Systematic internalisers (SIs) are investment firms which, on an organised, frequent, systematic and substantial basis, deal on own account by executing client orders outside a regulated market, MTF or OTF without operating a multilateral system.

 

New

 

 

16 July 2020

 

ESMA MiFIR report on systematic internalisers in non-equity instruments, ESMA70-156-2756

 

ESMA MiFID II/MiFIR Review Report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares, ESMA70-156-2682

 

13 July 2020

 

Notice to Stakeholders, Withdrawal of the United Kingdom and EU rules in the field of markets in financial instruments, REV1 - Replaces the notice dated 8 February 2018

 

8 July 2020

 

ESMA updates its Q&As on MiFID II and MiFIR transparency, the new Q&A document provides technical clarifications for the performance of the mandatory systematic internaliser (SI) test.

The Q&A specifies how the number of transactions and the nominal amount traded of a derivative shall be allocated when a derivative contract changes over the observation period from one sub-class to another.

 

 

The definition of systematic internaliser is laid down in Article 4(1)(20) of MiFID II and specified in Commission Delegated Regulation (EU) No 2017/565 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.

 

The systematic internaliser (SI) regime was introduced by MiFID I in 2007. Under MiFID I, systematic internaliser meant 'an investment firm which, on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF'.

 

 

“Execution of client orders” as an constituent element of the systematic internaliser’s definition

 

 

The reference to 'executing client orders' is integral to the definition of a systematic internaliser under both regimes MiFID I and MiFID II.

 

An investment firm will only constitute a systematic internaliser where it is proposing to execute a client order.

 

It is argued that if the investment firm is not proposing to execute client orders, the obligations under the systematic internaliser framework in Article 18 MiFIR (obligation for systematic internalisers to make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives) do not apply even where the thresholds are met (ISDA MiFID CP Submission, p. 6).

 

The circumstances when an investment firm should be considered as “executing client orders” when dealing on own account outside of trading venues have been explained by ESMA in more detail in the Questions and Answers on MiFID II and MiFIR transparency topics (Answer to the Question 7 updated on 3 October 2017, ESMA70-872942901-35).

 

For the purposes of the SIs’ determination, ESMA considers that in all circumstances where an investment firm is dealing with a counterparty that is not a financial institution authorised or regulated under Union law or under the national law of a Member State (‘financial institution’), the investment firm is deemed to be executing a client order and the transaction should count towards the calculations (both the numerator and the denominator).

 

Where the investment firm is dealing with a financial institution, ESMA considers that one party to the transaction will always act in a client capacity.

 

Systematic internaliser can stream prices to clients

Therefore, in order to determine when an investment firm is “executing client orders” when dealing on own account outside of trading venues, investment firms need to assess which of the two parties to the transactions acts in the capacity of executing client orders.

 

Investment firms may determine this either on a transaction by transaction basis or by type of transactions or type of counterparties.

 

Different indicators could be used for determining which party executed a client order: e.g. whether an investment firm has classified the counterparty as a professional client, who initiated the trade or who received the instruction to deal and the extent to which the counterparty relied on the other party to conclude the transaction.

 

 

Delineation between systematic internalisers and trading venues

 

 

Formal definition (which in itself is not changed by the MiFID II significantly) notwithstanding, one may ask, what is the key feature differentiating this legal vehicle from other commonly known types of market places.

 

The said distinction appears to lay in the fact a systematic internaliser is a counterparty and not a trading venue. This means, while trading venues are facilities in which multiple third-party buying and selling interests interact in the system, a systematic internaliser operates a bilateral system and is not allowed to bring together third party buying and selling interests in functionally the same way as trading venue.

 

If a systematic internaliser does this, it is operating a multilateral system and needs authorisation to operate an MTF or OTF.

 

Making this more clear, for instance, a so-called single-dealer platform, where trading always takes place against a single investment firm should be considered a systematic internaliser, were it to comply with the requirements.

 

However, a so-called multi-dealer platform, with multiple dealers interacting for the same financial instrument, should not be considered a systematic internaliser.

 

This has been underlined in the Recital 19 of the said Commission Delegated Regulation (EU) 2017/565 of 25 April 2016:

 

"Pursuant to Directive 2014/65/EU, a systematic internaliser should not be allowed to bring together third party buying and selling interests in functionally the same way as a trading venue. A systematic internaliser should not consist of an internal matching system which executes client orders on a multilateral basis, an activity which requires authorisation as a multilateral trading facility (MTF). An internal matching system in this context is a system for matching client orders which results in the investment firm undertaking matched principal transactions on a regular and not occasional basis."

