Alternative Trading Systems

Part

MAR Market Conduct

Chapter

Alternative Trading Systems

Printed on: 17/06/2024

Rulebook at: 28/08/2007

MAR 5

Alternative Trading Systems

MAR 5.1

Application and purpose

01/12/2004

MAR 5.1.1

This chapter is relevant to every firm that has, or intends to apply for, a Part IV permission and that:

(1) if it is a UK domestic firm, operates or proposes to operate an ATS from an establishment in the United Kingdom or elsewhere;

(2) if it is an overseas firm, operates or proposes to operate an ATS from an establishment in the United Kingdom.

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MAR 5.1.2

This chapter is subject to the provisions in ECO. For example, this chapter is not relevant to an incoming ECA provider acting as such.

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Purpose

MAR 5.1.3

The purpose of this chapter is to provide a framework for implementing several of the CESR ATS standards. The FSA considers that the implementation of these standards will protect consumers, promote market confidence, reduce financial crime and promote public understanding of the financial system. These standards, and therefore this chapter, do not apply to bilateral systems, which are excluded from the definition of an ATS.

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MAR 5.2

Guidance about what constitutes an ATS

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MAR 5.2.1

MAR 5.2.2 G to MAR 5.2.8 G set out guidance on the meaning of the expressions ATS and bilateral system (as defined in the Glossary). This guidance is adapted from the guidance contained in the CESR ATS standards on the meaning of "qualifying system" (which is the term equivalent to ATS used in those standards).

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"System"

MAR 5.2.2

For the purposes of the definitions of an ATS and a bilateral system, a system is intended to include not only the electronic parts (if any) of a system but also any rules, protocols, procedures and agreements that make up the system. It is also intended to cover the various parts of a system whether provided directly by the ATS operator or by another person under an arrangement with the ATS operator.

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"Price taking systems"

MAR 5.2.3

A system may be an ATS although it does not directly involve price formation. For example, a price taking system such as certain crossing systems may be an ATS.

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"Buying and selling interests"

MAR 5.2.4

The expression buying and selling interests is intended to include not only orders, but also quotes and indications of interest.

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"Brings together"

MAR 5.2.5

Buying and selling interests will be regarded as being brought together in the system if they are brought together under the system's rules or by means of the system's protocols or internal operating procedures. The concept of bringing together is intended to cover any process under which interests interact; this may be by automatic matching, by way of selection of interests by users themselves or otherwise. It is not necessary that the interests be displayed to users. The fact that, after interests are matched, the users must ratify a proposed transaction does not mean that the interests are not brought together in the system. However, systems such as order routing systems where interests are transmitted but do not interact are not intended to be covered by the definition of an ATS.

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"Non-discretionary rules"

MAR 5.2.6

The reference to non-discretionary rules in the definition of an ATS is intended to exclude systems where the operator exercises discretion as to how the interests interact. However, the reference is not intended to exclude a system just because the operator has discretion as to whether or not to enter an interest into the system. It is also not intended to exclude a system just because users have discretion about whether or not to take up or accept any expression of interest.

01/12/2004

Bulletin boards etc.

MAR 5.2.7

A bulletin board or similar system where users contact each other outside the system (that is, not under the system's rules and not by means of the system's protocols or internal operating procedures) to negotiate the material terms of transactions will not be covered by the definition of an ATS.

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Bilateral system/central counterparty

MAR 5.2.8

The definition of an ATS excludes bilateral systems. The definition of bilateral system is intended to capture a system that is like an ATS except that a single person enters into one side of every transaction effected using the system. It is not however intended to cover central counterparty systems, where in substance participants deal among themselves but where their deals are assumed by the central counterparty as buyer and seller. A central counterparty will have a flat book unless there is a default or mistake, while typically the counterparty in a bilateral system will take principal positions in investments on a continuous basis. The definition of bilateral system is slightly flexible in that occasional crossings of client orders will not of itself make the system an ATS. It also includes a system where, rather than a single person, one of a number of persons in the same group enters into one side of every transaction effected using the system.

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MAR 5.3

Notification of establishment of an ATS

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Application for permission

MAR 5.3.1

A person who applies for a Part IV permission and proposes to operate an ATS will be required to complete appropriate parts of the application pack relating to the operation of an ATS(see AUTH 3.9 (Procedures in relation to applications for Part IV permission)).

