Alternative Investment Management Association

ESMA 103 rue de Grenelle 75007 Paris France Submitted via the ESMA website 3 October 2011 Dear Sirs, Guidelines on systems and controls in a highly automated trading environment for trading platforms, investment firms and competent authorities The Alternative Investment Management Association (AIMA) 1 welcomes the opportunity to respond to the questions posed in the European Securities and Markets Authoritys (ESMA) consultation paper Guidelines on systems and controls in a highly automated trading environment for trading platforms, investment firms and competent authorities (the Consultation). Summary of AIMAs comments AIMA supports ESMA in introducing guidelines on systems and controls in a highly automated trading environment for trading platforms, investment firms and competent authorities (the Guidelines). AIMA agrees that ESMA should introduce the Guidelines as soon as practicable and that they should be reviewed and updated immediately before the introduction of any proposed changes to MiFID, MAD and related provisions by the European institutions. Further details should be given about the types of records which competent authorities should expect firms to provide when documenting their trading algorithms. Testing of trading algorithms should be conducted in a manner appropriate to their intended effect, the amount of capital that will dedicated to the trades and the length of time for which the algorithm will be operational. Full testing of the algorithm, including the effect on the markets of an immediate shut down of the algorithm, should be conducted in each case. AIMA strongly supports the introduction of intelligently-designed automated market circuit breakers for all trading platforms. These should be used as a preference over discretionary manual halts in trading, which may cause uncertainty and create new volatility. The Guidelines should state that trading algorithms should take account of, and set appropriate limits on, all relevant factors, not just price and quantity, including current market liquidity, execution timing, the likely fill ratio and the costs of each transaction.

AIMA is the trade body for the hedge fund industry globally; our membership represents all constituencies within the sector including hedge fund managers, fund of hedge funds managers, prime brokers, fund administrators, accountants and lawyers. Our membership comprises over 1,200 corporate bodies in over 40 countries.

1 The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: [email protected] Internet: http://www.aima.org
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Alternative Investment Management Association

AIMA fully supports trading platform requirements to monitor, record and report instances of potential market abuse to the competent authorities and believes the Guidelines should further specify procedures for dealing with requests from competent authorities for additional information to detect market abuse. AIMA believes that the guidance on dealing with market abuse in the Guidelines is not only applicable to automated and high frequency trading strategies but also to manually entered orders. Automated and high frequency trading should not in any way, in and of itself, be considered market abuse. Trading venues should be guided by the competent authorities as to what practices those authorities consider to be market abuse and for which patterns they would like the trading venues to monitor. Investment firms should retain certain responsibilities for their clients who access electronic trading platforms through direct market access (DMA) or sponsored access (SA). However, the Guidelines should not seek to provide new requirements for investment firms to monitor or regulate their clients, many of which are already overseen by competent authorities. The Guidelines should include both the specific text of the Guidelines and the explanatory notes.

AIMAs comments AIMA believes that new market technology has led to significant improvements in the operation and efficiency of the markets, which, in turn, has created greater price transparency and reliability. As a consequence, new participants have been attracted to the markets and liquidity has improved, resulting in further reductions in transaction costs and narrower bid-ask spreads. In many instances, algorithmic and high-frequency trading is conducted as a result of legal best execution obligations, which require intermediaries to achieve the best possible results for their clients in executing trades. Best execution is measured in terms of many factors, one of which is the speed of execution. Whilst there are risks associated (as there are with all trading methods) with the use of automated trading, we believe that such risks can be effectively mitigated by the use of appropriate risk controls at firms, by proper oversight of the markets by competent authorities and by circuit breaker controls imposed by trading venues. The Markets in Financial Instruments Directive (MiFID) 2 has created a comprehensive regime in Europe for the regulation of trading platforms and investment firms and its implementation has generally been regarded as a success, bringing significant benefits to European markets. MiFID is applicable to trading on regulated markets and MTFs regardless of whether the trades are conducted under manual processes or via automated trading systems. The rules under MiFID and also the Market Abuse Directive (MAD) 3 are sufficiently broadly worded that they capture and are appropriate for all forms of trading, including automated trading. However, AIMA supports ESMAs proposed guidance, which we believe will provide further clarity on specific organisational requirements that trading platforms and investment firms should have in place in order to ensure they are in compliance with the provisions of and the goals underlying MiFID and MAD (i.e., transparency, fair and orderly trading, protection against market abuse, etc.). AIMA provides details answers to the questions posed in the Consultation in the Annex to this letter.

Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC. Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse).

The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: [email protected] Internet: http://www.aima.org
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Alternative Investment Management Association

Conclusion AIMA supports ESMA in the introduction and publication of the Guidelines, subject to certain changes as set out in our comments in Annex 1. The Guidelines should be regularly reviewed and updated, including to take account of expected proposed changes to MiFID and MAD. We additionally comment that automated trading is playing an increasing role in the market and is providing important benefits to all market users. Therefore, we support the implementation of wise regulation and guidance from ESMA that will provide an appropriate regulatory framework in which high frequency and automated trading can continue to be widely used. We thank you for this opportunity to comment on the Consultation and we are, of course, happy to discuss any of our comments with you in greater detail. Yours faithfully,

Ji Krl Director of Government & Regulatory Affairs

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Alternative Investment Management Association

Annex 1 Background Q1: Do you agree with ESMA that it is appropriate to introduce guidelines already before the review of MiFID covering organisational arrangements for trading platforms and investment firms in relation to highly automated trading, including the provision of DMA/SA? Yes, we believe that it is appropriate for ESMA to introduce its proposed guidelines (the Guidelines) ahead of the review of MiFID and MAD and subsequent amending proposals expected to be published by the European Commission in October 2011. The Guidelines generally create no new obligations for firms but provide further useful guidance on how trading platforms and investment firms should consider the systems and controls requirements in MiFID for their automated trading activities. Such guidance is useful for both the firms and the competent authorities and should help ensure greater harmonisation of implementation and application of MiFID across European Member States. As ESMA acknowledges, the Guidelines will need to be reviewed again in future and updated to take into account any changes to the MiFID framework approved by the European institutions. As the MiFID review proposal is expected to be published in October 2011, we believe that the specific new provisions that impact the Guidelines may not be implemented until 2013 or 2014. Therefore, it seems sensible to provide guidance now on the application of provisions which will remain in force for at least the next two years. ESMA should review, and consult on, the continued appropriateness of the Guidelines prior to the implementation of the revisions to MiFID before making changes to the Guidelines. It should further review the Guidelines on an on-going basis to take account of any changes in market practice that could impact them. We believe that many of the provisions of MiFID referenced in the proposed Guidelines are unlikely to be impacted significantly by proposed changes and, therefore, that the Guidelines are likely to need certain revisions rather than a complete overhaul when the revised MiFID and MiFIR are agreed. Draft guidelines on electronic trading systems for trading platforms and investment firms Trading platforms Q2: Do you think that the draft guidelines adequately capture all the relevant points relating to the operation of trading platforms electronic trading systems? Yes, we believe that the draft Guidelines adequately capture all the relevant points relating to the operation of trading platforms electronic trading systems. AIMAs hedge fund manager members, as market participants, rely on the integrity of the market during normal and stressed market conditions and we believe that it is important that trading systems have: (i) good governance arrangements; (ii) resilient computer systems; (iii) appropriate back-ups of those systems; and (iv) well trained IT and compliance staff that monitor the trading systems and subject them to regulator stress testing and review. Q3: Are there areas where it would be helpful to have more detail on the organisational requirements applying to trading platforms electronic trading systems? Although not directly applicable to AIMA members, further details about competent authorities expectations on compliance with the Guidelines may be appreciated. For example, although we support a general requirement to keep records about testing methodologies, a reasonable trading platform operator might still ask what sort of records a competent authority might expect to see. We appreciate that there is a balance to be struck between (a) specificity as to what is expected (bearing in mind the requirements already in MiFID) and (b) allowing firms to exercise judgement about how best to comply in light of their specific business activities and size.