 

On 3 April 2017 ESMA has clarified in closer detail how to interpret the reference to the “occasional basis” used in the said Recital 19 of the Commission Delegated Regulation (EU) 2017/565.

 

ESMA is of the view that a SI activity is characterised by risk-facing transactions that impact the Profit and Loss account of the firm.

 

Where an SI would receive, and execute, two potentially matching buying and selling interests from clients as one matched principal trade or where it would try to find the buyer for a sell order (or the other way around) and execute the first leg contingent on the second leg, those transactions would not qualify as risk facing transactions.

 

As such, they could only be executed by an SI on an occasional basis, as provided for by Recital (19) of the Commission Delegated Regulation (EU) 2017/565.

 

ESMA is of the view that an SI would not be undertaking matched principal trading on an occasional and non-regular basis if it meets any of the following criteria:

 

a) the investment firm operates one or more systems or arrangements, be they automated or not, intended to match opposite client orders. The investment firm may accidentally receive two opposite matching buying and selling interests and match them but it should not have systems in place aimed at increasing opportunities for client order matching;


b) when executing client orders, non-risk facing activities account for a recurrent or significant source of revenue for the investment firm’s trading activity;


c) the investment firm markets, or otherwise promotes, its matched principal trading activities.

 

The problem of blurred delineation between trading venues and systematic internalisers has become the subject of the ESMA's letter of 1 February 2017 to the European Commission on MiFID II systematic internalisers operating broker crossing networks (ESMA70-872942901-19), where ESMA has expressed its concern over the potential establishment of networks of systematic internalisers by investment firms to circumvent certain MIFID II obligations; in particular, the requirements for investment firms operating internal matching systems and executing client orders on a multilateral basis to be authorised as trading venues, and the trading obligation for shares.

 

The European Commission reacted in June 2017 and issued the draft Commission Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the specification of the definition of systematic internalisers for the purposes of that Directive.

 

In the said document the EU executive arm argues that the technological and market developments make it necessary to specify that a systematic internaliser is not allowed to engage, on a regular basis, in the internal or external matching of trades via matched principal trading or other types of de facto riskless back-to-back transactions in a given financial instrument outside a trading venue.


Therefore, the new Article 16a has been inserted into the Delegated Regulation (EU) 2017/565 with the following wording:

 

“Article 16a
Participation in matching arrangements
An investment firm shall not be considered to be dealing on own account for the purposes of Article 4(1)(20) of Directive 2014/65/EU where that investment firm participates in matching arrangements entered into with entities outside its own group with the objective or consequence of carrying out de facto riskless back-to-back transactions in a financial instrument outside a trading venue” (Commission Delegated Regulation (EU) 2017/2294 of 28 August 2017 amending Delegated Regulation (EU) 2017/565 as regards the specification of the definition of systematic internalisers for the purposes of Directive 2014/65/EU).

 

Another aspect of the necessary distinction between systematic internalisers, multilateral systems and Approved Publication Arrangements (APAs) has been accentuated by ESMA in the Questions and Answers on MiFID II and MiFIR market structures topics of 7 July 2017 (ESMA70-872942901-38).

 

This time ESMA referred to a situation where APAs proposed setting up arrangements which, on top of their APA services, provide a suite of quote streaming and order execution services to SIs and their clients (in this set-up clients could not interact with more than one SI via a single message but could send multiple messages to multiple SIs participating in the service provided).

 

The context was of Articles 14(1) and 18(1) of MIFIR, which require SIs to make public firm quotes, which may be published through an APA.

 

In the ESMA opinion, a system that provides quote streaming and order execution services for multiple SIs is a multilateral system and is required to seek authorisation as a regulated market, MTF or OTF in accordance with Article 1(7) of MiFID II.

 

Continuing the thread of comparisons between systematic internalisers and trading venues it is useful to refer also to post-trade transparency issues.

 

Considering systematic internalisers are competing with trading venues over customers’ order flow and to provide for a level playing field, in the Answer to Question 8 (updated on 3 October 2017, Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35) ESMA underlined that:

 

1. trading venues and systematic internalisers using similar technology and systems should process transactions for post-trade publication at the same speed;

 

2. real time post-trade transparency requirements, as expressed in Articles 6 and 10 of MiFIR and further specified in:


- Article 14 of RTS 1 (Commission Delegated Regulation (EU) 2017/587 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and on transaction execution obligations in respect of certain shares on a trading venue or by a systematic internaliser) and


- Article 7 of RTS 2 (Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives);

 

apply equally to trading venues and investment firms (systematic internalisers including).

