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Consultation Paper No. 15 Alternative Trading Systems

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Consultation Paper No. 15

June 2005

Alternative Trading Systems

The Dubai Financial Services Authority ("DFSA") Consultation Paper Addressed to Parties Interested in the Development of Financial Services and Markets Regulation within Dubai's Financial Free Zone (The "DIFC")

1. Introduction

This paper consults on the DFSA's proposed rules in respect of Alternative Trading Systems and Operators of such systems.

The amendments to the GEN module are attached as Annex A; the amendments to the AUT module are attached as Annex B and the amendments to the COB module are attached as Annex C.

This paper also consults on associated changes to other parts of the DFSA Rulebook. These changes are set out in Annexes D and E in respect of the PIB and GLO modules.

The draft rules are published for consultation purposes only. Please note that, although the draft rules are in near final form, the DFSA reserves the right to amend the drafts at its sole discretion. The rules will be made under powers contained in the Regulatory Law 2004.

Comments are invited on any aspect of the regime proposed in this paper, on both the principles and the detailed drafting. The DFSA would be particularly interested to have the views of firms considering using the proposed rules and views on how this regime compares with those in other major centres. In the light of the comments received, the DFSA may determine to adopt in whole, or in part, the proposals outlined in these papers, or may amend the proposals.

Anyone wishing to submit comments should provide details of the organisation he or she represents. The names of commentators and the content of their submissions may be published on the DFSA website and in other documents to be published by the DFSA. If you wish your name to be withheld from publication, please indicate this when you make your submission.

Any comments should be addressed to:
Mr Nicholas Alves
Legal Counsel
DFSA
PO Box 75850
Dubai, UAE

or e-mailed to nalves@dfsa.ae

All comments should be provided in writing, on or before 26 July 2005.

2. Background and context

The draft rules and the associated changes to other parts of the DFSA Rulebook need to be considered in the context of the core Financial Services laws - the Regulatory Law 2004, the Markets Law 2004 and the Law Regulating Islamic Financial Business 2004 and the objectives of the DFSA set out therein.

3. The DFSA rulebook

The core Financial Services laws provide the DFSA with a wide range of powers, including powers to make rules and to issue Guidance. This Guidance is not binding on the DFSA, nor does it create a "safe harbour" protecting those who comply with it from action for breach of the underlying rule.

The rules together make up a Rulebook containing a number of modules. The DFSA Rulebook may be viewed on the DFSA's website (www.dfsa.ae) along with all the DIFC Laws and Regulations.

The DFSA has power to waive or modify rules, and is prepared to use this to adapt the rules to specific circumstances which may arise.

4. Interpreting the rulebook

Defined terms are identified throughout the Rulebook by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO). Please note that Annex E contains further definitions. Unless the context otherwise requires, where capitalisation of the initial letter is not used, an expression has its natural meaning.

Every provision in the Rulebook must be interpreted in the light of its purpose. The purpose of any provision is to be gathered first and foremost from the text of the provision in question and its context among other relevant provisions. A provision means every type of provision, including Rules and Guidance.

Where reference is made in the Rulebook to another provision of the Rulebook or other DIFC legislation, it is a reference to that provision as amended from time to time. If a provision in the Rulebook refers to a communication, notice, agreement, or other document 'in writing' then, unless the contrary intention appears, it means in legible form and capable of being reproduced on paper, irrespective of the medium used. Expressions Related to writing must be interpreted accordingly. Any reference to 'dollars' or '$' is a reference to United States Dollars unless the contrary intention appears. References to Articles made throughout the Rulebook are references to Articles in the Regulatory Law 2004 unless otherwise stated.

Unless the contrary intention appears:

• words in the Rulebook importing the masculine gender include the feminine gender and words importing the feminine gender include the masculine; and
• words in the Rulebook in the singular include the plural and words in the plural include the singular.

Unless the contrary intention appears, a day or business day refers to:

• in relation to anything done or to be done in (including to be submitted to a place in) the u.a.e. any day which is not a Friday or Saturday or an official u.a.e. Bank holiday; and
• in relation to anything done or to be done by reference to a market outside the u.a.e. any day on which that market is normally open for business.

5. Purpose and summary of the material provisions of the Rules relating to Alternative Trading Systems and the Operations to such systems.

