WebICE Compliance to MiFID II Requirements relating to pre-and post-trade controls December 2017

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1 WebICE Compliance to MiFID II Requirements relating to pre-and post-trade controls December 2017 Copyright Intercontinental Exchange, Inc All Rights Reserved.

2 The table below presents an analysis of how WebICE and associated ICE systems address a number of MiFID II articles. For clarification, WebICE can only be used to access ICE markets. This means that in some cases, the required controls detailed in the MiFID II articles are met by the Exchange rather than by the investment firm themselves. MiFID II Article Description WebICE Compliance RTS 6, Article 12, Kill Functionality (MiFID II Article 17(1)) 1. An investment firm shall be able to cancel immediately, as an emergency measure, any or all of its unexecuted orders submitted to any or all trading venues to which the investment firm is connected ( kill functionality ). ACE (which is a web-based application that is available to Risk Managers and Company Administrators) allows the user to either cancel orders or log off traders 1. The search for active orders can be filtered by company, user ID, clearing account, Order ID or OnBehalfOfSubID. ACE is available to both Trading and Clearing Members. The Trading version allows the user to view all orders for that Member, but the Clearing version additionally allows the users to view the information for all the companies for whom they act as the clearer. Mass cancellation of orders is also available through the Trading Firm Private Order Feed (POF), but it is not available via the Clearing Firm POF. 2. For the purposes of paragraph 1 (above), unexecuted orders shall include those originating from individual traders, trading desks or, where applicable, clients. Members may also ring the helpdesk to request cancellation of all orders. Individual users also have the ability to cancel all or some of their own orders. Through WebICE, there is also a facility that allows Risk 1 Logging off a user will cancel all of their day orders. Good till Cancel (GTC) orders will only be cancelled if the Cancel on Disconnect request is in place. Page 2 of 11

3 RTS 6, Article 15 - Pretrade controls on order entry (MiFID II Article 17(1)) 3. For the purposes of paragraph 1 and 2 (above), an investment firm shall be able to identify which trading algorithm and which trader, trading desk or, where applicable, which client is responsible for each order that has been sent to a trading venue 1. An investment firm shall carry out the following pre-trade controls on order entry for all financial instruments: a) price collars, which automatically block or cancel orders that do not meet set price parameters, differentiating between different financial instruments, both on an order-by-order basis and over a specified period of time. Managers or Super Users to cancel one or more orders of another user within the same firm. The Risk Manager must have the correct permission for the relevant market type and also be subscribed to the relevant product to do this. User ID, OnBehalfOfSubID, Clearing Account, Order ID, Algo and Client Identifier information is available to Members through the Trade Capture and FIX Private Order Feeds (POFs). Price protections are built into the trading system operating on a pre-trade basis. Reasonability Limits and NCR A reference price is calculated by the system (which is generally either the midpoint of bid/offer, last trade or the theoretical value calculated from an underlying price). Two levels of price bands are then applied either side of the reference price. The outer bands are the Reasonability Limits (RL). Bids above the upper level and offers below the lower level are rejected. The inner bands form the No- Cancellation Range (NCR). Bids above the upper level and offers below the lower level are not rejected, but a soft warning is raised in WebICE. Trades inside the NCR will not be cancelled, but trades outside may be. The width of the Reasonability Limits and NCR are published on the ICE website. Page 3 of 11

4 They are configurable per product and applied on a per order basis. Circuit Breaker (IPLs) These halt any movement of the price controls for a predetermined period, when large price moves are observed over a short period of time. The values that relate to the required price move, related time period and hold period are published on the ICE website b) maximum order values, which prevent orders with an uncommonly large order value from entering the order book. c) maximum order volumes, which prevent orders with an uncommonly large order size from entering the order book. N/A. Contracts are not priced in value/notional terms. At a system level, maximum order sizes are defined on a per product basis. These apply to all users. For System Managed Accounts (SMAs) there are a range of pre-trade risk management parameters, that can be set via Clearing Admin. Four of these relate to order size. The Risk Manager can set values for the following parameters on a per product basis: Bid/Offer The maximum number of lots a user can bid/offer on outright order entry. Spread Bid/Spread Offer The maximum number of lots a user can bid or offer on a spread or User Defined Strategy (UDS). These values interact in such a way that for example, if the Bid/Offer limit is 50, but the spread Bid/Offer limit is 100 then an outright bid is rejected Page 4 of 11

