FINANCIAL SERVICES AND MARKETS Citation 1 These Regulations may be cited as the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges , Clearing Houses and Central Securities Depositories ) Regulations 2001. Commencement 2 These Regulations come into force on the day on which sections 290(1) and 292(2) of the Act (which relate to the making of recognition orders) come into force. Interpretation 3 1 In these Regulations— “the Act” means the Financial Services and Markets Act 2000; “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, price or quantity of the order or how to manage the order after its 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; “the appropriate regulator” has the meaning given in section 285A of the Act ; ... ... “ certificates ” has the meaning given in Article 2.1.27 of the markets in financial instruments regulation; ... “ commodity derivatives ” has the meaning given in Article 2(1)(30) of the markets in financial instruments regulation ; “the Companies Act” means the Companies Act 1989 ; ... ... “default fund” means the sum of the default fund contributions by the members or designated non-members of a recognised investment exchange to that exchange or by one recognised investment exchange to another or by the members of a recognised clearing house to that clearing house or by one recognised clearing house to another to the extent those contributions have not been returned or otherwise applied; “default fund contribution” has the same meaning as in section 188(3A) of the Companies Act; “defaulter” and “default” are to be construed in accordance with sections 188(2) and (2A) of the Companies Act, and references to action taken under the default rules of an exchange or clearing house are to be construed in accordance with section 188(4) of that Act; “ depositary receipts ” has the meaning given in Article 2(1)(25) of the markets in financial instruments regulation ; “derivative” has the meaning given in Article 2(1)(29) of the markets in financial instruments regulation; “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); “disorderly trading conditions” has the same meaning as in the markets in financial instruments directive; “emission allowances” has the meaning given in paragraph 11 of Part 1 of Schedule 2 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; “ exchange-traded fund ” has the meaning given in Article 2(1)(26) of the markets in financial instruments regulations ; “exempt activities”, in relation to a recognised body, means the regulated activities in respect of which the body is exempt from the general prohibition as a result of any of subsections (2) to (3A) or (3D) of section 285 of the Act; “facilities”, in relation to a recognised body, means the facilities and services it provides in the course of carrying on exempt activities, and references to the use of the facilities of an exchange is to be construed in accordance with paragraph (2); “the FCA ” means the Financial Conduct Authority; “financial crime” is to be construed in accordance with section 6(3) and (4) of the Act; “financial instrument” has the meaning given in Article 2(1)(9) of the markets in financial instruments regulation ; “the Financial Services Act” means the Financial Services Act 1986 ; “group” means a parent undertaking and all its subsidiary undertakings, and for those purposes, “parent undertaking” and “subsidiary undertaking” have the same meaning as in section 420 of the Act; “high-frequency algorithmic trading technique” means an algorithmic trading technique characterised by— 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; system-determination of order initiation, generation, routing or execution without human intervention for individual trades or orders; and high message intraday rates which constitute orders, quotes or cancellations; “investments” means investments of a kind specified for the purposes of section 22 of the Act; “liquid market” means a market for a financial instrument or a class of financial instruments, where there are ready and willing buyers and sellers on a continuous basis, assessed in accordance with the following criteria, taking into consideration the specific market structures of the particular financial instrument or of the particular class of financial instrument— the average frequency and size of transactions over a range of market conditions, having regard to the nature and cycle of products within the class of financial instrument; the number and type of market participants, including the ratio of market participants to traded instruments in a particular product; the average size of spreads, where available; “ management body ” in relation to an exchange means— the board of directors, or if there is no such board, the equivalent body responsible for the management of the exchange; and any other person who effectively directs the business of the exchange; “market contract” has the meaning given in section 286(4) of the Act (with reference, in the case of a recognised investment exchange, to section 155(2) of the Companies Act or article 80(2) of the Northern Ireland Order, or in the case of a recognised clearing house, to section 155(3) of the Companies Act or article 80(3) of the Northern Ireland Order) and references to a party to a market contract are to be construed in accordance with section 187 of the Companies Act; “market operator” has the meaning given in Article 2(1)(10) of the markets in financial instruments regulation; “matched principal trading” means a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction; “ multilateral system ” has the meaning given as in Article 2(1)(11) of the markets in financial instruments regulation ; “multilateral trading facility” means a UK multilateral trading facility within the meaning given in Article 2(1)(14A) of the markets in financial instruments regulation; “the Northern Ireland Order” means the Companies (No. 2) (Northern Ireland) Order 1990 ; and “organised trading facility” means a UK organised trading facility within the meaning given in Article 2(1)(15A) of the markets in financial instruments regulation; “qualifying credit institution” has the meaning given in section 417 of the Act, and for the purposes of that definition, “Part 4A permission” and “the regulated activity of accepting deposits” have the same meaning as in the Act; “regulated market” means a UK regulated market within the meaning of Article 2(1)(13A) of the