Workshop High Frequency Trading Act. Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG)

Transcription

1 Workshop High Frequency Trading Act Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) Frankfurt Ulf Linke (WA 39) Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG)

2 Overview Part 6 Securities Trading Act Conduct of business obligations, organisational requirements, transparency obligations Section 33 (1a) Securities Trading Act How does BaFin supervise? Treatment of EU branches Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 2

3 Part 6 Securities Trading Act Rules of Conduct Section 31 General Rule Investment services enterprises shall be required to provide investment services with expertise, care and diligence in the interests of their clients (blanket clause) to avoid and to disclose conflicts of interest. More details in Section 31 subsection 1-11 Rules are tailored for investment services enterprises who deal with clients. Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 3

4 Part 6 Securities Trading Act Organisational obligations - Section 33 General Rule The investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm with its obligations under the provisions of the Securities Trading Act. This includes: - a permanent and effective compliance - an adequate risk management - internal control mechanism/internal audit - Etc. Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 4

5 Part 6 Securities Trading Act Organisational obligations - Section 33 Subsection 1a New Rule for algorithmic trading Translation - not legally binding : Section 33 (1a) In addition, an investment services enterprise must comply with the provisions stipulated in this subsection if it conducts trading in financial instruments in such a way that a computer algorithm automatically determines individual parameters of orders, unless the system involved is used only for the purpose of routing orders to one or more trading venues or for the confirmation of orders (algorithmic trading). Parameters of orders within the meaning of the first sentence include, in particular, decisions on whether to initiate the order; on the timing, price or quantity of the order; or on how to manage the order after its submission, with limited or no human intervention. An investment services enterprise that conducts algorithmic trading must have in place effective systems and risk controls to ensure that its trading systems 1. are resilient, have sufficient capacity and are subject to appropriate trading thresholds and limits; 2. prevent the sending of erroneous orders or the system s functioning in a way that may create or contribute to a disorderly market; 3. cannot be used for any purpose that is contrary to European or national rules against market abuse or to the rules of a trading venue to which it is connected. An investment services enterprise that conducts algorithmic trading must also have in place effective business continuity arrangements to deal with unforeseen failures of its trading systems and must ensure that its systems are fully tested and properly monitored. Furthermore, it must ensure the documentation of every modification of any computer algorithm used for trading purposes. Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 5

6 Part 6 Securities Trading Act Organisational obligations - Section 33 Subsection 1a ESMA Guidelines 2012/122 Systems and controls in an automated environment for trading platforms, investment firms and compentent authorities BaFin circular Anforderungen an Systeme und Kontrollen für den Algorithmushandel von Instituten Consultation 02/2013 open until General Obligations Risk Management - Capacity and resilience, business continuity, testing Prevention of market abuse monitoring, automatic warning systems Compliance Function Documentation five years Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 6

7 Section 36 Examination of reporting requirements and rules of conduct How is supervision performed in Germany? Pursuant to section 36 of the German Securities Trading Act investment firms are examined once a year by an external auditor. The auditor has to assess whether the investment firms fulfil the provisions of the Securities Trading Act, especially organisational requirements and the rules of conduct. The auditor shall immediately file an examination report with the BaFin. Furthermore the BaFin may require the investment firms to furnish information and submit documents and also conduct examinations without immediate cause. Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 7

8 Section 36 Examination of reporting requirements and rules of conduct Time limits for examination Section 36 Before appointing the auditor BaFin investment firm shall notify BaFin Investment firm shall appoint auditor not later than the end of the financial year to which examination relates Examination shall start not later than 15 months after beginning of relevant financial year (financial year = legal year: of the following year) BaFin may participate in examination must be notified about start of examination in good time After conclusion of examination auditor shall file report without undue delay with BaFin. Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 8

9 Section 36 Examination of reporting requirements and rules of conduct How can the BaFin affect the examination? require to appoint another auditor if this is deemed necessary to achieve the purpose of the examination (e.g. skill, conflict of interest) make provisions relating to the content of the examination (e.g. determine main points of emphasis of the examination) participate in the examinations conduct the examination itself or through a person commissioned by it Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 9

10 Section 36a Treatment of EU-branches Foreign branches are generally examined once a year by an auditor who reports his findings to the BaFin. But the examination is limited (-> Art. 32 para. 7 MiFID/WpHG section 36b) In respect to the services provided within its territory the BaFin examines the compliance with the legal obligations concerning: rules of conduct (-> Art. 19 MiFID) classification of clients (-> Annex II of MiFID) inducements (-> Art. 26 Directive 2006/73/EG) handling and execution of orders (-> Art. 21/22 MiFID) Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 10

11 Section 36a Treatment of EU-branches But the BaFin does not examine: organisational requirements (e.g. Compliance department) -> Art. 13 MiFID measures to identify and to avoid conflict of interests -> Art. 18 MiFID the rules governing personal transactions of the employees of an investment firm -> Art. 13 para. 2 MiFID ESMA protocol on the supervision of branches under MiFID cooperation between home supervisor and BaFin regarding incoming branches standardised exchange of information, common oversight program, standing request of assistance Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 11

12 Questions? Contact: Ulf Linke WA 39 Tel.: Questions regarding special organisational requirements pursuant to section 33 (1a) Securities Trading Act (WpHG) page 12