 

Consequently, ESMA expects that trading venues and investment firms, in particular systematic internalisers, that use expedient systems publish transactions as close to real time as technically possible.

 

 

SI as a risk-taking market actor

 

 

The element of risk-taking in the systematic internalisers' activities has been analysed by ESMA in the said Questions and Answers on MiFID II and MiFIR market structures topics (ESMA70-872942901-38) as updated on 5 April 2017.

 

It is stressed that the aforementioned Recital 19 of the Commission Delegated Regulation (EU) 2017/565 is not limited to internal matching of client orders through matched principal trading but more generally prevents SIs from operating any system that would “bring together third party buying and selling interests in functionally the same way as a trading venue”.

 

According to ESMA, the prohibition for an SI to operate an internal matching system for matching client orders is just one example, as opposed to the unique circumstance, under which an SI would actually be operating functionally in the same way as a trading venue and would be required to seek authorisation as such.

 

Based on the SI definition provided in Article 4(1)(20) of MiFID II, ESMA understands that the trading activity of a SI is characterised by risk-facing transactions that impact the Profit and Loss account of the firm.

 

By undertaking such risk-facing transactions, SIs are a valuable source of liquidity to market participants.

 

In that regard, ESMA notes that the MiFIR pre-trade transparency provisions for SIs seek to avoid submitting SI to undue risks based on the assumption and understanding that SIs are indeed facing risks when trading.

 

In contrast to the above, ESMA is of the view that arrangements operated by an SI would be functionally similar to a trading venue where they meet the following criteria:

 

a) The arrangements would extend beyond a bilateral interaction between the SI and a client, with a view to ensuring that the SI de facto does not undertake risk-facing transactions. This would be the case, for instance, where an SI would have agreements with other liquidity providers so that the SI would do a riskless back-to back transaction with one of those liquidity providers whenever a transaction is executed with a client, or where it would only execute one transaction contingent on another one. A similar outcome would be reached from the reverse situation where one or more liquidity providers would be streaming quotes to an SI. The quotes would then be forwarded by the SI to its clients to be executed against, resulting again in no risk back-to-back transactions which could involve multiple parties.

 

The concept of de facto riskless back-to-back transactions is not confined to pairs of transactions in the same financial instrument. Other arrangements, for example where one leg is a securities transaction and the other is a derivative which references that security, could also be deemed as having the objective or consequence of carrying out de facto riskless back-to-back transactions.


By crossing client trading interests with other liquidity providers’ quotes, via matched principal trading or another type of riskless back-to-back transaction, so that it is de facto not trading on risk, the SI would actually organise an interaction between its client orders on the one hand and the SI or other liquidity providers’ quotes on the other hand. The SI would be bringing together multiple third party buying and selling trading interests in a way functionally similar to the operator of a trading venue.


b) The arrangements in place are used on a regular basis and qualify as a system or facility, as opposed to ad-hoc transactions. The existence of a system would be easily identified where, for instance, the arrangement in place would be underpinned by technological developments to increase speed and efficiency and legal agreements would be in place between the SI and liquidity providers. The operation of a system could also include circumstances where there is an understanding with third parties that trade by trade hedging will be available on a regular basis. ESMA recalls that MiFID II/MiFIR is technology neutral and applies to voice systems as well as to electronic and hybrid systems;


c) The transactions arising from bringing together multiple third party buying and selling interests are executed OTC, outside the rules of a trading venue.

 

ESMA highlights that the above does not prevent SIs from hedging the positions arising from the execution of client orders as long as it does not lead to the SI de facto executing non risk-facing transactions and bringing together multiple third party buying and selling interests.

 

ESMA is of the view that an SI would not be bringing together multiple third party buying and selling interests as foreseen in Recital 19 where hedging transactions would be executed on a trading venue.

 

 

Systematic internaliser's legal regime - key points

 

 

 

Asset classes within the the scope of the SI regime

 

MiFID II extends the systematic internaliser regime so that from applying solely to shares, as is the case under MiFID I, it will apply to a much broader range of asset classes:

 

- equity-like instruments (depositary receipts, ETFs, certificates and other similar financial instruments), and

 

- non-equity instruments (derivatives, bonds, structured finance products and emission allowances).

 

The fact that may potentially be in the centre of business analysis is that MiFID II changes current systematic internaliser regime in two significant ways:

 

1) the asset classes within the scope of the regime (see box); and

 

2) the pre-trade transparency requirements.

 

Systematic internalisers may decide on the basis of their commercial policy and in an objective, non-discriminatory way the clients to whom they give access to their quotes, distinguishing between categories of clients.

