On February 24, 2012, the European Securities and Markets Authority ("ESMA") published guidelines on systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities (the "Guidelines"). The Guidelines interpret existing EU requirements set out in the Markets in Financial Instruments Directive ("MiFID") and Market Abuse Directive. They are intended to come into effect in May 2012.
The May 2010 Flash Crash, which affected U.S. and EU security and derivative markets, provided the principal impetus for the Guidelines. However, the substance of the Guidelines moves beyond the Flash Crash to address generally the reliability, compliance, and proper management of electronic trading systems ("ETSs") used to deal in securities, derivatives and other financial instruments, including large scale trading platforms, individual systems used by specific traders, systems used to execute orders, and systems which automatically generate orders, i.e. trading algorithms. The Guidelines will not of themselves have the force of law but they should guide the EU Member State authorities' implementation and enforcement of existing laws and may, therefore, have the same effect as a new law or regulation would have on behavior of market participants.
Who will the Guidelines affect?
Any fund manager, broker-dealer or investment bank (any "Firm") that is regulated in the EU under MiFID, whether trading for its own account or for clients, which uses an ETS to trade in financial instruments, including securities and derivatives. Any EU regulated market ("RM") or multilateral trading facility ("MTF") that operates an ETS located within the EU, which means that Non-EU traders who trade in financial instruments admitted to trading on an RM or traded through an MTF will be subject indirectly to the Guidelines. Any Firm that provides clients with direct market access ("DMA") or sponsored access ("SA") to an ETS as part of the Firm's execution of orders on behalf of the clients ("Execution Services"). Entities that sell ETSs to RMs or MTFs or provide services related to ETSs. Entities, such as insurers, which are regulated in the EU but exempt from MiFID. What do the Guidelines cover?
There are eight sets of Guidelines – four for RMs and MTFs and four for Firms – with the Guidelines for RMs and MTFs and those for Firms covering the same issues:
General requirements for the proper development, testing, deployment...