EXTENT-2016: MiFID 2 Requirements for testing and business clocks

Dr. Sandra Bramkhoff
Senior VP, Cash Market
Development
Deutsche Boerse AG
MiFID 2 –
Requirements for
testing and business
clocks

Presentation Manual Deutsche Börse Group 1
MiFID II - Requirements for testing and business clocks
LSE - Software Testing & Trading Technology Trends
Dr. Sandra Bramhoff
22 June 2016

None of the information contained in this presentation constitutes investment advice. The content on this presentation is solely for information and
does not constitute an offer to sell or a solicitation of an offer to purchase any contract, share or other financial instrument. 2
Year 2014 2015 2016 2017 2018
H2 H1 H2 H1 H2 H1 H1 H2
Level1
MiFIR/MiFID II
Level2
Delegated and
implementing
acts
Regulatory
technical
standards
(RTS)
Implementing
technical
standards
(ITS)
Trilogue
Phase
Assign Consultation
F
P = Publication in official journal
F = Entry into force
T = Transposition into national law
A = Application within member states
today
Drafting
Consul-
tation
Drafting
Consu-
ltation
Consultation Drafting
Consul-
tation
EU Commission
EU Council, EU Parliament
ESMA
Endorsement & objection period
A
Postponement of application of MiFID II/MiFIR to 3 January 2018 agreed; postponement of transposition into
national law deferred to 3 July 2017
Delegated Acts: Publication in April/May 2016; afterwards, objection period for EU Parliament (EP) and Council
before entry into force
RTS: ESMA submitted to the EU Com draft regulatory technical standards in September 2015; adoption by EU
Com delayed (started in May 2016); final approval by EP and Council outstanding; objection period before entry
into force
ITS: ESMA submitted to the EU Com draft ITS in September 2015; adoption by EU Com delayed (expected for
June 2016); final approval by EP and Council outstanding; objection period before entry into force
3
P
P A
A
T A
Drafting
03.01.2087
03.01.2018
03.01.2018
03.01.201812.06.2014 02.07.2014 03.07.2016
May/June 2016
June 2016 (exp)
April/May 2016
Drafting
Drafting
1
P
MiFIR/ MiFID II timeline – Postponement of Level 1 agreed
2
4
1
2
3
4
F
July 2016 (exp)
F
July 2016 (exp)
F
July 2016 (exp)
P F P
June 2016
(exp)

Testing – What do investment firms need to ensure?1
3
does not constitute an offer to sell or a solicitation of an offer to purchase any contract, share or other financial instrument.
Set-up of testing
methodologies
Record keeping of
software changes
Sign-off of initial
deployment & update
Conformance testing
Knowledgeable staff
Controlled
deployment of
algorithms
Post- deployment
management
Stress testing
 Design and performance
of the system, algorithm or
strategy
 Undertake further testing
in case of substantial
changes to the trading
system or the access to
the venue
 To be undertaken by a
responsible party
designated by senior
management of the
investment firm
 For determination when a
change was made, who
made and who approved
the change and the nature
of the change
 When accessing the venue
as member or connecting
through SA arrangement
 In case of material change
of the systems of the
trading venue
 Prior to deployment or
material update of
algorithmic trading system
 Adequate number
 Definition of skills
necessary to fulfil (periodic
review)
 Initial and ongoing training
tailored to experience and
responsibilities of staff
 Maintenance of control
over trading algorithms in
production by setting limits
on number of financial
instruments, price, value
and number of orders,
strategy positions and
number of trading venues
used
 Performance of annual
self-assessment and
validation process for
elaboration of validation
report
 Review and evaluation of
algorithm trading systems
and trading algorithms
 Testing of algorithmic
trading systems to ensure
capability of withstanding
increased order flows of
market stresses
 Tests should consist of
high message volume and
trade volume tests
1 Please note that this constitutes only an overview of major items