5 above 50 lots, but a spread bid is permitted up to 100 lots. Inter Commodity Spread limits will utilize the Spread Bid and Offer per order. d) maximum messages limits, which prevent sending an excessive number of messages to order books pertaining to the submission, modification or cancellation of an order. All values are enforced for a single trading day. Physical Limits The Trading Platform imposes a restriction on inbound message traffic. Throttle limits are set by the exchange that control the maximum number of order entry and order revision messages per second. WebICE also allows for throttle limits to be set at the user level which will prevent an order or changes to the order(s) from being submitted if the specified limit set is breached. Messaging Policy ICE has a messaging policy that discourages inefficient trading. It does not, however, physically prevent message submission. The policy sets out a threshold for total messages over the course of a trading day in certain products on a per Firm basis. Each incoming order message (including submissions, revision, cancellations and consummations) is assigned a weighting. The further away the price is from the prevailing market at that time, the greater the weighting of that message. If the threshold is exceeded then the exchange reserves the right to restrict or suspend the access of that Firm. Page 5 of 11

6 2. An investment firm shall immediately include all orders sent to a trading venue into the calculation of the pre-trade limits referred to in paragraph 1 (above). 3. An investment firm shall have in place repeated automated execution throttles which control the number of times an algorithmic trading strategy has been applied. After a predetermined number of repeated executions, the trading system shall be automatically disabled until reenabled by a designated staff member. 4. An investment firm shall set market and credit risk limits that are based on its capital base, its clearing arrangements, its trading strategy, its risk tolerance, experience and certain variables, such as the length of time the investment firm has been engaged in algorithmic trading and its reliance on third-party vendors. The investment firm shall adjust those market and credit risk limits to account for the changing impact of the orders on the relevant market due to different price and liquidity levels. 5. An investment firm shall automatically block or cancel orders from a trader if it becomes aware that that trader does not have permission to trade a particular financial instrument. An investment firm shall automatically block or cancel orders where those orders risk compromising All pre-trade risk parameters are applied at the point of order submission. N/A as WebICE is not considered to be an algorithm. For SMAs, it is possible for Risk Managers to set pre-trade limits for both net and absolute positions on a per product basis. These are lot based and assess each order at the point of entry against other working orders and traded positions. If the new order breaches the configured position limit then it will be rejected. Additionally, for SMAs again, ICE offers the functionality for Risk Managers to set a post trade margin limit in Clearing Admin. When the sum of Initial Margin and Profit and Loss (PnL) for an SMA exceeds the configured value, the SMA is automatically suspended. This has the effect of cancelling all working orders (including GTCs). As well as the ability to cancel orders and logout traders that were detailed alongside the Kill Functionality, ACE allows the risk manager or administrator to disable individual accounts. Page 6 of 11

7 RTS 6, Article 16 - Realtime monitoring (MiFID II Article 17(1)) the investment firm's own risk thresholds. Controls shall be applied, where appropriate, on exposures to individual clients, financial instruments, traders, trading desks or the investment firm as a whole. 6. An investment firm shall have procedures and arrangements in place for dealing with orders which have been blocked by the investment firm's pre-trade controls but which the investment firm nevertheless wishes to submit. Such procedures and arrangements shall be applied in relation to a specific trade on a temporary basis and in exceptional circumstances. They shall be subject to verification by the risk management function and authorisation by a designated individual of the investment firm. 1. An investment firm shall, during the hours it is sending orders to trading venues, monitor in real time all algorithmic trading activity that takes place under its trading code, including that of its clients, for signs of disorderly trading, including trading across markets, asset classes, or products, in cases where the firm or its clients engage in such activities. 5. The systems for real-time monitoring shall have real-time alerts to assist staff in identifying unanticipated trading activities undertaken by means of an algorithm. An investment firm shall have a process in place to take remedial action as soon as possible after an alert has been generated, including, where necessary, an orderly withdrawal from the market. Those systems shall also provide alerts in relation to algorithms and DEA orders triggering circuit breakers of a trading venue. Real-time alerts shall be generated within five seconds after the relevant event. It is not possible to over-ride the risk management controls provided by the exchange on an order by order basis. In order to allow these trades/ orders to reach the trading platform, the risk manager would have to temporarily increase the firm s risk parameters. WebICE is not considered to be an algorithm, therefore this monitoring is not strictly required. If monitoring is desired, however, it is facilitated by ICE through the following systems: Clearing POF This provides a real-time feed of orders submitted and trades executed by a participant, where a specific clearing firm s account is specified on the order or trade message. ICE supports single and multisessions for clearers to receive all customer order and trade data. Account numbers are now required to be submitted on each order. Trading Firm POF This provides a real-time feed of orders and trades, as with the Clearing POF, but is restricted to messages within Page 7 of 11