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Alternative Investment Management Association

Q4: Do you have additional comments on the draft guidelines on organisational requirements for trading platforms electronic trading systems? No. Draft guidelines on electronic trading systems for trading platforms and investment firms Investment firms Q5: Do you think that the draft guidelines adequately capture all the relevant points related to the operation of trading algorithms? Yes. Q6: Are there areas where it would be helpful to have more detail in the guidelines applying to the organisational requirements for investment firms electronic trading systems? A trading algorithm may be thought of in three forms: (i) a mathematical formula or number model; (ii) a written description of the goal of the algorithm and how it hopes to achieve the goal; and (iii) the computer code that implements the algorithm. It is unclear what records would be desirable in this case, as items (i) and (iii) may be extremely technical and may only be intelligible to people with high-levels of experience and/or training. The value to a market regulator of having access to these is also likely to be minimal if the regulatory is seeking to consider how the algorithm will interact with the market and what its effects will be. It may be useful for the Guidelines to be more specific on what records are required to be kept and what level of detail is needed. There must be a balance, when considering record-keeping, monitoring and control of trading algorithms, between: (i) what information would be valuable to and useable by the market regulator for monitoring purposes; and (ii) what firms can realistic undertake to do. We note also that trading algorithms may contain a description of an investment firms total trading strategy for a period of time. Investment firms invest significant time and money into developing algorithms and they are generally regarded as highly confidential within the industry. Although we do not object to providing information about these algorithms to market regulators, where it is necessary for them to monitor the markets, we highlight that significant financial losses will be felt by the firm if confidentiality is breached. Leaked information about the principles underlying the algorithm or the code itself may lead to other unscrupulous traders reverse engineering how decisions are made, leading to copy cat trading and damage to a firms market position. ESMA should consider how it may address these issues in its Guidelines or the explanatory text. Q7: Do you have additional comments on the draft guidelines relating to organisational requirements for investment firms electronic trading systems? We agree that it is desirable to have the ability to enact an immediate shut down of a particular algorithm in an orderly manner. In practice, traders are aware that, as part of good risk management, it is crucial that they can stop trading immediately when necessary and are prepared to trade out of their positions if their algorithms are switched off to avoid losses. In certain circumstances, it may be more appropriate to prevent losses for the trader and to avoid volatility in the market by winding down algorithms more slowly to ensure an orderly withdrawal from the market. As part of testing of algorithms, firms could be required to test the result of an immediate shut down of their systems part-way through running an algorithm and ensure that it is capable of predicting possible effects and plan a shut-down as soon as the algorithm mis-performs, without creating further problems for market. Testing is an important part of rolling out a new trading algorithm and quite aside from their regulatory obligations, investment firms are commercially incentivised to conduct proper testing, where their proprietary capital or capital of their investors is at risk of loss from errors in those algorithms. We believe the Guidelines 5 The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: [email protected] Internet: http://www.aima.org
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Alternative Investment Management Association

and the explanatory text properly consider the sorts of tests which may be appropriate before a trading algorithm is used. Ultimately, testing of an algorithm should be done in a manner that is appropriate in the circumstances, considering technical, regulatory and commercial issues. Having appropriate limits on the type and number of instruments that can be traded under the algorithm and limits on other variables (such as price) is a sensible proposal and will prevent run away algorithms that are able to take in to account extreme value inputs. These limits should be considered by the investment firms and included within the coding of the algorithm, rather than being set out in regulatory rule or in the Guidelines. It is good practice for parties to review and consider appropriate limits, which are likely to be included at the testing phase in any case. Ultimately, the level of testing conducted and limits to the operation of an algorithm should be appropriate to an algorithms size, complexity and nature. The principle of monitoring, in real time, investment firms electronic trading systems is supported. However, we would highlight that, in reality, it may not be practicable for a large active trader (who has many different algorithms operating in the market at the same time which execute tens or hundreds of thousands of trades a day) to have a complete understanding of the firms position at any one moment. The guidelines should not assume unrealistic (and likely unnecessary) abilities of compliance staff to monitor trading. Testing and appropriate limits on algorithms provide sufficient protections, in place of the ability to monitor the position of the firm at any one moment. Draft guidelines on organisational requirements for trading platforms and investment firms to promote fair and orderly markets in a highly automated trading environment - Trading platforms Q8: Do the draft guidelines on organisational requirements for trading platforms to promote fair and orderly trading offer a sufficiently comprehensive list of the necessary controls on order entry? Yes, the Guidelines provide a sufficiently comprehensive list of the necessary controls on order entry. We support the provision of further guidance to trading venues that will help ensure fair and orderly trading for all users of the market, including those using automated trading systems. In particular, we support the introduction of strong and robust automated circuit breakers that will halt trading in specific, defined circumstances, such as in particularly volatile markets for specific listed stocks. Ideally, similar markets would have similarly designed circuit breaker triggers and other characteristics; however, it is important that they are designed in such a way as to consider the liquidity and depth of the markets they are applied to. A one-size fits all approach is unlikely to be appropriate. Such circuit breakers must be thoroughly tested and intelligently designed to ensure that they are triggered under appropriate circumstances but do not halt trading so frequently as to interrupt normal trading. A conclusion of the US Securities and Exchange Commission (SEC) following the May 2011 flash crash was that automated circuit breakers on US trading venues were not tripped at the correct point and, thus, did not halt trading at the correct point 4 . As such, US trading venues are currently working on improvements to circuit breaker systems to ensure they are effective and trigger under the right circumstances 5 . Q9: Are there any areas of the draft guidelines on organisational requirements for trading platforms to promote fair and orderly trading where you believe it would be helpful to have more detail? AIMA supports the Guidelines suggestion that trading venues should have the ability or arrangements in place to: (i) prevent members access; (ii) cancel, amend or correct transactions; and (iii) limit, constrain or halt trading to
4

