COB 14.2 COB 14.2 Operating a Facility for Investment Tokens which permits direct access
COB 14.2.1 COB 14.2.1
This section applies to an ATS Operator that has Direct Access Members.
COB 14.2.1 Guidance1. A Direct Access Member is defined in GLO as a Person that an ATS Operator has admitted as a member under COB Rule 9.3.1(1)(e).2. A Person will only be admitted as a Direct Access Member where that Person does not meet any of the criteria at COB 9.3.1(1)(a)-(d), although a Person admitted as a member under any of those criteria may also trade Investment Tokens. A Direct Access Member may be an individual or a Body Corporate, but will not, for example, be an Authorised Firm or an institutional investor whose main activity is to invest in financial instruments.3. See also the requirements relating to Direct Access Members in COB Rule 9.3.1(4).
An ATS Operator must ensure that:(a) it treats each Direct Access Member as its Client;(b) its Operating Rules clearly set out:(i) the duties owed by the ATS Operator to the Direct Access Member and how the ATS Operator is held accountable for any failure to fulfil those duties; and(ii) the duties owed by the Direct Access Member to the ATS Operator and how the member is held accountable for any failure to fulfil those duties;(c) appropriate investor redress mechanisms are available, in accordance with GEN chapter 9, and disclosed to each member permitted to trade Investment Tokens on its facility; and(d) its facility contains a prominent disclosure of the risks associated with the use of DLT for trading and clearing Investments, particularly those relating to Digital Wallets and the susceptibility of private cryptographic keys to misappropriation.
COB 14.2.3 COB 14.2.3(1) Without limiting the generality of the systems and controls obligations of the ATS Operator, an ATS Operator must have in place adequate systems and controls to address market integrity, AML, CTF or investor protection risks in permitting a Direct Access Member to trade on its facility, including procedures to:(a) identify the ultimate beneficial owner of a Direct Access Member, where such a member is a body corporate;(b) ensure that appropriate customer due diligence sufficient to address AML and CTF risks has been conducted on each Direct Access Member, prior to permitting that member to trade on its facility;(c) detect and address market manipulation and abuse;(2) An ATS Operator must have adequate controls and procedures to ensure that trading in Investment Tokens by Direct Access Members does not pose any risks to the orderly and efficient functioning of the facility’s trading system, including controls and procedures to:(a) mitigate counterparty risks that may arise from defaults by Direct Access Members through adequate collateral management measures, such as margin requirements, based on the settlement cycle adopted by the ATS Operator;(b) identify and distinguish orders that are placed by Direct Access Members, and, if necessary, enable the ATS Operator to stop orders of, or trading by, such members;(c) prevent Direct Access Members from allowing access to other persons to trade on the trading facility; and(d) ensure that Direct Access Members fully comply with the Operating Rules of the facility and promptly address any gaps and deficiencies that are identified.(3) An ATS Operator must have adequate resources and systems to carry out front-line monitoring of the trading activities of Direct Access Members.(4) An ATS Operator must ensure that, to the extent that any of the systems and controls referred to in (1) are embedded within, or otherwise facilitated through DLT, they are included within the scope of the annual audit and the written report required under COB Rule 14.5.1.
COB 14.2.3 Guidance1. To satisfy the DFSA of the matters referred to in COB Rule 14.2.3(1), an ATS Operator should, as a minimum, be able to demonstrate that it has effective procedures built into its DLT or similar technology application being used that enable:(a) the clear identification of each Direct Access Member accessing its facility to trade; and(b) the monitoring of bid and offer prices and volatility for any indications of market manipulation or abuse.