New German exemption for third country proprietary trading firms

The new law introduces an exemption to the licensing requirement for non-EEA entities exclusively conducting proprietary trading activities relating to transactions in financial instruments on own account on German trading venues where conducted by the non-EEA entity as a participant or member of such venue (which shall apply until any publication by ESMA of an applicable equivalence decision under MiFIR).

The German Banking Act (Kreditwesengesetz, "KWG") has been amended as part of the German legislative package of the Act on the Introduction of Special Provisions for the Recovery and Resolution of Central Counterparties and on the Amendment of the Securities Trading Act to the Information and Evidence Requirements pursuant to Articles 4a and 10 of Regulation (EU) No. 648/2012 (*Gesetz zur Einführung von Sondervorschriften für die Sanierung und Abwicklung von zentralen Gegenparteien und zur Anpassung des Wertpapierhandelsgesetzes an die Unterrichtungs- und Nachweispflichten nach den Artikeln 4a und 10 der Verordnung (EU) Nr. 648/2012- "the Act"*).

The Act comprises clarifications in relation to the licensing requirements for entities registered outside the EEA and conducting cross-border proprietary trading with counterparties or on trading venues in Germany.

It should be noted that the understanding of the term proprietary trading (Eigengeschäft), as defined in the KWG, is narrow. In contrast to trading on own account for others (Eigenhandel), proprietary trading may not be triggered or motivated by services provided to clients (eg back-to-back client-related trades on a German trading venue). This includes structures where an asset manager acts on behalf of its fund. Even if this fund should only comprise assets owned by the asset manager.

According to the revised section 32 para. 1a sentence 3 no. 4 of the German Banking Act, third-country firms who are exclusively conducting proprietary trading as a participant of a German trading venue do not require a license from the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - "BaFin"). This applies until the respective firm has been registered by ESMA to provide investment services in the European Union in accordance with article 48 MiFIR, following an equivalence decision by ESMA in relation to the third country legal framework. Third countries are defined as jurisdictions which are not part of the European Union.

The supplement clarifies that companies from third countries are not subject to the licensing requirement pursuant to Section 32 (1a) sentence 2 KWG until they are included in the ESMA register for proprietary trading that they operate as a member of an exchange or participant in a trading venue. In contrast to proprietary trading in commodity derivatives, emission certificates or derivatives on emission certificates conducted outside exchanges/trading venues and also in contrast to direct electronic access, exchange members or participants in a supervised trading venue are subject to an admission procedure and trading rules controlled by the exchange or trading venue. These requirements are subject to the Exchange Supervisory Authority or the BaFin's supervision of the trading venue, and are thus indirectly subject to state control and supervision. This justifies refraining from separate supervision by BaFin in the case of companies that conduct exclusively proprietary trading as a member of an exchange or trading participant on a trading venue within the meaning of MiFID, until an EU-wide regulation is in place.

This exemption does not cover any such firms that are performing the following activities:

• market making;
• systematic internalisation;
• purchasing and selling of financial instruments on one's own account as service to others, and
• high frequency trading.

Third-country proprietary trading firms applying to become exchange participants will benefit from the exemption by operation of law and are not obliged to submit an application to BaFin.