Algorithmic Trading Regulations, 2017

Suppliment tal-Gazzetta tal-Gvern ta’ Malta Nru. 19,925, 22 ta’ Diċembru, 2017

Taqsima B

L.N. 395 of 2017

Investment Services Act

(Cap. 370)

Financial Markets Act

(Cap. 345)

Algorithmic Trading Regulations, 2017

IN EXERCISE of the powers conferred by article 12 of the

Investment Services Act, and article 49 of the Financial Markets Act,

the Minister responsible for the regulation of financial services, acting

on the advice of the Malta Financial Services Authority, has made the

following regulations:-

(1)

The title of these regulations is the Algorithmic Citation, scope

and

Trading Regulations, 2017.

commencement.

(2) The purpose of these regulations is to implement Article 4

(1) paragraphs 24, 39 to 41 and Article 17 (1) – (6) of MIFID as herein

defined, and they shall be interpreted and applied accordingly.

(3)

These regulations shall come into force on the 3rd January

2018.

(1) In these regulations unless the context otherwise Definitions.

requires

"the Acts" mean the Investment Services Act and the Financial Cap. 370.

Markets Act;

"algorithmic trading" means trading in financial instruments

where a computer algorithm automatically determines individual

parameters of orders such as whether to initiate the order, the timing,

submission, with limited or no human intervention, and does not

include any system that is only used for the purpose of routing orders

to one or more trading venues or for the processing of orders involving

no determination of any trading parameters or for the confirmation of

orders or the post-trade processing of executed transactions;

"competent authority" means the Malta Financial Services

Authority established by the Malta Financial Services Authority Act; Cap. 330.

"direct electronic access" means an arrangement where a member

or participant or client of a trading venue permits a person to use its

trading code so the person can electronically transmit orders relating to

a financial instrument directly to the trading venue and includes

arrangements which involve the use by a person of the infrastructure of

the member or participant or client, or any connecting system provided

by the member or participant or client, to transmit the orders (direct

market access) and arrangements where such an infrastructure is not

used by a person (sponsored access);

"high-frequency algorithmic trading technique" means an

algorithmic trading technique characterised by

(a) infrastructure intended to minimise network and other

types of latencies, including at least one of the following

facilities for algorithmic order entry: co-location, proximity

hosting or high-speed direct electronic access;

(b) system-determination of order initiation, generation,

routing or execution without human intervention for individual

trades or orders; and

(c) high message intraday rates which constitute orders,

quotes or cancellations;

"Maltese investment firm" means a person licensed in terms of

the Investment Services Act, whose head office is in Malta and who is

entitled to carry on an activity in a Member State or EEA State other

than Malta in exercise of a European Right;

"MAR" means Regulation (EU) No 596/2014 of the European

Parliament and of the Council of 16 April 2014 on market abuse

(market abuse regulation) and repealing Directive 2003/6/EC of the

European Parliament and of the Council and Commission Directives

2003/124/EC, 2003/125/EC and 2004/72/EC, as amended from time to

time;

"MiFID" means Directive 2014/65/EU of the European

Parliament and of the Council of 15 May 2014 on markets in financial

instruments and amending Directive 2002/92/EC and Directive 2011/

61/EU, as amended from time to time, and includes any implementing

measures that have been or may be issued thereunder;

"trading venue" means a regulated market, an MTF or an OTF.

(2) Words and expressions used in the Acts shall, in these

regulations, have the same meaning as is assigned to them in the Acts.

A Maltese investment firm that engages in algorithmic Requirements

applicable to

trading shall have in place

investment

firms engaging

in algorithmic

(a) effective systems and risk controls suitable to the

trading.

business it operates to ensure that its trading systems are resilient

and have sufficient capacity, are subject to appropriate trading

thresholds and limits and prevent the sending of erroneous orders

or the systems otherwise functioning in a way that may create or

contribute to a disorderly market;

(b) effective systems and risk controls to ensure the

trading systems cannot be used for any purpose that is contrary

to MAR or to the rules of a trading venue to which it is

connected;

(c)

effective business continuity arrangements to

deal with any failure of its trading systems and shall ensure its

systems are fully tested and properly monitored to ensure that

they meet the requirements laid down in this regulation.

(1) A Maltese investment firm that engages in Notification to

algorithmic trading in Malta or in another Member State or EEA State the

authority.

shall notify this to the competent authority and to the European

regulatory authority of the trading venue at which the Maltese

investment firm engages in algorithmic trading as a member or

participant of the trading venue where this is not established in Malta.

(2) Upon receipt of a notification pursuant to sub-regulation

(1), the competent authority may require the Maltese investment firm

to provide, on a regular or ad hoc basis, a description of the nature of

its algorithmic trading strategies, details of the trading parameters or

limits to which the system is subject, the key compliance and risk

controls that it has in place to ensure the conditions laid down in

regulation 3 are satisfied and details of the testing of its systems.

(3) The competent authority may, at any time, request further

information from the Maltese investment firm about its algorithmic

trading and the systems used for that trading.