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Variation of permission to operate an ATS

MAR 5.3.2

If a firm that proposes to operate an ATS applies for variation of Part IV permission to carry on an additional regulated activity necessary to operate the ATS, the FSA considers that, for the purposes of SUP 6.3.20 G (Applications involving significant changes), the proposal will usually cause a significant change to the firm's business or risk profile. The FSA may therefore require the firm to complete the appropriate parts of the full application pack (see AUTH 3.9), as directed by the FSA.

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Notice by firm that already has permission to operate an ATS

MAR 5.3.3

If a firm that proposes to operate an ATS already has permission to carry on the regulated activity necessary to operate the ATS, the firm should give notice of the proposal to the FSA before it begins to operate the ATS, in accordance with Principle 11 (Relations with regulators). This is because the FSA considers that this is a business expansion that could have a significant impact on the firm's risk profile or resources (see SUP 15.3.8 G). When the FSA receives notice, it may request further information from the firm such as the completion of a systems form.

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Notification of significant changes to ATS

MAR 5.3.4

The FSA would also expect an ATS operator to give the FSA notice if there is any significant change to the operation of an ATS that it operates, in accordance with Principle 11 (Relations with regulators). Notice should be given as soon as reasonably practicable after the change.

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MAR 5.4

Requirements to be imposed on the Part IV permission of an ATS operator

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MAR 5.4.1

The FSA proposes to implement several of the CESR ATS standards by imposing requirements on the Part IV permissions of ATS operators.

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MAR 5.4.2

The FSA proposes to impose the requirements on the Part IV permissions of ATS operators in a way that has regard to the principle in the CESR ATS standards that the standards should be implemented in a differentiated way, taking into account the particular risk to be addressed and each ATS's circumstances.

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MAR 5.4.3

If a person who proposes to operate an ATS applies for a Part IV permission, the FSA will be minded to impose the requirements under section 43 of the Act (Imposition of requirements).

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MAR 5.4.4

If a firm that proposes to operate an ATS applies for a variation of Part IV permission to carry on an additional regulated activity necessary to operate the ATS, the FSA will be minded to impose the requirements under section 44 (Variation etc. at request of authorised person) or section 45 (Variation etc. on the Authority's own initiative) of the Act.

01/12/2004

MAR 5.4.5

In relation to current ATS operators, or firms proposing to operate an ATS that have permission to carry on the regulated activity necessary to operate the ATS, the FSA will be minded to impose the requirements under section 44 or 45 of the Act.

01/12/2004

MAR 5.4.6

The FSA may decide not to impose particular requirements in particular cases if it is not appropriate to do so. For example, the FSA will be minded not to impose requirements for pre-trade information to be provided to users or published on ATS operators that operate price taking systems or request for quote systems. Also, it will be minded not to impose requirements for publication of post-trade information on ATS operators that operate ATS's that facilitate trading in interest-rate swaps, contractually based investments relating to currency, or debt securities other than benchmark bonds.

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MAR 5.4.7

The FSA proposes to impose requirements for publication of pre-trade and post-trade information that are no more onerous in relation to an investment than the standard that applies under the Act or relevant national law of another State (as the case may be) to the exchange operating the underlying market for the investment.

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MAR 5.4.8

MAR 5 Annex 1 G sets out an illustration of the form of requirements that the FSA will be minded to impose on the Part IV permission of an ATS operator. The exact form may vary to take into account the matters referred to in MAR 5.4.2 G. The FSA may also consider setting out more detail in the requirements if the FSA considers it appropriate to do so (for example, if requested to do so by an ATS operator).

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MAR 5.5

Parts of the Handbook applicable to the operation of an ATS

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MAR 5.5.1

The purpose of this section is to help prospective and actual ATS operators find their way around the Handbook by setting out which parts of it apply to them when operating an ATS.

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MAR 5.5.2

The application of the Handbook to the operation of ATS's is summarised in MAR 5.5.3 G. ATS operators should read applicable parts of the Handbook to find out what the detailed regulatory requirements are for operating ATS's.

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MAR 5.5.3

Handbook provisions applicable to ATSs

Part of Handbook

Applicability to ATSs

High Level Standards

Principles for Businesses (PRIN)

This applies. However, note that some Principles are (partially) disapplied for clients that are market counterparties as further detailed in PRIN 3.4.

Senior management arrangements, Systems and Controls (SYSC)

This applies.