Among other potential areas to address in this regard, the staffs of the CFTC and SEC are working together with the markets to consider recalibrating the existing market-wide circuit breakers none of which were triggered on May 6 - Findings Regarding the Market Events of May 6, 2010. Report of the staffs of the staffs of the U.S. Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission on Emerging Regulatory Issues (30 September 2010). SEC Press Release: SEC Announces Filing of Limit Up-Limit Down Proposal to Address Extraordinary Market Volatility (5 April 2011).

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Alternative Investment Management Association

promote fair and orderly trading. However, we believe that there is a need to ensure that these powers are used sparingly and in a transparent and predictable way. If trading venues halt trading or take other actions in an unpredictable way using manual means and exercising wide discretion, this will impact normal trading and may lead to large scale withdrawals from the market when trading is predicted to be volatile in future, possibly exacerbating volatile market conditions. We believe that trading platforms should favour automated halts to trading, such as the use of circuit breakers, which can be applied at the correct moment, when trading is no longer orderly, so that trading can resume after a short period of time once orderly trading is expected to, again, be possible. These concerns, which we believe are shared by all market users, should be considered within the Guidelines. Further, we believe that the Guidelines, beyond the explanatory notes, should make specific reference to the use of circuit breakers. We not aware of existing requirements for trading venues that require them to ensure that their member firms have employees with adequate knowledge and training. Member firms are assumed to be sophisticated market users by virtue of their status and it is the role of those member firms rather than the role of the trading venue to ensure that employees have sufficient training and knowledge. Q10: Do you have additional comments on the draft guidelines on organisational requirements for trading platforms to promote fair and orderly trading? No. Draft guidelines on organisational requirements for trading platforms and investment firms to promote fair and orderly markets in a highly automated trading environment Investment firms Q11: Do the draft guidelines on organisational requirements for investment firms to promote fair and orderly trading offer a sufficiently comprehensive list of the necessary controls on order entry? Yes, the Guidelines provide a sufficiently comprehensive list of the necessary controls on order entry. These are issues of which investment firm compliance staff are very much aware and spend significant amounts of time monitoring. Q12: Are there any areas of the draft guidelines on organisational requirements for investment firms to promote fair and orderly trading where you believe it would be helpful to have more detail? In point 2, bullet point 1, it states that trading systems should automatically block trades if they do not meet price or size parameters. Whilst we agree that these parameters are appropriate considerations, there are others, which are also important to the firm and to fair and orderly trading, such as (i) the current market liquidity; (ii) execution timing; (iii) the likely fill ratio; and (iv) the overall costs of each transaction. These considerations may usefully be included within the Guidelines. Q13: Do you have additional comments on the draft guidelines on organisational requirements for investment firms to promote fair and orderly trading? No. Draft guidelines on organisational requirements for trading platforms and investment firms to prevent market manipulation in a highly automated trading environment - Trading platforms Q14. Are there any areas of the draft guidelines for trading platforms on organisational requirements for regulated markets and MTFs to prevent market manipulation where it would be useful to have extra detail? 7 The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: [email protected] Internet: http://www.aima.org
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Alternative Investment Management Association