4
Production
Simulation
Simulation facilities
which reproduces as
realistically as possible
the live production
Basic Test1
Connectivity Test2
Conformance Testing
3
Test Reports3
Investment
Firm n
Investment
Firm 2
Investment
Firm 1
2
Testing of
algorithms in own
environment
1
Testing algorithms to
avoid disorderly trading
Algo Test
1
Certification to trading venue that the algorithms deployed have gone through testing
Conformance testing prior to (a) deployment of a new access to the trading venue’s system (b) a material change in the trading venue’s access
functionality (c) the deployment or substantial update of the member’s trading algorithms or strategies
Access to testing environment for members
Strict separation of testing environment from production
1
2
3
1 Basic test includes functionalities such as submission, modification or cancellation of an order or an indication of interest, static and market data downloads and all business data flows.
2 Connectivity test includes cancel/don’t cancel on disconnect, market data feed loss and throttles, recovery including cold intra-day starts and the handling of suspended instruments or stale
market data.
3 Trading venues shall deliver a report with the outcome of the conformance testing exclusively to the actual or prospective member.
Test symbols
Testing under MiFID II – What are the requirements?
4
4
Testing environment
Trading Venue

Business Clocks – What requirements will apply with MiFID II?
5
Gateway-to-gateway
latency1
Max. divergence
from UTC
Granularity of
timestamp
Trading venues
>= 1 ms2 1ms 1ms or better
< 1 ms2 100 µs 1µs or better
HFTs - 100 µs 1µs or better
Voice trading - 1s 1s or better
RFQ - 1s 1s or better
Negotiated
Transactions
- 1s 1s or better
Other trading activity - 1ms 1ms or better
¹ Gateway-to-gateway latency shall be the time measured from the moment a message is received by an outer gateway of the trading venue’s system, sent through the order submission
protocol, processed by the matching engine, and then sent back until an acknowledgement is sent from the gateway.
2 Measured at the 99th percentile of all orders advertised through the system according to CP ‘Guidelines on transaction reporting, reference data, order record keeping and clock
synchronization’ published on 23 December 2015
Reference time: Operators of trading venues and their members or participants shall synchronise the business clocks they use to record the date
and time of any reportable event with the Coordinated Universal Time (UTC)
Level of accuracy: Applicable for operators of trading venues and their members
1
2
µs = microsecond, ms = millisecond, s = second

6
But this includes
weekend days and bank
holidays…
According to my calendar
you have 561 days, so
request rejected!
I need more resources
for MiFID II as we only
have 389 days left…
And?
©Dilbert characters Scott Adams Inc.
Last comments…
Thank you very much for your attention!

Dr. Sandra Bramhoff
Senior Vice President
Market Development
Deutsche Börse AG
Phone: + 44 207 862 7259
Email: sandra.bramhoff@deutsche-boerse.com

Presentation Manual Deutsche Börse Group 8
Back-up

MiFID II requirements for testing & business clocks - references
9
Level 1: Testing Art. 17 (1) MiFID II
Algorithmic trading: An investment firm that engages
in algorithmic trading […] shall ensure its systems
are fully tested […].
Art. 48 (1) MiFID II
Systems resilience, circuit breakers and electronic
trading: Member States shall require a regulated
market to ensure its trading systems […], are fully
tested […].
Art. 48 (6) MiFID II
Systems resilience, circuit breakers and electronic
trading: Member States shall require a regulated
market […] [to require] members or participants to
carry out appropriate testing of algorithms and
providing environments to facilitate such testing
[…]
Level 2: Testing RTS 6
Section 1 – Testing and deployment of trading
algorithms and systems
 Art. 3 – Staffing
 Art. 5 – General methodology
 Art. 6 – Conformance testing
 Art. 7 – Testing environments
 Art. 8 – Controlled deployment of algorithms
 Art. 10 – Stress Testing
Investments Firms
RTS 7
Chapter 2 – Capacity and Resilience of Trading
Venues
 Art. 8 – Testing of the trading systems
 Art. 8 – Conformance testing
 Art. 9 – Testing the members’ algorithms to avoid
disorderly trading conditions
Trading venues
Art. 50 MiFID II
Synchronisation of business clocks: Member States shall require that all trading venues and their members or
participants synchronise the business clocks they use to record the date and time of any reportable event.
RTS 25
 Art. 1 – Reference Time
 Art. 2 & 3 – Level of accuracy for operators of trading venues and their members and trading venues
 Art. 4 – Compliance with the maximum divergence requirements
Level 1: Business clocks
Level 2: Business clocks

EXTENT-2016: MiFID 2 Requirements for testing and business clocks

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EXTENT-2016: MiFID 2 Requirements for testing and business clocks