BaFin Moves Highlight EU HFT Regulatory Discrepancies

Under the German High-Frequency Trading Act, BaFin has the right to grant an exemption from HFT requirements to some trading firms wanting to passport into Germany if those firms are subject to an equivalent regulation within the European Economic Area (EEA). However, some firms registered locally with the UK’s Financial Conduct Authority (FCA), could see their exemption revoked because of divergence in capital requirements.

"What BaFin has determined is that because some HFT firms, like the UK-authorized non-Mifid firms, have significantly lower capital requirements than Mifid-authorized firms, their authorization is not equivalent and not suitable for the purpose of the German HFT law," says Sam Tyfield, partner at law firm Vedder Price and member of the firm's investment services and finance, and transactions groups.

Initial Capital Requirement
The High-Frequency Trading Act, passed by the German parliament in February 2013, introduces a license requirement for high-frequency traders, and imposes a code of conduct as well as some organizational requirements within the firms, pre-empting the Europe-wide regulations such as the Market Abuse Directive and the Markets in Financial Instruments Directive (Mifid II).

It also requires that entities applying for a high-frequency trading license must have initial capital of at least €730,000 ($988,000), which is higher than what is required for non-Mifid firms.

"For those firms, whether big or small, this is a considerable issue because it could potentially affect all their trading on Eurex, which can be a big part of their business," says Christian Voigt, product manager at Fidessa.

"For those firms, regardless if they are big or small, this is a considerable issue because it could potentially affect all their trading on Eurex, which can be a big part of their business," says Christian Voigt, product manager at Fidessa.

BaFin has not confirmed the number of firms affected by this last-minute twist, but as the drop-dead date to comply with the High-Frequency Trading Act is Feb. 14, the German authority will allow additional time for the firms wanting to apply for a variation of permission with the FCA to become fully authorized.

Definition Discrepancies
According to Voigt, a recurring problem with HFT is that it has different definitions in different European countries.

"The FCA regulates numerous financial firms in general, but there is still no Europe-wide definition as to what HFT really is," he says. "If Germany had waited for Mifid to implement such measures within the European sphere, it would have been easier to apply this consistently across European countries."

Some countries, like France and Germany, have already implemented measures designed to curb HFT activity but by doing so on their own, they have increased the regulation gaps among European Union countries.