(4) The competent authority shall, on the request of a European

regulatory authority of the trading venue at which the Maltese

investment firm as a member or participant of the trading venue is

engaged in algorithmic trading and without undue delay, communicate

the information referred to in sub-regulations (2) and (3) that it

receives from the Maltese investment firm that engages in algorithmic

trading.

(5)

The Maltese investment firm shall arrange for records to be

kept in relation to the matters referred to in this regulation and shall

ensure that those records be sufficient to enable the competent

authority to monitor compliance with the requirements of MiFID.

(6) A Maltese investment firm that engages in a high-

frequency algorithmic trading technique shall store in an approved

form accurate and time sequenced records of all its placed orders,

including cancellations of orders, executed orders and quotations on

trading venues and shall make them available to the competent

authority upon request.

A Maltese investment firm that engages in algorithmic

trading to pursue a market making strategy shall, taking into account

the liquidity, scale and nature of the specific market and the

characteristics of the instrument traded

making strategy.

(a) carry out this market making continuously during a

specified proportion of the trading venue’s trading hours, except

under exceptional circumstances, with the result of providing

liquidity on a regular and predictable basis to the trading venue;

(b) enter into a binding written agreement with the

trading venue which shall at least specify the obligations of the

Maltese investment firm in accordance with paragraph (a) of this

regulation; and

(c) have in place effective systems and controls to ensure

that it fulfils its obligations under the written agreement referred

to in paragraph (b) at all times.

For the purposes of these regulations and of article 4E of

the Financial Markets Act, a Maltese investment firm that engages in

algorithmic trading shall be considered to be pursuing a market

making strategy when, as a member or participant of one or more

trading venues, its strategy, when dealing on own account, involves

posting firm, simultaneous two-way quotes of comparable size and at

competitive prices relating to one or more financial instruments on a

single trading venue or across different trading venues, with the result

of providing liquidity on a regular and frequent basis to the overall

market.

(1) A Maltese investment firm that provides direct

electronic access to a trading venue shall

(a) have in place effective systems and controls which

ensure a proper assessment and review of the suitability of

clients using the service, that clients using the service are

prevented from exceeding appropriate pre-set trading and credit

thresholds, that trading by clients using the service is properly

monitored and that appropriate risk controls prevent trading that

may create risks to the Maltese investment firm itself or that

could create or contribute to a disorderly market or could be

contrary to MAR or the rules of the trading venue

Provided that direct electronic access to a trading venue

without such controls is prohibited.

(b) be responsible for ensuring that clients using that

service comply with the requirements of MiFID and the rules of

the trading venue;

(c) monitor the transactions in order to identify

infringements of those rules, disorderly trading conditions or

conduct that may involve market abuse and that is to be reported

to the competent authority;

(d) ensure that there is a binding written agreement

between the Maltese investment firm and the client regarding the

essential rights and obligations arising from the provision of the

service and that under the agreement the Maltese investment

firm retains responsibility under MiFID; and

(e) notify the competent authority and where the trading

venue is not established in Malta, the European regulatory

authority of the trading venue at which the Maltese investment

firm provides direct electronic access accordingly.

(2) The competent authority may require the Maltese

investment firm to provide, on a regular or ad hoc basis, a description

of the systems and controls referred to in paragraph (a) of sub-

regulation (1) and evidence that those have been applied.

(3) The competent authority shall, on the request of a European

regulatory authority of a trading venue, in relation to which the

Maltese investment firm provides direct electronic access,

communicate without undue delay the information referred to in sub-

regulation (2) that it receives from the Maltese investment firm.

(4) The Maltese investment firm shall arrange for records to be

kept in relation to the matters referred to in this regulation and shall

ensure that those records be sufficient to enable the competent

authority to monitor compliance with the requirements of the MiFID.

A Maltese investment firm that acts as a general clearing Investment

member for other persons shall have in place effective systems and firms

general clearing

controls to ensure clearing services are only applied to persons who member

other persons.

are suitable and meet clear criteria and that appropriate requirements

are imposed on those persons to reduce risks to the Maltese investment

firm and to the market. The Maltese investment firm shall ensure that

there is a binding written agreement between the Maltese investment

firm and the person regarding the essential rights and obligations

arising from the provision of that service.

(1) Where a person falling within the scope of these

regulations fails to comply with any provisions of such regulations or

any rules issued thereunder further implementing such regulations, the

competent authority may, by notice in writing and without recourse to

a court hearing, impose on such person an administrative penalty and

other administrative measures in accordance with the provisions of the

Financial Markets Act (MiFID and MiFIR Administrative Penalties,

Measures and Investigatory Powers) Regulations, 2017 or the

Investment Services Act and Banking Act (MiFID and MiFIR

Administrative Penalties, Measures and Investigatory Powers)

Regulations, 2017.

(2) A right of appeal to the Financial Services Tribunal shall lie

from the decisions which the competent authority shall take under

these regulations and the provisions of Part VI of the Financial

Markets Act or Article 19 of the Investment Services Act shall apply

mutatis mutandis.

For the better carrying out of the provisions of these

regulations, the competent authority may, from time to time, issue and

publish Investment Service Rules which shall be binding on

investment firms and others as may be specified therein.

€0.27