Recognised Investment Exchange

L.N. 3 of 2003

FINANCIAL MARKETS ACT

(CAP. 345)

Recognised Investment Exchange

(Recognition Requirements) Regulations, 2003

IN exercise of the powers vested in him by article 3 of the Financial

Markets Act, the Minister of Finance, acting upon the advice of the

Malta Financial Services Authority as the Competent Authority has made

the following regulations>-

(1) The title of these regulations is the Recognised Title and

commencement.

Investment Exchange (Recognition Requirements) Regulations, 2003.

(2) These regulations shall come into force on the 3rd

January 2003.

Interpretation.

In these regulations>

PART I - RECOGNITION REQUIREMENTS

Financial resources

1. (1) The Recognised Investment Exchange must have financial resources

sufficient for the proper performance of its functions.

(2) Without prejudice to the generality of the foregoing, each Recognised

Investment Exchange shall satisfy at all times those minimum financial resources

requirements and minimum financial reporting requirements that may be prescribed

by the Competent Authority from time to time.

(3) In considering whether the requirement in (1) above is satisfied, the

Competent Authority may, without prejudice to the generality of its powers, take into

account all the circumstances in relation to a Recognised Investment Exchange,

including>

(a) any activity carried on or proposed to be carried on by the Recognised

Investment Exchange<

(b) the general, operational, legal and market risks to which it is exposed<

(c)

the amount and composition of its capital<

(d) the amount and composition of its liquid financial assets<

(e)

the amount and composition of any other financial resources<

(f) the financial benefits, liabilities, risks and exposures arising from its

connection with any person.

Suitability

2. (1) The Recognised Investment Exchange must be a fit and proper person

to perform its functions and be of good standing.

(2) In considering whether the requirements in (1) above are satisfied,

the Competent Authority may, without prejudice to the generality of its powers, take

into account the following circumstances in relation to a Recognised Investment

Exchange>

(a)

the structure of its ownership and control<

(b) the commitment shown by its governing body to satisfying the

recognition requirements and to complying with other obligations in or under the

Act<

(c) its arrangements, policies and resources for fulfilling its obligations in

relation to its activities as a Recognised Investment Exchange in terms of the Act

or any regulations made thereunder<

(d) its arrangements for ensuring that it employs or appoints individuals

who are honest and demonstrate high standards of integrity and are competent for

their role<

(e) the effectiveness of its arrangements to control conflicts of interest<

(f) the independence of its compliance function from its commercial and

marketing functions.

Constitution and governance

3. (1) The constitution, governance, organisational structure and management

systems of the Recognised Investment Exchange must be adequate and appropriate.

(2) In considering whether the requirements in (1) above are satisfied,

the Competent Authority may, without prejudice to the generality of its powers, take

into account the following circumstances in relation to a Recognised Investment

Exchange>

(a) the extent to which its constitution and organisation provide for effective

governance<

(b) the arrangements made to ensure that its governing body has effective

control over the functions of the Recognised Investment Exchange<

(c) the structure and organisation of its governing body, including the

distribution of responsibilities and functions among its officers, departments,

members, and committees<

(d) the access which its compliance department has to the governing body<

(e) the size and composition of its governing body including the number

and responsibilities of executive and non-executive members<

(f)

the number of independent members of the governing body<

(g) the integrity and competence of its governing body and of its officers.

Systems and controls

4. (1) The Recognised Investment Exchange must ensure that all the systems

and controls used in the performance of its functions are adequate and appropriate for

the scale and nature of its business.

(2) Sub-paragraph (1) applies in particular to, without limitation, systems

and controls concerning>

(a)

the transmission of information<

(b) the assessment and management of risks to the performance of the

functions of the Recognised Investment Exchange<

(c) the effecting and monitoring of transactions on the Recognised

Investment Exchange<

(d) the operation of the arrangements mentioned in paragraph 5(2)(e)

below< and

(e) the safeguarding and administration of assets belonging to users of the

facilities of the Recognised Investment Exchange, where relevant.

(3) In considering whether the requirements in (1) above are satisfied, the

Competent Authority may, without prejudice to the generality of its powers, take into

account the following circumstances in relation to a Recognised Investment Exchange>

(a)

the distribution of duties and responsibilities among its departments<

(b) the staffing resources of its departments<

(c) the supervisory arrangements for which each department is responsible<

(d) the arrangements by which the governing body is able to keep the

allocation of responsibilities between, and the appointment, supervision and

remuneration of company officers under review<

(e)

arrangements for internal and external audit<

(f) its information technology systems, including back-up systems to such

information technology systems and its plans for action in the event of a failure

of any such information technology systems<

(g) the arrangements by which it measures and controls different types of

risk<

(h) arrangements for risk management procedures<

(i) arrangements under which clearing and settlement instructions arising

from a transaction are entered into its systems to the point at which any rights or

liabilities arising from that transaction are discharged<

(j) arrangements and processes involved in the recording of assets belonging

to users of the facilities of the Recognised Investment Exchange and held by the

Recognised Investment Exchange, including the recording of the identity of the

owners of, and other persons being interested in, such assets<

(k) the recording of instructions given in relation to any assets belonging

to users of its facilities<

(l) the recording of any action taken in fulfilment of any instructions

received by the Recognised Investment Exchange in relation to any assets

belonging to users of its facilities<

(m) the systems and controls designed to ensure the confidentiality of

certain classes of information and the proper use of any such information.

