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The Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001

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Regulations 4 and 5.

SCHEDULEU.K.

PART IU.K.Recognition requirements for investment exchanges

Financial resourcesU.K.

1.—(1) The exchange must have financial resources sufficient for the proper performance of its functions as a recognised investment exchange.U.K.

(2) In considering whether this requirement is satisfied, [F1the FCA] [F2must] (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the exchange’s connection with any person, and any activity carried on by the exchange, whether or not it is an exempt activity.

Textual Amendments

Commencement Information

I1Sch. para. 1 in force at 1.12.2001, see reg. 2

SuitabilityU.K.

2.—(1) The exchange must be a fit and proper person to perform the functions of a recognised investment exchange.U.K.

(2) In considering whether this requirement is satisfied, [F1the FCA] may (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the exchange’s connection with any person.

[F3(3) The persons who effectively direct the business and operations of the exchange must be of sufficiently good repute and sufficiently experienced to ensure the sound and prudent management and operation of the financial markets operated by it.

(4) The persons who are in a position to exercise significant influence over the management of the exchange, whether directly or indirectly, must be suitable.]

Textual Amendments

Commencement Information

I2Sch. para. 2 in force at 1.12.2001, see reg. 2

Systems and controlsU.K.

3.—(1) The exchange must ensure that the systems and controls used in the performance of its functions are adequate, and appropriate for the scale and nature of its business.U.K.

(2) Sub-paragraph (1) applies in particular to systems and controls concerning—

(a)the transmission of information;

(b)the assessment [F4, mitigation] and management of risks to the performance of the exchange’s functions;

(c)the effecting and monitoring of transactions on the exchange;

[F5(ca)the technical operation of the exchange, including contingency arrangements for disruption to its facilities;]

(d)the operation of the arrangements mentioned in paragraph 4(2)(d) below; and

(e)(where relevant) the safeguarding and administration of assets belonging to users of the exchange’s facilities.

Textual Amendments

Commencement Information

I3Sch. para. 3 in force at 1.12.2001, see reg. 2

Safeguards for investorsU.K.

4.—(1) The 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.U.K.

(2) Without prejudice to the generality of sub-paragraph (1), the exchange must ensure that—

(a)access to the exchange’s facilities is subject to criteria designed to protect the orderly functioning of the market and the interests of investors [F6and is in accordance with paragraph 7B];

[F7(aa)it has transparent and non-discretionary rules and procedures—

(i)to provide for fair and orderly trading, and

(ii)to establish objective criteria for the efficient execution of orders;]

F8(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c)appropriate arrangements are made for relevant information to be made available (whether by the exchange or, where appropriate, by issuers of the investments) to persons engaged in dealing in investments on the exchange;

(d)satisfactory arrangements [F9, which comply with paragraph 7D,] are made for securing the timely discharge (whether by performance, compromise or otherwise) of the rights and liabilities of the parties to transactions effected on the exchange (being rights and liabilities in relation to those transactions);

(e)satisfactory arrangements are made for recording transactions effected on the exchange, and transactions (whether or not effected on the exchange) which are cleared or to be cleared by means of its facilities;

[F10(ea)appropriate arrangements are made to—

(i)identify conflicts between the interests of the exchange, its owners and operators and the interests of the persons who make use of its facilities or the interests of the financial markets operated by it, and

(ii)manage such conflicts so as to avoid adverse consequences for the operation of the financial markets operated by the exchange and for the persons who make use of its facilities;]

(f)appropriate measures [F11(including the monitoring of transactions effected on the exchange)] are adopted to reduce the extent to which the exchange’s facilities can be used for a purpose connected with market abuse or financial crime, and to facilitate their detection and monitor their incidence; and

(g)where the exchange’s facilities include making provision for the safeguarding and administration of assets belonging to users of those facilities, satisfactory arrangements are made for that purpose.

(3) In sub-paragraph (2)(c), “relevant information” means information which is relevant in determining the current value of the investments.

Textual Amendments

Commencement Information

I4Sch. para. 4 in force at 1.12.2001, see reg. 2

[F12Provision of pre-trade information about share tradingU.K.

Textual Amendments

4A.—(1) The exchange must make arrangements for—U.K.

(a)current bid and offer prices for shares, and

(b)the depth of trading interest in shares at the prices which are advertised through its systems,

to be made available to the public on reasonable commercial terms and on a continuous basis during normal trading hours, subject to the requirements contained in Chapter IV of the Commission Regulation.

(2) If an exchange decides to give investment firms and credit institutions required to publish their quotes in shares—

(a)in accordance with Article 27 of the markets in financial instruments directive, or

(b)by [F1the FCA],

access to the arrangements referred to in sub-paragraph (1), it must do so on reasonable commercial terms and on a non-discriminatory basis.

(3) [F1The FCA] may waive the requirements of sub-paragraph (1) in the circumstances specified—

(a)in the case of shares to be traded on a multilateral trading facility operated by the exchange, in Article 29.2 of the markets in financial instruments directive and Chapter IV of the Commission Regulation; or

(b)in the case of shares to be traded on a regulated market operated by the exchange, in Article 44.2 of that directive and Chapter IV of the Commission Regulation.

(4) In this paragraph, “shares” means shares admitted to trading on a regulated market.

Textual Amendments

Provision of post-trade information about share tradingU.K.