markets in financial instruments regulation; “regulatory functions”, in relation to a recognised body, has the meaning given in section 291(3) of the Act. “senior management” means natural persons who exercise executive functions within an investment firm, a market operator or a data reporting services provider and who are responsible, and accountable to the management body, for the day-to-day management of the entity, including for the implementation of the policies concerning the distribution of services and products to clients by the firm and its personnel; “settlement” has the same meaning as in the markets in financial instruments directive; “ SME growth market” means a multilateral trading facility that is registered as an SME growth market in accordance with Part 5.10 of the Market Conduct sourcebook; “ sovereign debt ” has the meaning given by Article 2(1)(46) of the markets in financial instruments regulation ; “ structured finance products ” has the meaning given in Article 2(1)(28) of the markets in financial instruments regulation ; “ systematic internaliser ” has the meaning given in Article 2(1)(12) of the markets in financial instruments regulation ; “ third country firm ” has the meaning given in Article 2(1)(42) of the markets in financial instruments regulation ; “transferable securities” has the meaning given in Article 2(1)(24) of the markets in financial instruments regulation ; ... 1A In Part 1 of the Schedule, in paragraph 21A in Part 3 of the Schedule and in paragraph 31 in Part 5 of the Schedule, “clearing” has the same meaning as in the markets in financial instruments directive. 1B Any reference in these Regulations to a sourcebook is to a sourcebook in the Handbook of Rules and Guidance published by the FCA containing rules made by the FCA under the 2000 Act as the sourcebook has effect on IP completion day. 2 In these Regulations, references to dealings on an exchange, or transactions effected on an exchange, are references to dealings or transactions which are effected by means of the exchange’s facilities or which are governed by the rules of the exchange, and references to the use of the facilities of an exchange include use which consists of any such dealings or entering into any such transactions. 3 In these Regulations, except in regulation 6, references to the performance of the functions of a recognised body are references to the carrying on by it of exempt activities together with the performance of its regulatory functions. Recognition requirements for investment exchanges 4 Parts I and II of the Schedule set out recognition requirements applying to bodies in respect of which a recognition order has been made under section 290(1)(a) of the Act, or which have applied for such an order under section 287 of the Act. Recognition requirements for clearing houses which are not central counterparties 5 Parts III and IV of the Schedule set out recognition requirements applying to bodies in respect of which a recognition order has been made under section 290(1)(c) of the Act, or which have applied for such an order under section 288(1A) of the Act. Recognition requirements for central counterparties 5A Parts 5 and 6 of the Schedule set out recognition requirements applying to bodies in respect of which a recognition order has been made under section 290(1)(b) of the Act, or which have applied for such an order under section 288(1) of the Act. Recognition requirements for central securities depositories 5B Part 7 of the Schedule sets out recognition requirements applying to bodies in respect of which a recognition order has been made under section 290(1)(d) of the Act, or which have applied for such an order under section 288A of the Act. Method of satisfying recognition requirements 6 1 In considering whether a recognised body or applicant satisfies recognition requirements applying to it under these Regulations, the appropriate regulator may take into account all relevant circumstances including the constitution of the person concerned and its regulatory provisions and practices within the meaning of section 302(1) of the Act. 2 Without prejudice to the generality of paragraph (1), a recognised body or applicant may satisfy recognition requirements applying to it under these Regulations by making arrangements for functions to be performed on its behalf by any other person. 3 Where a recognised body or applicant makes arrangements of the kind mentioned in paragraph (2), the arrangements do not affect the responsibility imposed by the Act on the recognised body or applicant to satisfy recognition requirements applying to it under these Regulations, but it is in addition a recognition requirement applying to the recognised body or applicant that the person who performs (or is to perform) the functions is a fit and proper person who is able and willing to perform them. 4 This regulation does not apply in respect of a recognised CSD or an applicant for an order under section 288A of the Act. Dealings and transactions not involving investments 7 Nothing in these Regulations is to be construed as requiring a recognised investment exchange to limit dealings on the exchange to dealings in investments, or as requiring a ... recognised clearing house to limit the provision of its clearing services to clearing services in respect of transactions in investments. Exchanges and clearing houses which do not enter into market contracts 8 Nothing in Parts II or IV of the Schedule is to be taken as requiring a recognised investment exchange or recognised clearing house which does not enter into such contracts as are mentioned in section 155(2)(b) or (3) of the Companies Act to have default rules, or to make any arrangements, relating to such contracts. Effect of recognition under the Financial Services Act 1986 9 1 In this regulation, “commencement” means the beginning of the day on which subsections (2) and (3) of section 285 of the Act (exemption from the general prohibition for recognised investment exchanges and clearing houses) come into force. 2 Subject to paragraph (3), an order under section 37(3) of the Financial Services Act which was in force immediately before commencement has effect after commencement as if it were a recognition order made under section 290(1)(a) of the Act following an application under section 287 of the Act, declaring the body or association to which it relates to be a recognised investment exchange. 