BaFin

BaFin Updates HFT Legislation Guidance

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BaFin, the German financial regulator, updated guidance on its website in clarification of several issues concerning the Hochfrequenzhandelsgesetz (High Frequency Trading Act) which came into force on May 15.  The Act introduces authorisation and organisational requirements intended to mitigate the potential risks arising from the speed and complexity of algorithmic high-frequency trading methods which make up some 40 per cent of exchange trades in Germany.

The updated guidance seeks to clarify issues including:

  • licensing requirements;
  • transitioning requirements;
  • definition of HFT; and
  • date of effectiveness.

The BaFin FAQ webpage (in English) is available here.

Germany’s Lower House Approves High Frequency Trading Bill

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On February 28, the Bundestag (Germany’s lower house of parliament) approved a bill aimed to prevent the abuse and associated dangers of high frequency trading.  The bill requires that high frequency traders obtain authorization, which has been unregulated up to now.  It also requires market participants to ensure that they have properly configured trading systems which will not cause market disturbances.  Additionally, a fee will be imposed on traders who make excessive use of high frequency trading systems and limits will be introduced in respect to the ratio between abandoned and executed orders.

Bafin (the German regulator) will have responsibility for supervising high frequency trading and will have information and intervention rights under the proposed legislation.  In particular, it will have the power to request a description of algorithmic trading patterns and trading parameters, and can prohibit the use of certain algorithmic trading strategies if they violate exchange rules or cause disruption in the markets.  Trading strategies which are conducted with the intention of disturbing trading or deceiving the markets will be considered to be market manipulation.

Germany Toughens its Take on AIFMD

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On July 20, the Federal Ministry of Finance and the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) published its draft for the implementation of the Alternative Investment Fund Managers Directive (AIFMD).

Highlights of the new ‘Capital Investment Code’ (Kapitalanlagegesetzbuch) include:

Distinction between AIF whose shares/units may be held by professional investors only (so called ‘specialised-AIF’) and AIFs whose shares may be held by non-professional investors.

  • Real estate (RE) and infrastructure funds can only be established as closed-ended funds. Existing open-ended RE/infrastructure funds would benefit from a grandfathering rule and could continue to exist in the same form as before.
  • Non-professional investors will only be permitted to invest in certain fund types, e.g. they are prohibited from directly investing into certain fund types such as hedge funds or private equity funds. Investment into these vehicles will only be allowed via fund of funds or master-feeder structures.
  • Private placements for third country funds should be abolished. Third country funds would only be allowed to market their funds in Germany if certain (extensive) requirements are met.

Interested parties have until August 17 to comment on the 500-page document.

German Legislation to Regulate Algorithmic Traders and Trading Strategies on German Trading Venues

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On July 30, the German Ministry of Finance presented new draft legislation in the form of an “Act for the Prevention of Risks and the Abuse of High Frequency Trading” (Entwurf eines Gesetzes zur Vermeidung von Gefahren und Missbräuchen im Hochfrequenzhandel).

Highlights include:

  • Inclusion of an extended definition of proprietary trading which will trigger a license requirement as a financial services institution under the German Banking Act as well as supervision by the German financial authority (“BaFin”).
  • High Frequency Trading (“HFT”) firms will be subject to the general regulatory framework applicable to investment firms under the German Banking Act and the German Securities Trading Act including a proposed “speed limit” for electronic trading in its regulated markets and multilateral trading facilities.
  • Investment firms, management companies and investment companies that are engaged in algorithmic trading would be subject to specific organisational requirements.
  • Trading participants will be obligated to ensure an adequate ratio between their purchase and sales orders and transactions which are actually executed.
  • Increased Enforcement Powers of Stock Exchange Supervisory Authorities and BaFin.
  • Certain HFT strategies will in the future fall under the revised German market abuse rules.

The new legislation will be adopted after the summer recess and will come into force in Q3/Q4 of 2012.