4B.—(1) The exchange must make arrangements for the price, volume and time of transactions executed in shares to be made available to the public as soon as possible after the time of the transaction on reasonable commercial terms, subject to the requirements contained in Chapter IV of the Commission Regulation.U.K.

(2) If an exchange decides to give investment firms and credit institutions required to make public details of their transactions in shares—

(a)in accordance with Article 28 of the markets in financial instruments directive, or

(b)by [F1the FCA],

access to the arrangements referred to in sub-paragraph (1), it must do so on reasonable commercial terms and on a non-discriminatory basis.

(3) [F1The FCA] may permit exchanges to defer the publication required by sub-paragraph (1) in the circumstances specified, and subject to the requirements contained—

(a)in the case of shares traded on a multilateral trading facility operated by an exchange, in Article 30.2 of the markets in financial instruments directive and Chapter IV of the Commission Regulation; or

(b)in the case of shares traded on a regulated market operated by an exchange, in Article 45.2 of that directive and Chapter IV of the Commission Regulation.

(4) If [F1the FCA] permits exchanges to defer the publication required by sub-paragraph (1), those exchanges must ensure that the existence of and the terms of the permission are disclosed to users and members of their facilities and to investors.

(5) In this paragraph, “shares” means shares admitted to trading on a regulated market.]

Textual Amendments

Disclosure by issuers of securitiesU.K.

F135.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.K.

Textual Amendments

Promotion and maintenance of standardsU.K.

6.—(1) The exchange must be able and willing to promote and maintain high standards of integrity and fair dealing in the carrying on of regulated activities by persons in the course of using the facilities provided by the exchange.U.K.

(2) The exchange must be able and willing to cooperate, by the sharing of information or otherwise, with [F1the FCA], with any other authority, body or person having responsibility in the United Kingdom for the supervision or regulation of any regulated activity or other financial service, or with an overseas regulator within the meaning of section 195 of the Act.

Textual Amendments

Commencement Information

I5Sch. para. 6 in force at 1.12.2001, see reg. 2

Rules and consultationU.K.

7.—(1) The exchange must ensure that appropriate procedures are adopted for it to make rules, for keeping its rules under review and for amending them.U.K.

(2) The procedures must include procedures for consulting users of the exchange’s facilities in appropriate cases.

(3) The exchange must consult users of its facilities on any arrangements it proposes to make for dealing with penalty income in accordance with paragraph 8(3) below (or on any changes which it proposes to make to those arrangements).

Commencement Information

I6Sch. para. 7 in force at 1.12.2001, see reg. 2

[F14Admission of financial instruments to tradingU.K.

Textual Amendments

7A.—(1) The exchange must make clear and transparent rules concerning the admission of financial instruments to trading on any financial market operated by it.U.K.

(2) The rules must ensure that all financial instruments admitted to trading on a regulated market operated by the exchange are capable of being traded in a fair, orderly and efficient manner (in accordance with Chapter V of the Commission Regulation, where applicable).

(3) The rules must ensure that—

(a)all transferable securities admitted to trading on a regulated market operated by the exchange are freely negotiable (in accordance with Chapter V of the Commission Regulation, where applicable); and

(b)all contracts for derivatives admitted to trading on a regulated market operated by the exchange are designed so as to allow for their orderly pricing as well as for the existence of effective settlement conditions.

(4) The exchange must maintain arrangements to provide sufficient publicly available information (or satisfy itself that sufficient information is publicly available) to enable the users of a multilateral trading facility operated by it to form investment judgments, taking into account both the nature of the users and the types of instrument traded.

(5) The exchange must maintain effective arrangements to verify that issuers of transferable securities admitted to trading on a regulated market operated by it comply with the disclosure obligations.

(6) The exchange must maintain arrangements to assist users of a regulated market operated by it to obtain access to information made public under the disclosure obligations.

(7) The exchange must maintain arrangements regularly to review whether the financial instruments admitted to trading on a regulated market operated by it comply with the admission requirements for those instruments.

(8) The rules must provide that where an exchange, without obtaining the consent of the issuer, admits to trading on a regulated market operated by it a transferable security which has been admitted to trading on another regulated market, the exchange—

(a)must inform the issuer of that security as soon as is reasonably practicable, and

(b)may not require the issuer of that security to demonstrate compliance with the disclosure obligations.

(9) The rules must provide that where an exchange, without obtaining the consent of the issuer, admits to trading on a multilateral trading facility operated by it a transferable security which has been admitted to trading on a regulated market, it may not require the issuer of that security to demonstrate compliance with the disclosure obligations.

(10) In this paragraph—

“derivatives” has the same meaning as in the markets in financial instruments directive;

“the disclosure obligations” are the initial, ongoing and ad hoc disclosure requirements contained in the relevant articles and given effect—

(a)

in the UK by Part 6 of the Act and Part 6 rules (within the meaning of section 73A of the Act); or

(b)

in another EEA State by legislation transposing the relevant articles in that State.

“issuer” has the same meaning as in the markets in financial instruments directive;

“the relevant articles” means—

(a)

Article 6.1 to 6.4 of Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation,

(b)

Articles 3, 5, 7, 8, 10, 14 and 16 of Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectuses to be published when securities are offered to the public or admitted to trading,

(c)

Articles 4 to 6, 14, 16 to 19 and 30 of Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 relating to the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, and

(d)

Community legislation made under the provisions mentioned in paragraphs (a) to (c).