Threshold Conditions (COND)

This applies.

Statements of Principle and Code of Practice for Approved Persons (APER)

This applies to an approved person who performs a controlled function for an ATS operator.

The Fit and Proper test for Approved Persons (FIT)

This applies.

General provisions (GEN)

This applies.

Business standards

Interim Prudential sourcebooks (IPRU)

These apply, as appropriate.

Conduct of Business sourcebook (COB)

In general, COB applies to ATS operators.
Service companies that operate an ATS are subject to the provisions of COB mentioned in COB 1.2.1 (2)A.
There are special terms of business set out in COB 4.2.17 for ATS operators that have customers (as opposed to those whose only clients are market counterparties).
Most of COB will not apply to ATS operators if their business is wholly within the scope of Inter-Professional Conduct (Inter-professional conduct): see COB 1.3.4.

Market Conduct sourcebook (MAR)

The Code of Market Conduct (The Code of Market Conduct) applies. Price Stabilising Rules (Price Stabilising Rules) are likely to be of limited relevance to the business of an ATS operator.
Inter-Professional Conduct (Inter-Professional Conduct will ordinarily be relevant to ATS's whose clients are market counterparties. MAR 3.4.10A G is particularly relevant to the information that these ATS operators should provide to their clients.
Ordinarily, service companies are not covered by Inter-Professional Conduct. However, MAR 3.1.1 R provides that MAR 3.4.10 G and MAR 3.4.10A G apply to a service company that operates an ATS.
MAR 5 (Alternative trading systems) is directly relevant to the operation of an ATS.

Training and Competence sourcebook (TC)

This applies.

Regulatory process

Authorisation manual (AUTH)

This applies in relation to an application by a prospective ATS operator for authorisation. In particular, 3.24.1 provides that if an applicant who wishes to operate an ATS intends to assume responsibility for the clearing or settlement of transactions effected using the ATS, the applicant should provide sufficient information with its application to demonstrate that it has adequate arrangements in place to ensure efficient clearing or settlement (as the case may be) of the transactions.

Supervision manual (SUP)

This applies.

Decision, Procedure and Penalties Manual (DEPP)

This applies.

Redress

Dispute resolution: Complaints sourcebook (DISP)

ATS operators are subject to the compulsory jurisdiction of the Financial Ombudsman Service.
However, a firm which notifies the FSA under DISP 1.1.7 that it does not conduct business with eligible complainants (persons eligible to have a complaint considered under the Financial Ombudsman Service, as defined in DISP 2.4) will be exempt from the rules on complaint handling procedures for firms (DISP 1.2 to DISP 1.7) and from the Financial Ombudsman Funding rules ( FEES 5 ).

Redress

Compensation sourcebook (COMP)

COMP applies to all firms. However, ATS operators that do not conduct business that could give rise to a protected claim by an eligible claimant as defined and have no reasonable likelihood of doing so can gain exemption under COMP 13.3 from some compensation scheme levies.

Complaints against the FSA (COAF)

This applies.

Specialist sourcebooks

Collective Investment Schemes Sourcebook (CIS)

ECO applies to an ATS operator that is an electronic commerce activity provider.
REC does not apply to an ATS operator.
The other specialist sourcebooks are likely to be of limited relevance to an ATS operator in respect of its operation of an ATS.

Credit Unions (CRED)

Electronic money (ELM)

E-commerce Directive (ECO)

Deleted

Professional firms (PROF)

Recognised Investment Exchanges and Recognised Clearing Houses (REC)

Listing, Prospectus and Disclosure

Listing Rules, LR

This may apply if the firm is applying for listing in the United Kingdom, is a listed issuer in the United Kingdom, is a sponsor or is applying for approval as a sponsor.

Prospectus Rules, PR

This may apply if the firm makes an offer of transferable securities to the public in the United Kingdom or is seeking the admission to trading of transferable securities on a regulated market situated or operating in the United Kingdom.

Disclosure Rules and Transparency Rules, DTR

This may apply if the firm is an issuer, any class of whose financial instruments have been admitted to trading on a regulated market, or are the subject of an application for admission to trading on a regulated market, other than issuers who have not requested or approved admission of their financial instruments to trading on a regulated market.

Handbook guides

Service companies (SERV)

This applies to a service company that operates an ATS.

Energy market participants (EMPS)

This applies to an energy market participant that operates an ATS.