No, the Guidelines provide sufficient detail as to how trading venues must establish organisational arrangements in order to prevent market manipulation and abuse. AIMA fully supports the requirement to monitor, record and report instances of potential market abuse to the competent authorities. The Guidelines might further propose that trading platforms be required to (a) provide competent authorities with additional information as requested where such information is recorded as part of other MiFID requirement;, and (b) have organisational arrangements to report that additional information in a similar, prompt manner. Q15. Do you have additional comments on the draft guidelines on organisational requirements for RMs and MTFs to prevent market manipulation? AIMA wishes to comment that organisational requirements, as detailed in the Guidelines, are not only applicable to automated and high frequency trading strategies but also to manually entered orders. Automated trading should not in any way, in and of itself, be considered market abuse. Trading platforms are rightly under an obligation to assist competent authorities, by providing information in other ways, to help them detect and prosecute instances of market manipulation and abuse. It is not the role of the trading platform, however, to determine what is and what is not market manipulation. Competent authorities may usefully provide updated guidance, on an ongoing basis, as to which practices are considered to be abusive, beyond those listed in the explanatory notes (e.g., ping orders and quote stuffing). Without such guidance, different quantities and types of information are likely to be received from different Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs). Some are likely to provide excessive information, which it may be difficult for competent authorities to properly analyse while others may provide insufficient amounts of information, potentially preventing detection of certain instances of market abuse. An inclusion within the guidance to say that trading platforms should be guided by the competent authorities as to which strategies are considered a potential market abuse is requested. Draft guidelines on organisational requirements for trading platforms and investment firms to prevent market manipulation in a highly automated trading environment - Investment firms Q16: Are there any areas of the draft guidelines on organisational requirements to deal with market manipulation for investment firms where you believe it would be helpful to have more detail? No, the Guidelines provide sufficient detail on the organisational requirements necessary to deal with market manipulation for investment firms. Q17: Do you have additional comments on the draft guidelines relating to organisational requirements to deal with market manipulation for investment firms? A further additional requirement may be for investment firms to have in place systems and procedures which allow any members of staff to flag suspicious trading activities to compliance staff for further investigation and for onward reporting to the competent authorities via suspicious transaction reports. The Guidelines may also require firms to have in place arrangements to prevent unauthorised parties accessing trading systems or otherwise being able to execute trades on behalf of the firm without proper authority (e.g., electronic security arrangements). Guidelines on direct market access and sponsored access - Trading platforms Q18: Do the draft guidelines on organisational requirements for trading platforms whose members/participants or users offer DMA/SA deal adequately with the differences between DMA and SA? Whilst, under current arrangements, it is correct that investment firms retain responsibility for their clients 8 The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: [email protected] Internet: http://www.aima.org
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Alternative Investment Management Association