(11) This paragraph is without prejudice to the generality of paragraph 4.

Access to the exchange’s facilitiesU.K.

7B.—(1) The exchange must make transparent and non-discriminatory rules, based on objective criteria, governing access to, or membership of, its facilities.U.K.

(2) In particular those rules must specify the obligations for users or members of its facilities arising from—

(a)the constitution and administration of the exchange;

(b)rules relating to transactions on the market;

(c)its professional standards for staff of any investment firm or credit institution having access to or membership of a financial market operated by the exchange;

(d)conditions established under sub-paragraph (3)(c) for access to or membership of a financial market operated by the exchange by persons other than investment firms or credit institutions; and

(e)the rules and procedures for clearing and settlement of transactions concluded on a financial market operated by the exchange.

(3) Rules of the exchange about access to, or membership of, a financial market operated by it must permit the exchange to give access to or admit to membership (as the case may be) only—

(a)an investment firm,

(b)a credit institution, or

(c)a person who—

(i)is fit and proper,

(ii)has a sufficient level of trading ability and competence,

(iii)where applicable, has adequate organisational arrangements, and

(iv)has sufficient resources for the role he is to perform, taking account of the exchange's arrangements under paragraph 4(2)(d).

(4) Rules under this paragraph must enable—

(a)an investment firm authorised under Article 5 of the markets in financial instruments directive, or

(b)a credit institution authorised under the [F15capital requirements directive],

by the competent authority of another EEA State (including a branch established in the United Kingdom of such a firm or institution) to have direct or remote access to, or membership of, any financial market operated by the exchange on the same terms as a UK firm.

(5) The exchange must make arrangements regularly to provide [F1the FCA] with a list of the users or members of its facilities.

(6) This paragraph is without prejudice to the generality of paragraph 4.

Textual Amendments

Access to central counterparty, clearing and settlement facilitiesU.K.

7C.—(1) This paragraph applies to an exchange which provides central counterparty, clearing or settlement facilities.U.K.

(2) The exchange must make transparent and non-discriminatory rules, based on objective criteria, governing access to those facilities.

(3) The rules under sub-paragraph (2) must enable an investment firm or a credit institution authorised by the competent authority of another EEA State (including a branch established in the United Kingdom of such a firm or institution) to have access to those facilities on the same terms as a UK firm for the purposes of finalising or arranging the finalisation of transactions in financial instruments.

(4) The exchange may refuse access to those facilities on legitimate commercial grounds.

Choice of settlement facilitiesU.K.

7D.—(1) The rules of the exchange must permit a user or member of a regulated market operated by it to use whatever settlement facility he chooses for a transaction.U.K.

(2) Sub-paragraph (1) only applies where—

(a)such links and arrangements exist between the chosen settlement facility and any other settlement facility as are necessary to ensure the efficient and economic settlement of the transaction; and

(b)the exchange is satisfied that the smooth and orderly functioning of the financial markets will be maintained.

Suspension and removal of financial instruments from tradingU.K.

7E.  The rules of the exchange must provide that the exchange must not exercise its power to suspend or remove from trading on a regulated market operated by it any financial instrument which no longer complies with its rules, where such step would be likely to cause significant damage to the interests of investors or the orderly functioning of the financial markets.]U.K.

DisciplineU.K.

8.—[F16(1) The exchange must have—U.K.

(a)effective arrangements (which include the monitoring of transactions effected on the exchange) for monitoring and enforcing compliance with its rules, including rules in relation to the provision of clearing services in respect of transactions other than transactions effected on the exchange;

(b)effective arrangements for monitoring and enforcing compliance with the arrangements made by it as mentioned in paragraph 4(2)(d); and

(c)effective arrangements for monitoring transactions effected on the exchange in order to identify disorderly trading conditions.]

(2) Arrangements made pursuant to sub-paragraph (1) must include procedures for—

(a)investigating complaints made to the exchange about the conduct of persons in the course of using the exchange’s facilities; and

(b)the fair, independent and impartial resolution of appeals against decisions of the exchange.

(3) Where arrangements made pursuant to sub-paragraph (1) include provision for requiring the payment of financial 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 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 exchange in relation to that breach;

(b)for the benefit of users of the exchange’s facilities;

(c)for charitable purposes.

Textual Amendments

Commencement Information

I7Sch. para. 8 in force at 1.12.2001, see reg. 2

ComplaintsU.K.

9.—(1) The 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 regulatory functions.U.K.

(2) But sub-paragraph (1) does not extend to—

(a)complaints about the content of rules made by the exchange, or

(b)complaints about a decision against which the complainant has the right to appeal under procedures of the kind mentioned in paragraph 8(2)(b) above.

(3) The arrangements must include arrangements for a complaint to be fairly and impartially investigated by a person independent of the exchange, and for him to report on the result of his investigation to the exchange and to the complainant.

(4) The arrangements must confer on the person mentioned in sub-paragraph (3) the power to recommend, if he thinks it appropriate, that the exchange—

(a)makes a compensatory payment to the complainant,

(b)remedies the matter complained of,

or takes both of those steps.

(5) Sub-paragraph (3) is not to be taken as preventing the exchange from making arrangements for the initial investigation of a complaint to be conducted by the exchange.