(4) The Recognised Investment Exchange must ensure that it is able to

control the performance and quality of any contractual commitments for any services

or facilities that it outsources to third parties.

Safeguards for investors

“Act” means the Financial Markets Act and the words and Cap. 345.

expressions used shall have the same meaning as is given to them

in the said Act, unless otherwise defined herein<

“applicant” means a person who has submitted an application

to the Competent Authority to become a Recognised Investment

Exchange<

“instrument” shall have the same meaning as that provided

in the Investment Services Act <

“Recognised Investment Exchange” shall mean a person in

respect of whom the Competent Authority has issued a recognition

order<

“Schedule” means the Schedule to these regulations.

(1) The Schedule sets out the recognition requirements which Recognition

requirements.

must be satisfied by an applicant if it is to qualify as a Recognised

Investment Exchange and which must be satisfied by each Recognised

Investment Exchange on a continuing and ongoing basis if it is to remain

a Recognised Investment Exchange

(2) The burden of proving to the Competent Authority that

the recognition requirements have been or are being properly satisfied

rests exclusively on the applicant or the Recognised Investment

Exchange, as the case may be.

(1) In considering whether an applicant or a Recognised

Investment Exchange satisfies the recognition requirements applying

to it under these regulations, the Competent Authority may take into

account any other circumstances that it may deem relevant in each

particular case.

(2) An applicant or a Recognised Investment Exchange may

satisfy recognition requirements applying to it under these regulations

by entering into an agreement to the satisfaction of the Competent

Authority for any functions specified in the said agreement to be

performed on its behalf by another person.

(3) An agreement of the kind mentioned in subregulation

(2) above shall be made in writing, and entered into between an applicant

or a Recognised Investment Exchange, as the case may be, and the

person who is to perform any functions on behalf of such applicant or

Recognised Investment Exchange. Such agreement shall be executed

by duly authorised officials of the governing body of the respective

entities.

(4) Where an applicant or a Recognised Investment

Exchange enters into any agreement of the kind mentioned in

subregulation (2) above, any such agreement shall not affect the

responsibility imposed by the Act on such applicant or Recognised

Investment Exchange to satisfy recognition requirements applying to it

under these regulations.

(5) The liability of the Recognised Investment Exchange

for any breaches of the recognition requirements or any other regulations

or directives issued under the Act, shall not be affected or reduced as a

result of the Recognised Investment Exchange entering any agreement

of the kind mentioned in subregulation (2) above.

(6) Any person who, not being a Recognised Investment

Exchange, is to perform any specified function in terms of any agreement

of the kind mentioned in subregulation (2) above shall be confirmed,

after due verification, by the applicant or the Recognised Investment

Exchange as the case may be, as being a fit and proper person being

able and willing to perform such functions. This confirmation shall be

made by the governing body of the applicant or Recognised Investment

Exchange, as the case may be, in the form of a written declaration to

that effect which shall be submitted to the Competent Authority together

with a duly authenticated true copy of the relevant agreement of the

kind mentioned in subregulation (2) above .

(7) Notwithstanding anything in the foregoing, the

Recognised Investment Exchange shall be responsible towards the

Competent Authority for the supervision of the proper performance of

any functions performed by any person throughout any such period

that any agreement of the kind mentioned in subregulation (2) above

shall remain in force.

(1) The Recognised Investment Exchange must ensure that business

conducted by means of its facilities is conducted in an orderly manner and so as to

afford proper protection to investors.

(2) Without prejudice to the generality of sub-paragraph (1), the Recognised

Investment Exchange must, by virtue of appropriate procedures to the satisfaction of

the Competent Authority, ensure that>

(a) access to the Recognised Investment Exchange’s facilities is subject to

criteria designed to protect the orderly functioning of the market and the interests

of investors<

(b) dealings on the Recognised Investment Exchange are limited to

instruments in which there is a proper market<

(c) appropriate arrangements are made for price-sensitive information to

be made available (whether by the Recognised Investment Exchange or, where

appropriate, by issuers of the instruments) to the public<

(d) appropriate arrangements are made for price-sensitive information to

be stored, protected and published or otherwise made available (whether by the

Recognised Investment Exchange or, where appropriate, by issuers of the

instruments) to the public<

(e) satisfactory arrangements are made for securing the timely discharge

of the rights and liabilities of the parties to transactions effected on the Recognised