activities when accessing electronic markets under DMA and SA, investment firms are better able to monitor those trades for DMA, since the trading is transmitted through the investment firms own internal electronic trading system. The Guidelines should require investment firms to monitor and taking responsibility for their clients activities, as necessary and appropriate to the method by which they access markets. Further, for this reason, additional and appropriate levels of due diligence may be needed in respect of SA clients. Generally, however, the Guidelines are sufficiently high-level to incorporate clients accessing the markets by DMA and SA. We particularly support the Guidelines for assigning individual customer access IDs and, where this is not done already, trading platforms should be encouraged to adopt these. These individual customer access IDs should be used by the market regulator to monitor a firms trading activities. No useful goal, however, is achieved by making these IDs available to the market. We believe the guidelines or explanatory text should make it clear that client identities should remain confidential from the market, which may otherwise impact their ability to trade. Q19: Are there any areas of the draft guidelines on organisational requirements for trading platforms whose members/participants or users offer DMA/SA where you believe it would be helpful to have more detail? We believe that, to ensure fair competition in the market, all SA providers of an exchange must be required to implement the MiFID rules and the ESMA guidelines in a consistent manner. The level of monitoring and control exercised by an SA provider over its clients impacts the speed with which the clients can trade and the timing for placing those trades. If there is inconsistent application, certain clients may be unfairly given an advantage in the market and the SA provider may not be properly monitoring and controlling their trades. Where possible, the draft guidelines should contain more detail about the SA controls that would permitted closer alignment of monitoring and control standards among the SA providers. Q20: Do you have additional comments on the draft guidelines relating to organisational requirements for trading platforms whose members/participants or users provide DMA/SA? No. Guidelines on direct market access and sponsored access - Investment firms Q21: Do the draft guidelines on organisational requirements for investment firms providing DMA/SA deal adequately with the differences between DMA and SA? Yes, the Guidelines generally deal with differences between DMA and SA or apply the same standard where the method of access is of less concern. However, it may usefully indicate that each of the Guideline points should be taken forward by firms as appropriate to the method by which their clients access the markets. In particular, as we have commented in response to question 18, additional and appropriate levels of due diligence may be needed in respect of SA clients given the nature of their access to the markets. Q22: Are there any areas of the draft guidelines on organisational requirements for investment firms providing DMA/SA where you believe it would be helpful to have more detail? No, the draft Guidelines provide sufficient detail on the organisational requirements for investment firms providing DMA/SA. Q23: Do you believe that there is sufficient consistency between the draft guidelines on organisational requirements for investment firms providing DMA/SA and the SECs Rule 15c3-5 to provide an effective framework for tackling relevant risks in crossborder activity and without imposing excessive costs on groups active in both the EEA and the US? 9 The Alternative Investment Management Association Limited 167 Fleet Street, London, EC4A 2EA Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-mail: [email protected] Internet: http://www.aima.org
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Alternative Investment Management Association

We agree that it is important to have similarly high standards with regard to DMA and SA in the EU and the US, given the amount of cross border trading that occurs between these jurisdictions. Such consistent standards will promote good risk management and equal assurances of orderly trading from clients of investment firms. In general, we believe that the proposed ESMA Guidelines and the SECs Rule 15c3-5 cover the same ground and provide sufficiently similar requirements. The US requirement, being implemented as a long and detailed regulatory rule, has a different status from the short high-level guidelines proposed by ESMA. However, since MiFID already has substantive provisions applicable to DMA/SA, this status does not significantly detract from the benefits of having similar requirements. Q24: Do you have additional comments on the draft guidelines on organisational requirements for investment firms providing DMA/SA? AIMA acknowledges that investment firms have responsibility for all trading undertaken using its membership of the trading platform. However, whilst we do not advocate the avoidance of appropriate retention of control and monitoring of the business of clients, we believe the Guidelines should not require additional new requirements, which may place a disproportionate burden on investment firms. The vast majority of clients who use investment firm DMA and SA to access markets are, themselves, investment firms and credit institutions who are fully regulated under MiFID and/or other legislation and are subject to oversight by market regulators. Investment firms, however, must accept a high level of responsibility for the trading that they allow through their exchange memberships given the direct nature of the access being granted by virtue of DMA and to an even greater extent SA. There is even greater need for investment firms to take highlevels of responsibility for those clients that are not regulated under MiFID. To provide otherwise may lead to regulatory arbitrage opportunities through allowing certain firms to conduct the same types of activities but being subject to less stringent requirements than those trading on a regulated principal basis. Of particular importance is the use of documentation between investment firms and their clients which state the obligations of the parties and the limits within which the clients may access electronic trading platforms. We believe this area could useful be further elaborated in the Guidelines to state exactly what the documentation between the parties should cover. As part of having responsibility for clients trading activities, investment firms should be able to halt trading by a client immediately. However, this power should be used sparingly and only as necessary to prevent disorderly trading in the markets. General questions regarding the draft guidelines Q25: Does the explanatory text provided in addition to the guidelines (see Annex VII to this CP) help market participants to better understand the purpose and meaning of the guidelines? Should it therefore be retained in the final set of guidelines? Yes, we believe that the explanatory text is useful for understanding the points in the guidance. The explanatory text often elaborates and, in some instances, covers topics that are not specifically mentioned elsewhere within the Guidelines. ESMA should consider whether the points in the explanatory text can be included within the guidance itself to give it more force of effect. We would encourage ESMA to retain this text in the final Guidelines.

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