Commencement Information

I8Sch. para. 9 in force at 1.12.2001, see reg. 2

[F17Operation of a multilateral trading facilityU.K.

Textual Amendments

9A.—(1) An exchange operating a multilateral trading facility must also operate a regulated market.U.K.

(2) An exchange operating a multilateral trading facility must comply with those requirements of—

(a)Chapter I of Title II of the markets in financial instruments directive, and

(b)Commission Directive 2006/73/EC of 10 August 2006,

which are applicable to a market operator (within the meaning of the directive) operating such a facility.

(3) The requirements of this paragraph do not apply for the purposes of section 292(3)(a) of the Act (requirements for overseas investment exchanges and overseas clearing houses).]

PART IIU.K.Recognition requirements for investment exchanges: default rules in respect of market contracts

Default rules in respect of market contractsU.K.

10.—(1) The exchange must have default rules which, in the event of a member of the 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.U.K.

(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 rules must enable action to be taken in respect of all unsettled market contracts, other than those entered into F18... for the purposes of or in connection with the provision of clearing services for the exchange.

[F19(4) Sub-paragraph (5) applies where the exchange has arrangements for transacting business with, or in relation to common members of, a recognised clearing house or another recognised investment exchange.

(5) A recognised investment exchange must have default rules which in the event of the clearing house or the investment exchange being or appearing to be unable to meet its obligations in respect of one or more market contracts, enable action to be taken in respect of unsettled market contracts to which that person is a party.]

Textual Amendments

Commencement Information

I9Sch. para. 10 in force at 1.12.2001, see reg. 2

Content of rulesU.K.

11.—(1) This paragraph applies as regards contracts falling within section 155(2)(a) of the Companies Act.U.K.

(2) The rules mentioned in paragraph 10 must provide—

(a)for all rights and liabilities between those party as principal to unsettled market contracts to which the defaulter is party as principal to be discharged and for there to be paid by one party to the other such sum of money (if any) as may be determined in accordance with the rules;

(b)for the sums so payable in respect of different contracts between the same parties to be aggregated or set off so as to produce a net sum; and

(c)for the certification by or on behalf of the exchange of the net sum payable or, as the case may be, of the fact that no sum is payable.

(3) The reference in sub-paragraph (2) to rights and liabilities between those party as principal to unsettled market contracts does not include rights and liabilities—

(a)in respect of margin; or

(b)arising out of a failure to perform a market contract.

(4) The rules may make the same or similar provision, in relation to non-members designated in accordance with the procedures mentioned in sub-paragraph (5), as in relation to members of the exchange.

(5) If such provision is made as is mentioned in sub-paragraph (4), the exchange must have adequate procedures—

(a)for designating the persons, or descriptions of person, in respect of whom action may be taken;

(b)for keeping under review the question which persons or descriptions of person should be or remain so designated; and

(c)for withdrawing such designation.

(6) The procedures must be designed to secure that—

(a)a person is not, or does not remain, designated if failure by him to meet his obligations in respect of one or more market contracts would be unlikely adversely to affect the operation of the market; and

(b)a description of persons is not, or does not remain, designated if failure by a person of that description to meet his obligations in respect of one or more market contracts would be unlikely adversely to affect the operation of the market.

(7) The exchange must have adequate arrangements—

(a)for bringing a designation or withdrawal of designation to the attention of the person or description of persons concerned; and

(b)where a description of persons is designated, or the designation of a description of persons is withdrawn, for ascertaining which persons fall within that description.

Commencement Information

I10Sch. para. 11 in force at 1.12.2001, see reg. 2

12.—(1) This paragraph applies as regards contracts falling within section 155(2)(b) [F20or (c)] of the Companies Act.U.K.

(2) The rules mentioned in paragraph 10 must provide—

(a)for all rights and liabilities of the defaulter under or in respect of unsettled market contracts to be discharged and for there to be paid by or to the defaulter such sum of money (if any) as may be determined in accordance with the rules;

(b)for the sums so payable by or to the defaulter in respect of different contracts [F21entered into by the defaulter in one capacity for the purposes of section 187 of the Companies Act] to be aggregated or set off so as to produce a net sum;

[F22(bb)if relevant, for that sum to be aggregated with, or set off against, any sum owed by or to the investment exchange by or to AP under an indemnity given or reimbursement or similar obligation in respect of a margin set off agreement in which the defaulter chose to participate so as to produce a net sum;]

[F23(c)for the net sum referred to in paragraph (b) or, if relevant, the net sum referred to in paragraph (bb)—

(i)if payable by the defaulter to the exchange, to be set off against—

(aa)any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property);

(bb)to the extent (if any) that any sum remains after set off under paragraph (aa), any default fund contribution provided by the defaulter remaining after any application of such contribution;

(ii)to the extent (if any) that any sum remains after set off under paragraph (i), to be paid from such other funds, including the default fund, or resources as the exchange may apply under its default rules;

(iii)if payable by the exchange to the defaulter, to be aggregated with—

(aa)any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property);

(bb)any default fund contribution provided by the defaulter remaining after any application of such contribution;]

(d)for the certification by or on behalf of the exchange of the sum finally payable or, as the case may be, of the fact that no sum is payable.

[F24(2A) In sub-paragraph (2), “margin set off agreement” means an agreement between the exchange and AP permitting any eligible position to which the Participant Member is party with the exchange and any eligible position to which the Participant Member is party with AP to be taken into account in calculating a net sum owed by or to the Participant Member to either the exchange or AP and/or margin to be provided to, either or both, the exchange and AP.

