Notice N36/00
London Stock Exchange
16 June 2000
16 June 2000
For the attention of the
chairman/senior partner/compliance officer,
all member firms N36/00
STOCK EXCHANGE NOTICE
CONSULTATION ON MEMBERSHIP RULE CHANGES
Introduction
1. On 21 December 1999, the Exchange issued Stock Exchange Notice N79/99 which
consulted on proposed rule changes to allow wider access to the SETS order
book. This notice summarises the key issues raised by member firms during the
consultation and sets out the Exchange's revised approach.
Aims of the N79/99 proposals
2. The proposals set out in N79/99 were principally intended to satisfy a
demand for access to the order book by European based non-ISD proprietary
traders ('non-ISD locals'), by expanding the SETS Participant rules.
Feedback received on N79/99
3. The main issues raised by member firms in response to the N79/99 proposals
were as follows:
SETS-only membership - this was considered unfair, in that it would allow
access to the Exchange's most liquid market without the obligations attached
to 'full' membership - principally the requirement to trade and transaction
report other business. As such, some member firms considered that SETS-only
access would be attractive to their existing institutional customers and may
result in disintermediation; and
Fitness and probity - objections focused on the risks associated with the
credit worthiness and fitness and probity of the firms that would apply.
UK authorisation of non-ISD locals
4. The Exchange has a number of UK based member firms which are authorised by
the Securities and Futures Authority (SFA) as non-ISD locals. In authorising
these firms, SFA satisfies itself that:
key individuals are fit and proper;
firms remain solvent at all times;
compliance procedures and controls are adopted; and
money laundering legislation is implemented.
Applications from non-ISD locals based elsewhere in the European Union (EU)
5. Access to the order book by non-ISD locals based elsewhere in the EU, will
be provided on the same basis as non-ISD locals within the UK, as follows:
they will be required to obtain 'full' membership of the Exchange. The firm
and the Exchange will agree the scope of the firm's business profile prior to
admission to membership. When determining whether to approve an expansion of
a firm's business profile, the Exchange will consider the scope of the firm's
authorisation by SFA or home state regulator; and
they will be required to execute a model B clearing agreement with a member
firm of the Exchange, authorised to provide this service. The Exchange will
liaise closely with SFA to ensure that any consequential changes to a model B
clearer's capital adequacy requirement are adequately monitored.
6. Membership will be granted where the level of authorisation and supervision
provided by the home state regulator is at least equivalent to that provided
by SFA to non-ISD locals in the UK. In addition, information sharing
arrangements must exist between the home state regulator and the Exchange, or
indirectly through the Financial Services Authority.
7. Where an equivalent level of regulation is not provided, the Exchange will
consider, in consultation with the home state regulator and SFA, providing
monitoring arrangements that are the equivalent to that provided by SFA for UK
non-ISD locals.
Rule changes
8. Rule 1.1 (a) (iii) has been amended to include non-ISD locals in other EU
jurisdictions, and Rule 1.1 (a) (v) has been amended to include the Investment
Services Regulations 1995. A new rule, 1.3 (a) (vii), has been added to
specify that in the case of all non-ISD locals, a model B clearing agreement
with an Exchange member firm is required.
9. The proposed amendments are set out in the attachment to this Notice.
Member firms are invited to comment on the proposed rule amendments by 14 July
2000. A further Notice will be issued confirming the effective date of any
rule changes.
Andrew McStravick
Head of Market Regulation
Any comments or queries on this Notice should be addressed to Mathew Wootton,
Head of Regulatory Development, telephone 020 7797 1570 (STX 31570) or
Email: mwootton@londonstockexchange.com
This Stock Exchange Notice will be available on the website at
www.londonstockexchange.com/regulation/notices/
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