Investment Exchange (being rights and liabilities in relation to those transactions)<

(f) appropriate arrangements are made for the matching of transactions

effected on or through the Recognised Investment Exchange<

(g) satisfactory arrangements are made for recording transactions effected

on the Recognised Investment Exchange, and transactions (whether or not effected

on the Recognised Investment Exchange) which are cleared or to be cleared by

means of its facilities, and the procedure of reporting such transactions<

(h) adequate procedures are established to ensure compliance by the

Recognised Investment Exchange with all the regulations and#or directives to

which it is subject<

(i) appropriate measures are adopted to reduce the extent to which the

facilities of the Recognised Investment Exchange can be used for a purpose

connected with market abuse, insider dealing or any other criminal offence, and

to facilitate their detection and monitor their incidence<

(j) its rules provide for the application of article 17 sub-articles (2) and (3)

and article 18 of the Act in any circumstances where a suspension of listing is

ordered by the Recognised Investment Exchange< and

(k) satisfactory arrangements are made for the safeguarding and

administration of assets belonging to users of those facilities, where relevant.

(3) In considering whether the requirements in (1) and (2) (a) above are

satisfied, the Competent Authority may, without prejudice to the generality of its powers,

take into account the following circumstances in relation to a Recognised Investment

Exchange>

(a) the suitability of the criteria for membership applied by the Recognised

Investment Exchange and the application of such criteria in an objective and non-

discriminatory manner<

(b) the measures designed to prevent the use of its facilities for abusive or

improper purposes<

(c) the safeguards designed to protect investors against fraud or misconduct,

recklessness, negligence or incompetence by users of its facilities<

(d) those arrangements designed to enable users of its facilities to monitor

their use thereof and raise queries about any use of those facilities which they are

reported to have made<

(e) arrangements to enable users of its facilities to comply with any relevant

regulatory or legal requirements<

(f) arrangements designed to reduce the risk that its facilities will be used

in ways which are incompatible with relevant regulatory or legal requirements<

(g) rules and procedures adopted for the prohibition of market abuse, insider

dealing and any other form of abusive trading practices by users of its facilities<

(h) arrangements and practices enabling members and clients to obtain the

best price available at the time for their size and type of trade<

(i) arrangements and practices ensuring sufficient pre- and post-trade

transparency, taking account of the practices in those markets and the trading

systems used<

(j) procedures enabling the Recognised Investment Exchange to influence

trading conditions or discontinue or suspend trading promptly when necessary to

maintain an orderly market.

(4) In considering whether a “proper market” exists for the purposes of

paragraph (2) (b) above, the Recognised Investment Exchange may, without prejudice

to the generality of its powers, take into account the following circumstances in relation

to an instrument>

(a) the existence of a sufficient number of persons already holding the

instrument or interested in dealing in it to bring about adequate forces of supply

and demand<

(b) the extent to which there are any limitations in relation to the persons

who may hold or deal in the instrument or the amount of the instrument which

may be held<

(c) whether there is adequate information in the public domain to enable

market participants to make a reasonably informed judgement about the value of

the instrument and the risks associated with it<

(d) the suitability of such instrument for any investor or class of investors.

Disclosure by issuers of securities

(1) The Recognised Investment Exchange must ensure that any issuers

whose securities are traded thereon are subject to satisfactory disclosure requirements

in relation to such securities and that these requirements are properly implemented at

all times for the purpose of ensuring that all relevant information is properly disclosed

to investors.

(2) The rules of the Recognised Investment Exchange must enable the

Recognised Investment Exchange, in the event of a failure by an issuer to comply with

the obligation of disclosure, or upon the specific instructions of the Listing Authority

to that effect>

(a) to discontinue the admission of the relevant securities to trading<

(b) to suspend trading in the relevant securities<

(c) to publish the fact that the issuer has failed to comply with the obligation

of disclosure< and

(d) to make public itself any information which the issuer has failed to

publish.

This paragraph is without prejudice to the requirement in paragraph 5(2)(c) above.

Promotion and maintenance of standards

(1) The Recognised Investment Exchange must be able and willing to

promote and maintain high standards of integrity and fair dealing in the carrying on of

activities by persons in the course of using the facilities provided by the Recognised

Investment Exchange.

(2) The Recognised Investment Exchange must be able and willing to

cooperate, by the sharing of information or otherwise, with the Competent Authority,

and with any other authority, body or person having responsibility for the supervision

or regulation of any regulated activity or other financial service, or with an overseas

regulator.