(2B) In sub-paragraph (2)—

“AP” means a recognised clearing house or another recognised investment exchange of whom a Participant Member is a member;

“eligible position” means any position which may be included in the set off calculation;

“Participant Member” means a person who—

(a)

is a member of the exchange;

(b)

is a member or participant of AP; and

(c)

chooses to participate, in accordance with the rules of the exchange, in such agreement.

(2C) The property, contribution, funds or resources referred to in paragraph (2)(c), against which the net sum is to be set off (or with which it is to be aggregated) are subject to any unsatisfied claims arising out of the default of a defaulter before the default in relation to which the calculation is being made.]

(3) The reference in sub-paragraph (2) to the rights and liabilities of a defaulter under or in respect of an unsettled market contract includes (without prejudice to the generality of that provision) rights and liabilities arising in consequence of action taken under provisions of the rules authorising—

(a)the effecting by the exchange of corresponding contracts in relation to unsettled market contracts to which the defaulter is party;

(b)the transfer of the defaulter’s position under an unsettled market contract to another member of the exchange;

(c)the exercise by the exchange of any option granted by an unsettled market contract.

(4) A “corresponding contract” means a contract on the same terms (except as to price or premium) as the market contract but under which the person who is the buyer under the market contract agrees to sell and the person who is the seller under the market contract agrees to buy.

(5) Sub-paragraph (4) applies with any necessary modifications in relation to a market contract which is not an agreement to sell.

(6) The reference in sub-paragraph (2) to the rights and liabilities of a defaulter under or in respect of an unsettled market contract does not include, where he acts as agent, rights or liabilities of his arising out of the relationship of principal and agent.

Textual Amendments

Commencement Information

I11Sch. para. 12 in force at 1.12.2001, see reg. 2

[F2512A.  The rules of the exchange must provide that, in the event of a default, any default fund contribution provided by the defaulter shall only be used in accordance with paragraph 12(2)(c)(i) or (ii).]U.K.

Textual Amendments

Notification to other parties affectedU.K.

13.  The exchange must have adequate arrangements for ensuring that—U.K.

(a)in the case of unsettled market contracts with a defaulter acting as principal, parties to the contract are notified as soon as reasonably practicable of the default and of any decision taken under the rules in relation to contracts to which they are a party; and

(b)in the case of unsettled market contracts with a defaulter acting as agent, parties to the contract and the defaulter’s principals are notified as soon as reasonably practicable of the default and of the identity of the other parties to the contract.

Commencement Information

I12Sch. para. 13 in force at 1.12.2001, see reg. 2

Cooperation with other authoritiesU.K.

14.  The exchange must be able and willing to cooperate, by the sharing of information and otherwise, with the Secretary of State, any relevant office-holder within the meaning of section 189 of the Companies Act, and any other authority or body having responsibility for any matter arising out of, or connected with, the default of a member of the exchange or any non-member designated in accordance with the procedures mentioned in paragraph 11(5) above [F26or the default of a recognised clearing house or another recognised investment exchange].U.K.

Textual Amendments

Commencement Information

I13Sch. para. 14 in force at 1.12.2001, see reg. 2

MarginU.K.

F2715.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.K.

Textual Amendments

PART IIIU.K.Recognition requirements for clearing houses

Modifications etc. (not altering text)

Financial resourcesU.K.

16.—(1) The clearing house must have financial resources sufficient for the proper performance of its functions as a recognised clearing house.U.K.

(2) In considering whether this requirement is satisfied, [F28the Bank of England] may (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the clearing house’s connection with any person, and any activity carried on by the clearing house, whether or not it is an exempt activity.

Textual Amendments

Commencement Information

I14Sch. para. 16 in force at 1.12.2001, see reg. 2

SuitabilityU.K.

17.—(1) The clearing house must be a fit and proper person to perform the functions of a recognised clearing house.U.K.

(2) In considering whether this requirement is satisfied, [F28the Bank of England] may (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the clearing house’s connection with any person.

Textual Amendments

Commencement Information

I15Sch. para. 17 in force at 1.12.2001, see reg. 2

Systems and controlsU.K.

18.—(1) The clearing house must ensure that the systems and controls used in the performance of its functions are adequate, and appropriate for the scale and nature of its business.U.K.

(2) This requirement applies in particular to systems and controls concerning—

(a)the transmission of information;

(b)the assessment and management of risks to the performance of the clearing house’s functions;

(c)the operation of the matters mentioned in paragraph 19(2)(b) below; and

(d)(where relevant) the safeguarding and administration of assets belonging to users of the clearing house’s facilities.

Commencement Information

I16Sch. para. 18 in force at 1.12.2001, see reg. 2

Safeguards for investorsU.K.

19.—(1) The clearing house must ensure that its facilities are such as to afford proper protection to investors.U.K.

