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 Level 1 MiFIR/MiFID II Level 2 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 03.01.2018 12.06.2014 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 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. 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 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. 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 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. 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. 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. 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: [email protected]

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 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. 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