(3) For the purposes of the foregoing provision the Recognised Investment

Exchange must have appropriate arrangements with its members enabling it to obtain

confidential information from its members and to disclose such information to the

Competent Authority and other appropriate bodies and in particular, to assist and

collaborate with the Competent Authority without delay in response to a specific written

request received from the Competent Authority in the performance of its functions

according to law.

Rules, bye-laws and consultation

(1) The Recognised Investment Exchange must ensure that appropriate

procedures are adopted for it to make rules or bye-laws, for keeping its rules or bye-

laws under review, and for amending them.

(2) The procedures referred to in the foregoing provision must include

procedures for consulting users of the Recognised Investment Exchange’s facilities in

appropriate cases.

(3) Without prejudice to the generality of paragraph (1) above, the

Recognised Investment Exchange must ensure that its bye-laws address, at all times,

each of the following matters>

(a)

Administration of the Recognised Investment Exchange<

(b) Criteria for the acquisition, retention and suspension of and

disqualification from membership<

(c)

Appropriate conduct of business rules<

(d) Criteria for the authorisation of persons to utilise the facilities of the

Recognised Investment Exchange<

(e) Rules and procedures requiring its members to furnish the Recognised

Investment Exchange with such information and documentation as may be

reasonably required by the Recognised Investment Exchange to ensure the proper

and lawful use of its facilities<

(f) Rules and procedures relating to trading, settlement and depository

services, where relevant<

(g) Minimum requirements and procedures for the listing and trading of

instruments on the Recognised Investment Exchange, including continuing listing

requirements<

(h) Rules and procedures relating to the amalgamation of listed companies<

(i) Minimum requirements and procedures relating to the de-listing of

instruments from the Recognised Investment Exchange.

(4) The Recognised Investment Exchange must consult users of its facilities

on any arrangements it proposes to make for dealing with penalty income in accordance

with paragraph 9(3) below or on any changes which it proposes to make to those

arrangements.

Discipline

(1) The Recognised Investment Exchange must have effective arrangements

for monitoring and enforcing compliance with>

(a) its rules and bye-laws (including rules in relation to transactions in

instruments listed on the Recognised Investment Exchange where such transactions

are not effected on the Recognised Investment Exchange)< and

(b) the arrangements made by it as mentioned in paragraph 5(2)(e) above.

(2) Arrangements made pursuant to paragraph (1) must include procedures

for investigating complaints made to the Recognised Investment Exchange about the

conduct of persons in the course of using the facilities of that Recognised Investment

Exchange.

(3) Where arrangements made pursuant to paragraph (1) include provision

for requiring the payment of penalties, they must include arrangements for ensuring

that any amount so paid is applied only in one or more of the following ways>

(a) towards meeting expenses incurred by the Recognised Investment

Exchange in the course of the investigation of the breach in respect of which the

penalty is paid, or in the course of any appeal against the decision of the Recognised

Investment Exchange in relation to that breach<

(b) for the benefit of users of the facilities of the Recognised Investment

Exchange<

(c) towards the Investment Compensation Scheme set up in terms of the

Investment Services Act<

(d) for charitable purposes.

Complaints

(1) The Recognised Investment Exchange must have effective

arrangements for the investigation and resolution of complaints arising in connection

with the performance of, or failure to perform, any of its functions>

Provided that the foregoing does not extend to complaints about the content of

rules made by the Recognised Investment Exchange.

(2) The arrangements must include arrangements for a complaint to be

fairly and impartially investigated by a person independent of the Recognised

Investment Exchange, and for him to report on the result of his investigation to the

Recognised Investment Exchange and to the complainant.

(3) The arrangements must confer on the person mentioned in sub-

paragraph (2) the power to recommend, if he thinks it appropriate, that the Recognised

Investment Exchange>

(a)

makes a compensatory payment to the complainant<

(b) remedies the matter complained of, or takes both of those steps.

(4) Sub-paragraph (2) is not to be construed as preventing the Recognised

Investment Exchange from making arrangements for the initial investigation of a

complaint to be conducted by the Recognised Investment Exchange.

Default rules in respect of market contracts

(1) The Recognised Investment Exchange must have default rules

which, in the event of a member of the Recognised Investment Exchange being or

appearing to be unable to meet his obligations in respect of one or more market contracts,

enable action to be taken in respect of unsettled market contracts to which he is a

party.

(2) The rules may authorise the taking of the same or similar action in

relation to a member who appears to be likely to become unable to meet his obligations

in respect of one or more market contracts.

(3) The Recognised Investment Exchange must have adequate

arrangements for ensuring that parties to the contract are notified as soon as reasonably

practicable of the default, the identity of the other parties to the contract and of any

decision taken under the rules in relation to contracts to which they are a party.

Cooperation with other authorities

The Recognised Investment Exchange must be able and willing to cooperate,

by the sharing of information or otherwise, with any other authority or body having

responsibility for any matter arising out of, or connected with, the default of a member

of the Recognised Investment Exchange.