(2) Without prejudice to the generality of sub-paragraph (1), the clearing house must ensure that—

(a)access to the clearing house’s facilities is subject to criteria designed to protect the orderly functioning of those facilities and the interests of investors;

(b)its clearing services involve satisfactory arrangements for securing the timely discharge (whether by performance, compromise or otherwise) of the rights and liabilities of the parties to transactions in respect of which it provides such services (being rights and liabilities in relation to those transactions);

(c)satisfactory arrangements are made for recording transactions which are cleared or to be cleared by means of its facilities;

(d)appropriate measures are adopted to reduce the extent to which the clearing house’s facilities can be used for a purpose connected with market abuse or financial crime, and to facilitate their detection and monitor their incidence; and

(e)where the clearing house’s facilities include making provision for the safeguarding and administration of assets belonging to users of those facilities, satisfactory arrangements are made for that purpose.

Commencement Information

I17Sch. para. 19 in force at 1.12.2001, see reg. 2

Promotion and maintenance of standardsU.K.

20.—(1) The clearing house must be able and willing to promote and maintain high standards of integrity and fair dealing in the carrying on of regulated activities by persons in the course of using the facilities provided by the clearing house.U.K.

(2) The clearing house must be able and willing to cooperate, by the sharing of information or otherwise, with [F28the Bank of England], with any other authority, body or person having responsibility in the United Kingdom for the supervision or regulation of any regulated activity or other financial service, or with an overseas regulator within the meaning of section 195 of the Act.

Textual Amendments

Commencement Information

I18Sch. para. 20 in force at 1.12.2001, see reg. 2

RulesU.K.

21.—(1) The clearing house must ensure that appropriate procedures are adopted for it to make rules, for keeping its rules under review and for amending them.U.K.

(2) The procedures must include procedures for consulting users of the clearing house’s facilities in appropriate cases.

(3) The clearing house must consult users of its facilities on any arrangements it proposes to make for dealing with penalty income in accordance with paragraph 22(3) below (or on any changes which it proposes to make to those arrangements).

Commencement Information

I19Sch. para. 21 in force at 1.12.2001, see reg. 2

[F29Access to central counterparty, clearing and settlement facilitiesU.K.

Textual Amendments

21A.—(1) The clearing house must make transparent and non-discriminatory rules, based on objective criteria, governing access to F30... clearing or settlement facilities provided by it.U.K.

(2) The rules under sub-paragraph (1) must enable an investment firm or a credit institution authorised by the competent authority of another EEA State (including a branch established in the United Kingdom of such a firm or institution) to have access to those facilities on the same terms as a UK firm for the purposes of finalising or arranging the finalisation of transactions in financial instruments.

(3) The clearing house may refuse access to those facilities on legitimate commercial grounds.]

Textual Amendments

DisciplineU.K.

22.—(1) The clearing house must have effective arrangements for monitoring and enforcing compliance with its rules.U.K.

(2) The arrangements must include procedures for—

(a)investigating complaints made to the clearing house about the conduct of persons in the course of using the clearing house’s facilities; and

(b)the fair, independent and impartial resolution of appeals against decisions of the clearing house.

(3) Where the arrangements include provision for requiring the payment of financial 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 clearing house 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 clearing house in relation to that breach;

(b)for the benefit of users of the clearing house’s facilities;

(c)for charitable purposes.

Commencement Information

I20Sch. para. 22 in force at 1.12.2001, see reg. 2

ComplaintsU.K.

23.—(1) The clearing house 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 regulatory functions.U.K.

(2) But sub-paragraph (1) does not extend to—

(a)complaints about the content of rules made by the clearing house, or

(b)complaints about a decision against which the complainant has the right to appeal under procedures of the kind mentioned in paragraph 22(2)(b) above.

(3) The arrangements must include arrangements for a complaint to be fairly and impartially investigated by a person independent of the clearing house, and for him to report on the result of his investigation to the clearing house and to the complainant.

(4) The arrangements must confer on the person mentioned in sub-paragraph (3) the power to recommend, if he thinks it appropriate, that the clearing house—

(a)makes a compensatory payment to the complainant,

(b)remedies the matter complained of,

or takes both of those steps.

(5) Sub-paragraph (3) is not to be taken as preventing the clearing house from making arrangements for the initial investigation of a complaint to be conducted by the clearing house.

Commencement Information

I21Sch. para. 23 in force at 1.12.2001, see reg. 2

[F31Recovery PlansU.K.

Textual Amendments

23A.  The clearing house must maintain a plan that sets out the steps that it will take in order to maintain the continuity of its exempt activities in the event that such continuity is threatened.]U.K.

PART IVU.K.Recognition requirements applying to clearing houses: default rules in respect of market contracts

Default rules in respect of market contractsU.K.

24.—(1) The clearing house must have default rules which, in the event of a member of the clearing house being or appearing to be unable to meet his obligations in respect of one or more market contracts, enable action to be taken to close out his position in relation to all unsettled market contracts to which he is a party.U.K.

(2) The rules may authorise the taking of the same or similar action where a member appears to be likely to become unable to meet his obligations in respect of one or more market contracts.

[F32(3) Sub-paragraph (4) applies where the clearing house has arrangements for transacting business with, or in relation to common members of, a recognised investment exchange or another recognised clearing house.

(4) A recognised clearing house must have default rules which in the event of the investment exchange or the clearing house being or appearing to be unable to meet its obligations in respect of one or more market contracts, enable action to be taken in respect of unsettled market contracts to which that person is a party.]

Textual Amendments

Commencement Information

I22Sch. para. 24 in force at 1.12.2001, see reg. 2

Content of rulesU.K.

25.—(1) The rules must provide—U.K.