8 RTS 6, Article 17 - Post- Trade Controls (MiFID II Article 17(1)) 1. An investment firm shall continuously operate the post-trade controls that it has in place. Where a post-trade control is triggered, the investment firm shall undertake appropriate action, which may include adjusting or shutting down the relevant trading algorithm or trading system or an orderly withdrawal from the market. that trading firm. Position Keeper This allows admin users at Trading, Clearing and Risk Management firms to view positions and PnL in real time. Users can set margin limits and alerts will be generated when an account breaches preconfigured thresholds. Clearing Admin Within Clearing Admin there is a tab Limit Breaches on the clearer s view. This allows Admins to view all limit breaches and navigate directly to the participant/account/product where the limit breach applies. The page refreshes every 5 minutes bringing in new breaches. Admins and Risk Managers also receive an every 5 minutes containing a.csv file of all Limit Breaches by participant/account/product. When circuit breakers (IPLs) are triggered, a message is broadcast to all users who are subscribed to the market in question. Additionally, the user whose order was rejected (the event that triggered the IPL) receives a message detailing the reason for their order being unfilled. In respect of post-trade controls ICE offers the functionality for Risk Managers of SMAs to set a post trade margin limit in Clearing Admin. When the sum of Initial Margin and PnL for an SMA exceeds the configured value, the SMA is automatically suspended. This has the effect of cancelling Page 8 of 11

9 2. Post-trade controls referred to in paragraph 1 shall include the continuous assessment and monitoring of market and credit risk of the investment firm in terms of effective exposure. 3. An investment firm shall keep records of trade and account information, which are complete, accurate and consistent. The investment firm shall reconcile its own electronic trading logs with information about its outstanding orders and risk exposures as provided by the trading venues to which it sends orders, by its brokers or DEA providers, by its clearing members or central counterparties and by its data providers or other relevant business partners. Reconciliation shall be made in real-time where the aforementioned market participants provide the information in real-time. An investment firm shall have the capability to calculate in real time its outstanding exposure and that of its traders and clients. 4. For derivatives, the post-trade controls referred to in paragraph 1 shall include controls regarding the maximum long and short and overall strategy positions, with trading limits to be set in units that are appropriate to the types of financial instruments involved. all working orders (including GTCs). In order to assist with reconciliation, ICE offers the following services: Clearing POF This provides a real-time feed of orders submitted and trades executed by a participant where a specific clearing firm s account is specified on the order or trade message. ICE supports single and multisessions for clearers to receive all customer order and trade data. Account numbers are now required to be submitted on each order. Trading Firm POF This provides a real-time feed of orders and trades as with the Clearing POF but is restricted to messages within that trading firm. Position Keeper This allows admin users at Trading, Clearing and Risk Management firms to view positions and PnL in real time. Page 9 of 11

10 Disclaimer This document is intended to function as guidance for this specific area and does not override or waive any obligations in the Exchange Regulations. It is without prejudice to any of the Exchanges' rights under the relevant Exchange Regulations. The information and materials contained in this guidance document - including text, graphics, links or other items - are provided as is and as available. ICE and its subsidiaries do not warrant the accuracy, adequacy or completeness of this information and materials. No warranty of any kind, implied, express or statutory is given in conjunction with the information and the materials. The information in this document is liable to change and ICE takes no duty to update such information. You should not rely on any information contained in this document without first checking that it is correct and up to date. This guidance is provided for information purposes only. This guidance does not form part of the contractual documentation between the Exchanges and Members or any third party. It is neither a full description of the services of the Exchanges, the Exchange Regulations or applicable laws. This guidance document in no way constitutes investment advice or solicitation to purchase investments or market data or otherwise engage in any investment activity. This guidance does not provide all the information that may be needed for Members or third parties to assess their compliance with MiFID II or other legal requirements. This guidance does not constitute legal, financial or any other form of advice and must not be relied on as such. It is the responsibility of any person considering using or accessing the Exchanges, whether as a Member, client or otherwise, to review and conduct its own due diligence on the relevant Exchange Regulations, legal documentation and any other information that may be relevant to its decision on whether and how to use the Exchanges' services. Members, clients and any other users of the Exchanges should consult their professional advisors about the subject of this guidance. Although this document has been prepared on the basis of the best information available at the moment of preparation, the Exchanges accept no liability for any decision taken on the basis of this guidance or for any omission in disclosure. This guidance has been prepared on the basis of, and reflects solely, the law and the legislation as it exists at the date hereof, and the versions of the Exchange Regulations applicable upon the entry into force of the relevant requirements. The Exchange shall not in any circumstances be liable, whether in contract, tort, breach of statutory duty or otherwise, for any losses or damages that may be suffered as a result of using this guidance. Such excluded losses or damages include (a) any loss of profit or revenue; (b) damage to reputation or loss of any contract or other business opportunity or goodwill; or (c) any indirect loss or consequential loss. No responsibility or liability is accepted for any differences of interpretation of legislative provisions and related guidance on which this guidance is based. This paragraph does not extend to an exclusion of liability for, or remedy in respect of, fraudulent misrepresentation, death or personal injury caused by negligence or any other liability which by applicable law may not be excluded or restricted. Page 10 of 11

11 This Guidance has been prepared on the basis of English laws and the law of the European Union save as otherwise stated. Page 11 of 11