Oil market participants (OMPS)

This applies to an oil market participant that operates an ATS.

In addition to Handbook modules the following Regulatory Guides are also relevant:
(1) The Enforcement Guide (EG)
(2) [intentionally blank]

28/08/2007

MAR 5 Annex 1

Illustrative form of requirements: Alternative Trading Systems

01/12/2004

Fair and orderly trading

The firm must, in relation to the operation of an ATS, have appropriate arrangements in place designed to ensure:

(a)

efficient pricing and the equitable treatment of users;

(b)

a trading methodology that enables fair and orderly trading; and

(c)

that sufficient information about quotes, orders and completed transactions is made available to users.

Publication of pre-trade information

(1)

This requirement only applies in relation to shares traded on an ATS and only if those shares are also traded on a UK RIE or a regulated market.

(2)

The firm must, in relation to the operation of an ATS, have appropriate arrangements in place to make publicly available information about quotes or orders or both relating to shares traded on the ATS that the ATS displays or advertises to users.

Publication of post-trade information

(1)

This requirement only applies in relation to investments traded on an ATS if those investments, or investments that are substantially similar in nature, are traded on a UK RIE, a regulated market or an EEA commodities market.

(2)

The firm must, in relation to the operation of an ATS, have appropriate arrangements in place to make publicly available information about the price, volume and time of completed transactions for investments traded on the ATS. For large transactions in debt securities, an indication that volume exceeded a certain figure (not being less than £7 million or its equivalent) instead of the actual volume is sufficient.

Method of publication

Information about quotes, orders or transactions shall be treated as being publicly available under requirements 2 and 3 if it is available on reasonable commercial terms. The firm may make information publicly available under those requirements by publishing the information itself (for example, by posting data on a web-site) or by arranging with a third party (such as an information vendor, regulated market or consolidated quotation system) to publish the information.

Timing of publication

(1)

For the purposes of requirements 1, 2 and 3, information about quotes, orders and transactions should be made available in a timely manner. In particular, information should be made available to users and to subscribers close to the time when the quote or order is given or the transaction is executed. Information may be made available to persons other than users or subscribers with a reasonable delay.

(2)

The firm may make information about a large order, quote or transaction available to users under requirement 1 or publicly available under requirement 2 or 3 at a time later than that specified in (1), but only to the extent reasonably necessary to protect the interests of the relevant user who placed the order, gave the quote or executed the transaction.

Monitoring of trading

(1)

The firm must, in relation to the operation of an ATS :

(a)

have appropriate arrangements in place that enable it to monitor transactions undertaken on the ATS to identify suspected breaches of any rules relating to fair and orderly trading on the ATS and conduct that may constitute market abuse;

(b)

report suspected material breaches of its rules relating to fair and orderly trading on the ATS or suspected market abuse to the FSA and other appropriate organisations; and

(c)

supply relevant information to the FSA as soon as practicable regarding the suspected breaches or suspected market abuse and provide full assistance to the FSA in investigating the suspected breach or suspected market abuse.

(2)

The functions referred to in (1) may be performed by the firm itself or by another person (such as the operator of a regulated market for the particular investment ) under a formal arrangement with the firm .

(3)

In (1), "rules" includes protocols, procedures or terms of, or established under, any agreement between the firm and a user.

Meaning of "appropriate arrangements"

In requirements 1, 2, 3 and 6, "appropriate" means appropriate having regard to the nature of the system, the nature and liquidity of investments traded on the system, the experience of users, the extent to which the wider market in the particular investment involves private customers, and the significance of the system in the overall market for the investment and, also in relation to requirement 6, the susceptibility of the investment traded to market abuse.

Access to sufficient publicly available information

(1)

The firm must, in relation to the operation of an ATS, provide, or be reasonably satisfied that there is publicly available, sufficient information to enable users who are customers to make a reasonably informed judgement about the value of each investment traded on the system and the risks associated with that investment.

(2)

In (1), "sufficient" means sufficient taking into account the nature and experience of users of the system who are customers and the type of investment traded on the system.

(3)

For the purposes of (1), if an investment is admitted to trading on an RIE , a regulated market or an EEA commodities market (and is not suspended from trading on the RIE or market), the firm may be reasonably satisfied that there is publicly available sufficient information about that investment to enable users who are customers to make a reasonably informed judgement about the investment.

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