(a)for all rights and liabilities of the defaulter under or in respect of unsettled market contracts to be discharged and for there to be paid by or to the defaulter such sum of money (if any) as may be determined in accordance with the rules;

(b)for the sums so payable by or to the defaulter in respect of different contracts [F33entered into by the defaulter in one capacity for the purposes of section 187 of the Companies Act] to be aggregated or set off so as to produce a net sum;

[F34(bb)if relevant, for that sum to be aggregated with, or set off against, any sum owed by or to the clearing house by or to AP under an indemnity given or reimbursement or similar obligation in respect of a margin set off agreement in which the defaulter chose to participate so as to produce a net sum.]

[F35(c)for the net sum referred to in paragraph (b) or, if relevant, the net sum referred to in paragraph (bb)—

(i)if payable by the defaulter to the clearing house, to be set off against—

(aa)any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property);

(bb)to the extent (if any) that any sum remains after set off under paragraph (aa), any default fund contribution provided by the defaulter remaining after any application of such contribution;

(ii)to the extent (if any) that any sum remains after set off under paragraph (i), to be paid from such other funds, including the default fund, or resources as the clearing house may apply under its default rules;

(iii)if payable by the clearing house to the defaulter, to be aggregated with—

(aa)any property provided by or on behalf of the defaulter as cover for margin (or the proceeds of realisation of such property);

(bb)any default fund contribution provided by the defaulter remaining after any application of such contribution; and]

(d)for the certification by or on behalf of the clearing house of the sum finally payable or, as the case may be, of the fact that no sum is payable.

[F36(1A) In sub-paragraph (1), “margin set off agreement” means an agreement between the clearing house and AP permitting any eligible position to which the Participant Member is party with the clearing house and any eligible position to which the Participant Member is party with AP to be taken into account in calculating a net sum owed by or to the Participant Member to or by either the clearing house or AP and/or margin to be provided to, either or both, the clearing house and AP.

(1B) In sub-paragraph (1A)—

“AP” means a recognised investment exchange or another recognised clearing house of whom a Participant Member is a member;

“eligible position” means any position which may be included in the set off calculation;

“Participant Member” means a person who—

(a)

is a member of the clearing house;

(b)

is a member or participant of AP; and

(c)

chooses to participate, in accordance with the rules of the clearing house, in such agreement.

(1C) The property, contribution, funds or resources referred to in paragraph (1)(c), against which the net sum is to be set off (or with which it is to be aggregated) are subject to any unsatisfied claims arising out of the default of a defaulter before the default in relation to which the calculation is being made.]

(2) The reference in sub-paragraph (1) to the rights and liabilities of a defaulter under or in respect of an unsettled market contract includes (without prejudice to the generality of that provision) rights and liabilities arising in consequence of action taken under provisions of the rules authorising—

(a)the effecting by the clearing house of corresponding contracts in relation to unsettled market contracts to which the defaulter is party;

(b)the transfer of the defaulter’s position under an unsettled market contract to another member of the clearing house;

(c)the exercise by the clearing house of any option granted by an unsettled market contract.

(3) A “corresponding contract” means a contract on the same terms (except as to price or premium) as the market contract but under which the person who is the buyer under the market contract agrees to sell and the person who is the seller under the market contract agrees to buy.

(4) Sub-paragraph (3) applies with any necessary modifications in relation to a market contract which is not an agreement to sell.

(5) The reference in sub-paragraph (1) to the rights and liabilities of a defaulter under or in respect of an unsettled market contract does not include, where he acts as agent, rights or liabilities of his arising out of the relationship of principal and agent.

Textual Amendments

Commencement Information

I23Sch. para. 25 in force at 1.12.2001, see reg. 2

[F3725A.  The rules of the clearing house must provide that in the event of a default, any default fund contribution provided by the defaulter shall only be used in accordance with paragraph 25(1)(c)(i) or (ii).]U.K.

Textual Amendments

Notification to other parties affectedU.K.

26.  The clearing house must have adequate arrangements for ensuring that parties to unsettled market contracts with a defaulter are notified as soon as reasonably practicable of the default and of any decision taken under the rules in relation to contracts to which they are a party.U.K.

Commencement Information

I24Sch. para. 26 in force at 1.12.2001, see reg. 2

Cooperation with other authoritiesU.K.

27.  The clearing house must be able and willing to cooperate, by the sharing of information and otherwise, with the Secretary of State, any relevant office-holder within the meaning of section 189 of the Companies Act, and any other authority or body having responsibility for any matter arising out of or connected with the default of a member of the clearing house [F38or the default of a recognised investment exchange or another recognised clearing house].U.K.

Textual Amendments

Commencement Information

I25Sch. para. 27 in force at 1.12.2001, see reg. 2

MarginU.K.

28.—(1) The rules of the clearing house must provide that in the event of a default, margin provided by the defaulter for his own account is not to be applied to meet a shortfall on a client account [F39other than a client account of the defaulter].U.K.

(2) This paragraph is without prejudice to the requirements of any rules relating to clients' money made by [F40the FCA under sections 137A and 137B of the Act].

[F41(3) For the purposes of this paragraph, “client account of the defaulter” means an account held by the clearing house in the name of the defaulter in which relevant transactions effected by the defaulter have been recorded.

(4) In sub-paragraph (3) “relevant transaction” has the same meaning as in regulation 16(1) of the Financial Markets and Insolvency Regulations 1991.]