 

Systematic internalisers are not obliged to publish firm quotes, execute clients' orders and give access to their quotes in relation to equity transactions above standard market size and non-equity transactions above the size specific to the instrument.

 

 

Quantitative criteria

 

 

 

"Investment firms will need to determine whether they are acting as SIs in a wide range of equity, fixed income and derivative financial instruments. This will be a particular issue for the fixed income and OTC derivatives markets, which currently operate as dealer markets with firms trading on a bilateral basis as principals."

 

MiFID II: Markets, Freshfields Bruckhaus Deringer

 

 

MiFIR recitals stress, in order to ensure an objective and effective application of the definition of systematic internaliser to investment firms, there should be a pre-determined threshold for systematic internalisation containing an exact specification of what is meant by frequent, systematic and substantial basis.

 

As observed in MiFID II: Markets, Freshfields Bruckhaus Deringer, following implementation of MiFID I, a smaller number of firms became SIs than the European authorities had expected.

 

The qualitative nature of the criteria that defined an SI made the assessment highly subjective and many firms concluded that they did not meet the criteria.

 

Mindful of the above circumstances, MiFIR introduces quantitative criteria to supplement the qualitative ones to make the definition more objective. For determining whether an investment firm is a systematic internaliser, financial authorities are granted powers to require information from trading venues; APAs, and CTPs (Consolidated Tape Providers).

 

Recital 18 of the said Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 stipulates pre-set limits "should be set at an appropriate level to ensure that OTC trading of such a size that it had a material effect on price formation is within scope while at the same time excluding OTC trading of such a small size that it would be disproportionate to require the obligation to comply with the requirements applicable to systematic internalisers."

 

When it comes to concrete criteria, the frequent and systematic basis is measured by the number of OTC trades in the financial instrument carried out by the investment firm on own account by executing client orders.

 

In turn, the substantial basis is measured either by the size of the OTC trading carried out by the investment firm in relation to the total trading of the investment firm in a specific financial instrument or by the size of the OTC trading carried out by the investment firm in relation to the total trading in the European Union in a specific financial instrument.

 

Both pre-set limits, first for the frequent and systematic basis and the second for substantial basis, should be crossed in order to be defined as a systematic internaliser.

 

The preliminary issue may arise with respect to the calculations' methodology, in particular, whether the calculations should be carried out on the group level or an individual entity level. Another ambiguous point were branches.

 

On 31 January 2017 ESMA, using the Questions and Answers instrument (Q&As), has presented the stance that the definition of systematic internaliser under MiFID II refers to "investment firms" established in the EU and, therefore, the calculations should be carried out at legal entity level and not at the group level.

 

Moreover, for EU investment firms operating branches in the Union, the activity of those branches would need to be consolidated for the purpose of the systematic internaliser calculations.

 

To check frequent, systematic and substantial criteria for particular asset classes see the table and boxes below.

 

 

 

Systematic internaliser thresholds for non-equity financial instruments

 

The conditions set out in the Table below are to be assessed on a quarterly basis on the basis of data from the past 6 months.

 

The assessment period shall start on the first working day of the months of January, April, July and October.

 

Newly issued instruments shall only be considered in the assessment when historical data covers a period of at least six weeks in the case of bonds, structured finance products and derivatives (three months in the case of shares, depositary receipts, ETFs, certificates and other similar financial instruments).

 

Legal base:

 

- Articles 13 - 17 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

- Questions and Answers on MiFID II and MiFIR transparency topics, 4 November 2016, ESMA/2016/1424

 

 

Criterion Description

 

Bonds

belonging to a class of bonds issued by the same entity

or

by any entity within the same group

(Article 13)

 

SFP

belonging to a class of structured finance products issued by the same entity

or

by any entity within the same group

(Article 14)

Derivatives

(Article 15)

Emission allowances

(Article 16)

Frequent and systematic

basis threshold

(liquid instruments)

- Number of OTC transactions executed during the past 6 months by the investment firm on own account when executing client orders / total number of transactions in the same financial instrument in the EU on any trading venue or OTC

- Minimum trading frequency during the past 6 months for transactions on own account when executing client orders (on average)

2.5 %

and

at least once a week

4 %

and

at least once a week

2.5 %

in the relevant class

and

at least once a week

 

4 %

of the relevant type of emission allowances

and

at least once a week

 

Frequent and systematic
basis threshold

(illiquid instruments)

Minimum trading frequency during the past 6 months for transactions on own account when executing client orders (on average)

at least once a week

at least once a week at least once a week

at least once a week

Substantial basis threshold

Criterion 1

 