3 But if the order was made by virtue of section 40(2) of the Financial Services Act (recognition requirements for overseas investment exchanges and clearing houses), it has effect as if it were a recognition order made under section 292(2)(a) of the Act. 4 Subject to paragraph (5), an order under section 39(3) of the Financial Services Act which was in force immediately before commencement has effect after commencement as if it were a recognition order made under section 290(1)(b) of the Act following an application under section 288 of the Act, declaring the body or association to which it relates to be a recognised clearing house. 5 But if the order was made by virtue of section 40(2) of the Financial Services Act (recognition requirements for overseas investment exchanges and clearing houses), it has effect as if it were a recognition order made under section 292(2)(b) of the Act. 6 Where a recognition order has effect by virtue of this regulation, the Authority may not give a notice under section 298(1)(a) of the Act, giving notice of its intention to give a direction under section 296 or to make a revocation order under section 297(2) in relation to the recognised body concerned, earlier than one month after commencement. 7 Paragraph (6) is without prejudice to section 298(7) of the Act (which permits the Authority to give a direction under section 296 of the Act without following the procedure set out in section 298, if the Authority considers it essential to do so), or to the continued effect of any notice which has effect as a notice given under section 298(1)(a) of the Act by virtue of regulation 10(4) below. Revocation of recognition: action taken before commencement 10 1 In this regulation— a “commencement” has the same meaning as in regulation 9 above, and b “relevant person” means— i in relation to action taken in respect of a body or association of the kind described in section 40(1) of the Financial Services Act (overseas investment exchanges and clearing houses), the Treasury, or ii in any other case, the Authority. 2 This regulation applies to action taken by a relevant person before commencement pursuant to section 37(7) or 39(7) of the Financial Services Act (which relate to revocation of recognition orders under that Act), or pursuant to subsections (2) to (9) of section 11 of that Act as they had effect by virtue of section 37(7) or 39(7). 3 Paragraphs (4) to (8) apply where a relevant person has given notice to a body or association under section 11(3) of the Financial Services Act of its intention to revoke a recognition order made under that Act in relation to that body or association, but has not notified the body or association of its determination whether to proceed to revoke that recognition order. 4 The notice has effect after commencement as if it were a notice given by the Authority under section 298(1)(a) of the Act, giving notice of the Authority’s intention to revoke the recognition order which is treated as having effect in relation to the body or association by virtue of regulation 9 above. 5 If before commencement the relevant person has complied with— a the requirement in subsection (3) of section 11 of the Financial Services Act to bring the notice to the attention of members of the body or association in question, or b the requirement in that subsection to publish the notice to other persons likely to be affected, the Authority is to be treated as having complied with the equivalent requirement in section 298(1)(b) or (as the case may be) (c) of the Act, in relation to the notice under section 298(1)(a) which has effect by virtue of paragraph (4). 6 Nothing in paragraph (4) or in the Act is to be treated as changing the length or affecting the continuity of the period within which, in accordance with the notice as originally given, representations might be made by any person to the relevant person pursuant to section 11(5) of the Financial Services Act, but any such representations are to be considered by the Authority as if they were representations made to it pursuant to section 298(3) of the Act. 7 For the purposes of the Authority’s consideration whether to proceed to exercise the power to make a revocation order under subsection (2) of section 297 of the Act (but without prejudice to any exercise by the Authority of that power where it has given a new notice under section 298(1)(a) after commencement), that subsection is to be read as if the reference in paragraph (a) to recognition requirements were a reference to recognition requirements other than new recognition requirements, and as if the reference in paragraph (b) to obligations were a reference to obligations other than new obligations. 8 A recognition requirement or obligation is to be treated as a new recognition requirement or obligation if its effect is not substantially the same as the effect of a requirement or obligation of the kind mentioned (or having effect as if mentioned) in section 37(7) (in the case of an investment exchange) or 39(7) (in the case of a clearing house) of the Financial Services Act (as those provisions had effect immediately before commencement). 9 Paragraph (10) applies where a relevant person has made an order (“the revoking order”) under section 37(7) or 39(7) of the Financial Services Act, revoking a recognition order made in relation to a body or association under that Act, but either— a the revoking order has not taken effect in accordance with section 11(2) of the Financial Services Act, or b the revoking order has taken effect but contains transitional provisions pursuant to section 11(7) of the Financial Services Act which continued to have effect immediately before commencement. 10 The revoking order has effect after commencement as if it were a revocation order made by the Authority under section 297 of the Act, revoking (with effect from the date specified in the revoking order) the recognition order which is treated as having effect in relation to the body or association by virtue of regulation 9 above, and as if any such transitional provisions were included in the revocation order by virtue of section 297(5) of the Act. FCA rules 11 The FCA may make rules for the purposes of these Regulations. David Clelland Clive Betts Two of the Lords Commissioners of Her Majesty’s Treasury 15th March 2001 Approved, Kim Howells Parliamentary Under Secretary of State for Consumers and Corporate Affairs, Department of Trade and Industry 9th April 2001