Textual Amendments

Commencement Information

I26Sch. para. 28 in force at 1.12.2001, see reg. 2

[F42PART 5U.K.Recognition requirements for central counterparties

Textual Amendments

Requirements of the EMIR regulationU.K.

29.  A central counterparty providing clearing services must meet the requirements set out in the EMIR regulation (within the meaning of section 313 of the Act).U.K.

[F43Loss allocationU.K.

Textual Amendments

F43Sch. paras. 29A, 29B and cross-headings inserted (1.2.2014 for specified purposes, 1.5.2014 in so far as not already in force) by The Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) (No. 2) Regulations 2013 (S.I. 2013/1908), regs. 1(3)(a)(b), 3(4)

29A.  The central counterparty must maintain effective arrangements (which may include rules) for ensuring that losses that—U.K.

(a)arise otherwise than as a result of clearing member default; and

(b)threaten the central counterparty’s solvency;

are allocated with a view to ensuring that the central counterparty can continue to provide the services and carry on the activities specified in its recognition order.

Recovery plansU.K.

29B.  The central counterparty must maintain a plan that sets out the steps that it will take in order to maintain the continuity of the services that it provides and the activities that it carries on that are specified in its recognition order in the event that such continuity is threatened.]U.K.

Market abuse or financial crimeU.K.

30.  The central counterparty must ensure that appropriate measures are adopted to reduce the extent to which its facilities can be used for a purpose connected with market abuse or financial crime, and to facilitate their detection and monitor their incidence.U.K.

Access to central counterparty, clearing and settlement facilitiesU.K.

31.—(1) The central counterparty must make transparent and non-discriminatory rules, based on objective criteria, governing access to central counterparty, clearing or settlement facilities provided by it.U.K.

(2) The rules under sub-paragraph (1) must enable an investment firm or a credit institution authorised by the competent authority of another EEA State (including a branch established in the United Kingdom of such a firm or institution) to have access to those facilities on the same terms as a UK firm for the purposes of finalising or arranging the finalisation of transactions in financial instruments.

(3) The central counterparty may refuse access to those facilities on legitimate commercial grounds.

PART 6U.K.Recognition requirements applying to central counterparties: default rules

IntroductionU.K.

32.  This Part sets out recognition requirements which apply to the default rules of a central counterparty.U.K.

InterpretationU.K.

33.  In this Part—U.K.

(a)“assets” has the meaning given by Article 39(10) of the EMIR Level 1 Regulation;

(b)“clearing member” has the meaning given by Article 2(14) of the EMIR Level 1 Regulation;

(c)“client” has the meaning given by section 190(1) of the Companies Act 1989;

(d)“default rules” has the meaning given by section 188(1) of the Companies Act 1989;

(e)“defaulting” has the meaning given by section 188(2) of the Companies Act 1989;

(f)“EMIR Level 1 Regulation” means Regulation (EU) No 648/2012 of 4 July 2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories;

(g)“indirect client” has the meaning given by section 190(1) of the Companies Act 1989;

(h)“position” has the has the meaning given by section 190(1) of the Companies Act 1989.

Portability of accounts: default rules going beyond requirements of EMIRU.K.

34.—(1) Sub-paragraph (2) applies to any provisions of the default rules which—U.K.

(a)provide for the transfer of the positions or assets of a defaulting clearing member;

(b)are not necessary for the purposes of complying with the minimum requirements of Articles 48(5) and (6) of the EMIR Level 1 Regulation; and

(c)may be relevant to a question falling to be determined in accordance with the law of a part of the United Kingdom.

(2) Where this sub-paragraph applies to any provisions of the default rules, the default rules must—

(a)include a summary of how a transfer under the provisions will work and its main legal implications (including information on the applicable insolvency law in the relevant jurisdictions), or a clear and prominent reference to the place where such a summary can be directly and easily accessed by the public;

(b)ensure that a position or asset cannot be transferred under the provisions without the consent of—

(i)the person for whose account the position or asset is held; and

(ii)the clearing member to whom the position or asset is transferred;

(c)ensure that any transfer under the provisions is fair to clients and indirect clients; and

(d)specify a pre-defined transfer period within which a transfer under the provisions must take place.

(3) For the purposes of sub-paragraph (2)(a), a clear and prominent reference to a place where a summary can be directly and easily accessed by the public may be provided by way of a direct internet link to an appropriate internet site.

(4) For the purposes of sub-paragraph (2)(b), consent may be given in advance of a default (such as by means of suitable provision in the default rules).

Liquidation of accountsU.K.

35.  The default rules must contain provision ensuring that, after the liquidation of an account and the return of any collateral to clients or to a clearing member for the account of the clearing member’s clients, the amount of any other net sum payable or, as the case may be, the fact that no other net sum is payable, in respect of that account will be certified for the purposes of section 163 of the Companies Act 1989.U.K.

[F44Loss allocationU.K.

Textual Amendments

36.  The default rules must contain provision ensuring that losses that—U.K.

(a)arise as a result of clearing member default;

(b)remain after the resources to which the central counterparty has access pursuant to Article 45 of the EMIR Level 1 Regulation have been exhausted; and

(c)threaten the central counterparty’s solvency;

are allocated with a view to ensuring that the central counterparty can continue to provide the services and carry on the activities specified in its recognition order.]]

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