governance, testing, on-going review, monitoring, surveillance, pre-trade and post-trade risk management, and security of trading systems.