Outline Confirmation 11 June 2007

Whilst most of the Exchange’s proposed changes were welcomed, a number of areas raised comment. The Exchange has therefore held further discussions with a number of member firms to ensure it fully understands these concerns. These are detailed below.

On Exchange

A number of member firms asked for further clarity as to the scope of the on Exchange rule post MiFID. As stated in the consultation, the Exchange is proposing a three tier regime for on Exchange, such that a transaction is deemed to be on Exchange if one or both of the parties to the transaction is a member firm (whether as agent or as principal) and the transaction is effected:

• in a security admitted to trading on an EU Regulated Market and the member firm and its counterparty agree at or prior to the time of effecting the transaction that it shall be subject to the Rules of the London Stock Exchange;

• in an AIM security unless the member firm and its counterparty agree at or prior to the time of effecting the transaction that it shall be subject to the rules of an AIM primary market registered organisation or an AIM secondary market registered organisation and the member firm is a member of that AIM primary market registered organisation or AIM secondary market registered organisation and reports the transaction to it in accordance with that organisation’s rules; (please note these rules are currently the subject of a separate consultation and are included here to ensure completeness)

• in any security admitted to trading on the Exchange’s markets not covered by either of the above unless the member firm and its counterparty agree at or prior to the time of effecting the transaction that it shall be reported to a trading venue that has equivalent or greater post-trade transparency than the Exchange’s regime for that security.

In order for member firms to determine which security is covered by which regime, a full mapping of segment and / or sector codes will be provided as part of the detailed rules consultation and updated again prior to MiFID implementation.

Trade Reporting Responsibility

There were polarised views on whether the Exchange should fully align its trade reporting responsibility rules with MiFID. Feedback from most retail brokers and market makers was that we should not remove the current obligation for market makers to be the reporting party when dealing with broker dealers. There was widespread concern that the proposal to move to a seller only reports regime where two member firms trade, even with delegation, would lead to confusion over reporting and increase their burden of compliance.

There were also concerns over the proposal that a delegated trade did not also include passing on the responsibility for reporting under the rules.

As a result, the Exchange will draft its detailed rules for consultation on the basis that the rules will be MiFID aligned but with some of the existing features retained. The table below summarises the approach, with arrows indicating which party reports:

Buyer → Seller ↓	Non Member	Broker Dealer	Market Maker
Non Member	N/A	↑	↑
Broker Dealer	←	←	↑
Market Maker	←	←	←

A market maker in one or more securities of a particular class of security shall be regarded as a market maker in all securities within that class for the purposes of the reporting rules. Also the ability to delegate the reporting of a trade will remain but with that delegation will pass full responsibility for reporting under the Rules.

Post Trade Transparency

There was general agreement that the Exchange should adopt a single block trade regime for all securities based on average daily turnover (ADT), and not just for securities that are admitted to trading on an EU Regulated Market. Indeed most firms recommended that the block trade regime be available to all member firms and not just restricted to market makers.

There was some feedback that suggested the Exchange should automatically delay publication of a trade that is large enough to qualify, however the general consensus from respondents was that this decision should be left to the member firm when entering the trade report. Hence a firm would select the relevant trade type indicator to dictate whether the trade is published immediately or is subject to delay. Firms will be required to submit the trade report to the Exchange immediately and certainly no later than 3 minutes after the time of the trade, regardless of whether delay is required or not.

The majority of firms who gave feedback agreed that the WPA and protection rules were incompatible with MiFID and that for the sake of simplicity only the block trade regime should exist.

As a result, the Exchange will draft its detailed rules for consultation on the basis of a single block trade regime available to any member firm where the size of the trade is large enough. Member firms will need to specifically request that a trade’s publication be delayed, by using the appropriate trade type indicator and TradElect will then apply the appropriate publication delay to the trade.

For securities that are admitted to trading on an EU Regulated Market, the ADT will be set by the relevant Competent Authority (ie: FSA). Other securities will have an ADT threshold set by the Exchange.

Where a member firm is not the reporting party but wishes to utilise a publication delay, they should request delegation for reporting from their counterparty.

Transaction Reporting

The proposal to abolish the requirement to transaction report to the Exchange received very positive feedback. However, the draft revisions to stamp duty legislation currently being debated in Parliament would still require reporting of some stock loans.

The Exchange understands that for regulated market securities, reporting will not be required if one of the firms involved in the loan is authorised under the laws of an EEA state. However, stock loans in non-regulated market securities such as AIM will still require reports.

The Exchange is reviewing whether the existing approach of flagging stock loan transactions in the settlement system would be appropriate and / or whether some form of trade report (eg at end of day) for stock loans should be introduced.

Gilts and Fixed Interest Rules

The Exchange continues to consult with the GEMMs and Gilt IDBs in relation to trade reporting responsibilities and the removal of transaction reporting.

Best Execution and Order Exposure

Whilst there was feedback from some firms requesting the Exchange maintain its order exposure rules, the vast majority of firms agreed that they were incompatible with MiFID and that best execution rules would in any case prevent firms from doing business outside of the best prices without good reason.

Whilst not replicating the existing order exposure rules, the negotiated trade waiver available under MiFID will ensure that an on Exchange trade that is not subject to pre-trade transparency will be representative of the current market price.

As a result, the Exchange will draft its detailed rules for consultation without order exposure rules.

Market Maker Rules

The Exchange has held widespread consultation with the market on market maker rules and considering how they will fit in a post MiFID environment. The broad consensus was that the retention of these rules will enhance the quality of pre-trade publication. As a result the Exchange will draft its detailed rules for consultation on the following basis:

• Retention of market maker to market maker challenge rules
• Retention of rules governing backs and choices
• Retention of rules governing market makers not prejudicing the business of a member firm if it is not able to complete the business in full (where such business was to be executed on Exchange)
• Retention of the dealer in front rule

Roll Over Trades

Roll over trades formed part of the consultation in relation to fragmentation issues. Following discussion and feedback from the market and the FSA, the Exchange believes there is little value in retaining a specific roll over rule in light of the potential fragmentation that MiFID will introduce. The Exchange has provided significant guidance on the roll over rule in the last few years and remains of the view that significant roll over trading or sale and buyback transactions, particularly in less liquid securities, could give a false or misleading impression to the market and the Exchange may consider this to be in breach of its general conduct rules 3300.

As a result, the Exchange will draft its detailed rules for consultation on the basis that there is no specific roll over rule but that some of the existing guidance to this rule may be included with the general conduct rules.