The Rules in respect of Alternative Trading Systems and the Operators of such systems are created under powers contained in the Regulatory Law 2004. The purpose of these Rules is to:

• Prescribe a new Financial Service activity, namely Operating an Alternative Trading System.
• Specify the attributes of a facility which would make it an Alternative Trading System.
• Provide requirements and standards, which an applicant would need to satisfy to be granted a License, including factors to be taken into consideration by the DFSA when assessing an application, for authorisation to carry on Financial Service of Operating an Alternative Trading System.
• Provide Rules in relation to the conduct of an ATS Operator in respect of Client disclosures, systems and controls, information dissemination and monitoring and disclosure of trades effected on the system.
• To amend the Glossary module (GLO) by the addition of new defined terms with regard to Alternative Trading Systems and ATS Operators.

In addition to the aforementioned rules, various consequential and clarificatory amendments have also been made to the General module, Authorisation module and Prudential module (PIB).

The Rules in the General module (GEN) create the new Financial Service of Operating an Alternative Trading System. The provisions also distinguish this new activity from two other similar Financial Services, namely Operating an Exchange and Operating a Clearing House. The Financial Service of arranging has been amended to exclude arrangements made by an ATS Operator for the purpose of facilitating trades on its system. However, if an ATS Operator deals as agent or principal then, subject to any exclusions available to such an Operator, the Operator would need to be separately authorised under its Licence to carry those activities.

In relation to Fees, it is proposed that the Fee for the Financial Service of Operating an ATS is $30,000. The application, initial annual and subsequent annual Fees are calculated on a case by case basis in accordance with Appendix 5 of the General Module (GEN). The DFSA may also Charge a supplementary Fee under GEN rule 7.2.4 in circumstances where it expects to incur substantial additional costs in dealing with an application or conducting ongoing supervision in relation to an ATS.

The Rules contained in the Authorisation module (AUT) implement provisions in relation to the assessment by the DFSA of an application by a Person or an Authorised Firm to Operate an Alternative Trading System. These provisions specify particular matters to which the DFSA will have regard but the DFSA is not limited in its consideration to such matters which are:

• Whether the establishment of an ATS is in the interests of the Financial Services markets industry;
• Whether the Alternative Trading System will lead to more efficient price discovery of, or deepen liquidity in, an Investment; and
• Whether there is any risk of market fragmentation of liquidity or inefficiency in price discovery as a result of the proposed ATS operation.

Further Rules provide provisions in relation to an application to change the scope of a Licence to include Operating an Alternative Trading System as well as some miscellaneous amendments to that chapter not Connected with ATS Operations.

The Conduct of Business Rules (COB) have been amended by the inclusion of a new chapter 17 which is intended to ensure amongst other things, that ATS Operators provide Clients using their system with sufficient information to enable the Clients to use the system efficiently and to understand any material risks involved in using the system. The Rules place a responsibility upon ATS Operators to establish and maintain systems and controls to ensure equitable treatment of Clients, fair pricing and the dissemination of sufficient information in relation to quotes, orders and completed transactions. In relation to this dissemination of information the ATS Operator is required to provide, or be reasonably satisfied that there is publicly available sufficient information to enable Clients of the system to make a reasonably informed judgement about the value of each Investment traded on the ATS and the risks associated with that Investment. In relation to Investments also traded on the facilities of an AMI or other regulated Exchange ATS Operators are required to establish and maintain systems and controls to ensure details of quotes, order, prices, volumes and the times of completed transactions are made publicly available. An ATS Operator is also under an obligation to monitor transactions undertaken on the ATS and to identify suspected or actual breaches of any rule, procedures or agreements relating to fair and orderly trading and Market Misconduct. A breach of an ATS Operator's rule relating to fair and orderly trading on the ATS is a prescribed matter for the purposes of Article 67(1)(e) of the Regulatory Law 2004, that is, the Operator is required to disclose to the DFSA any such breaches of the rules.

Consequential amendments has been made to the Prudential - Investment, Insurance Intermediation and Banking Business module (PIB) to prescribe the prudential Category for the new Financial Service.

In addition to providing new definitions for the Glossary module (GLO) the definition of Investment Business has been modified to include Operating an Alternative Trading System as one of the Financial Services constituting Investment Business.