ESMA report proposes changes to scope of MiFID II algorithmic trading and DEA licensing requirements

On 29 September 2021, ESMA published its long-awaited MiFID II review report on algorithmic trading.

The report concludes that no fundamental issues have emerged with respect to the algo regime which has overall delivered on its objectives. However, ESMA has made some recommendations to simplify the regime and make it more efficient. This includes proposals to capture OTC trading by SIs within the definition of algorithmic trading and subjecting SIs to some of the relevant governance, systems & controls and notification requirements.

ESMA also proposes to redraw the scope of licensing requirements for DEA users, including for third country firms. Helpfully, ESMA proposes that firms that have DEA to an EEA trading venue (Tier 1 DEA clients) should be able to rely on the MiFID II licensing exemption for firms which only deal on account. If implemented, this change could help to reduce uncertainty for UK firms that access EEA venues via DEA to execute own account orders. ESMA proposes that the same treatment should apply to firms which have DEA via sub-delegation (Tier 2 DEA clients), but leaves it to the Commission to clarify whether Tier 1 DEA clients which sub-delegate DEA to Tier 2 DEA clients should require authorisation as investment firms.

ESMA also proposes that third-country HFT firms which access EEA trading venues (whether directly or via DEA) should be authorised as investment firms, or alternatively should be assessed as subject to equivalent standards under a new ‘equivalence’ regime specific to HFT firms.

The report also includes proposals on other issues, such as playbooks for system outages and the use of speedbumps and asymmetric trade feeds.

Read our briefing note on our Knowledge Portal for a summary of key points from the report.