Clarity through the DEA tiers

An ESMA Q&A published this week provides some further guidance regarding the authorization of sub-delegated DEA providers, but it still leaves room for uncertainty. The Q&A draws a distinction between a DEA client that has EU exchange access directly via a member (Tier 1 DEA client), and a DEA client that obtains access through a sub-delegated DEA provider (Tier 2 DEA client). ESMA argues that Tier 2 clients do not have DEA access because in most cases they are not technically in possession of the trading code of the exchange member.

 Furthermore, the Q&A reiterates the Article 48(7) requirement that in order to provide DEA access, a member of an EU exchange must be a registered MiFID II firm or credit institution. However, it is not absolutely clear whether the authorization requirement includes sub-delegated DEA providers. If you analyze the question by reference to the above-mentioned client tiers a sub-delegated DEA provider's clients are Tier 2 and don't have DEA.

Logically it follows that if the clients don't have DEA, how can a sub-delegated firm be providing DEA? So much for clarification! With a short amount of time until implementation, further guidance on the issue seems unlikely. Therefore, we must look to answer the question on the authorization of sub-delegated DEA providers by a review of the client tiers