Number of OTC trading by investment firm in a financial instrument on own account when executing client orders during the past 6 months / total volume in the same financial instrument executed by the investment firm on own account or on behalf of clients and executed on a trading venue or OTC (in nominal amount)

 

25%

30%

25%

of the relevant class

30%

of the relevant type

Substantial basis threshold

Criterion 2

 

Number of OTC trading by investment firm in a financial instrument on own account when executing client orders during the past 6 months / total volume in the same financial instrument in the European Union, on a trading venue or OTC (in nominal amount)

 

1 %

2.25 %

1 %

of the relevant class

2.25 %

of the relevant type

 

 

 

Specific rules for calculating systematic internaliser thresholds

 

 

numbering blue Transactions that are not contributing to the price formation process and/or are not reportable

 

Transactions that are not contributing to the price formation process and/or are not reportable should not be part of the calculations for the purposes of the definition of the systematic internaliser regime, both for the numerator and the denominator of the quantitative thresholds.

 

The above stance is reasoned by ESMA by referring to provisions, which exempt investment firms from reporting certain types of transactions for the purposes of post-trade transparency i.e.:

 

- Article 13 of Commission Delegated Regulation (EU) 2017/587 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and on transaction execution obligations in respect of certain shares on a trading venue or by a systematic internaliser (RTS 1),

 

and

 

- Article 12 of Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives (RTS 2).

 

The aforementioned exempted transactions encompass:

 

(a) transactions excluded from MiFID II reporting in Article 2(5) of Commission Delegated Regulation (EU) of 28 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities;


(b) transactions executed by a management company as defined in Article 2(1)(b) of Directive 2009/65/EC or an alternative investment fund manager as defined in Article 4(1)(b) of Directive 2011/61/EU which transfer the beneficial ownership of financial instruments from one collective investment undertaking to another and where no investment firm is a party to the transaction;


(c) 'give-up transaction' or 'give-in transaction' which is a transaction where an investment firm passes a client trade to, or receives a client trade from, another investment firm for the purpose of post-trade processing;


(d) transfers of financial instruments such as collateral in bilateral transactions or in the context of a central counterparty (CCP) margin or collateral requirements or as part of the default management process of a CCP.


In the ESMA's view, the above types of transactions are technical and cannot be characterised as transactions where an investment firm is executing a client order by dealing on own account.

 

ESMA observes, however, that the lack of a reporting obligation for those types of transactions would be a considerable challenge for competent authorities to supervise and for investment firms to comply with the systematic internaliser regime.

 

numbering blue Primary market transactions, creation and redemption of ETFs

 

Primary market transactions in securities as well as creation and redemption of ETFs' units should not be included in the calculations when determining if the investment firm is a systematic internaliser.

 

numbering blue Off order book trades that are reported to a regulated market, MTF or OTF under its rules

 

Only off order book transactions that benefit from a waiver from pre-trade transparency are considered as executed on a trading venue, and do not count for the numerator when determining whether an investment firm is a systematic internaliser.

 

numbering blue Calculations granularity

 

Recital 19 of MiFIR reads that the requirements for systematic internalisers “should apply to an investment firm only in relation to each single financial instrument, for example on ISIN-code level, in which it is a systematic internaliser”.

 

The SI's thresholds calculations as regards derivatives should be performed at the most granular class level as identified in the said Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives (RTS 2).

 

Where an investment firm meets the thresholds for such a class, it should be considered as a systematic internaliser for all derivatives within that most granular class.


With respect to equity derivatives, the sub-classes as defined in Table 6.2 of Annex III of the RTS 2 for LIS and SSTI should be used.

 

As regards emission allowances according to ESMA the systematic internaliser threshold should be calculated at the level of the emission allowance type.

 

Both the numerator and the denominator must refer to the same sub-asset class level as identified in RTS 2.

 

numbering blue Calculations' level for structured finance products (SFPs)

 

For SFPs, systematic internaliser calculations should be performed at ISIN level and where, for a specific ISIN, an investment firm is above the thresholds prescribed, it should be considered a systematic internaliser for all SFPs issued by the same entity or by any entity within the same group.

 

Transactions with a third country dimension

 

 

In the Answer to the Question 2 (updated on 15 November 2017, ESMA Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35) ESMA explained in the tabular form how transactions with a third country dimension should be treated for the systematic internaliser calculations.

 

ESMA referred to a multitude of factual circumstances involving cross-border elements, in particular, according to the ESMA, transactions undertaken by non-EU subsidiaries of EU investment firms do not count for the systematic internaliser determination.

 

In turn, if one of the parties of the cross-border OTC-transaction is an investment firm authorised in the EU, the transaction is to be included for the systematic internaliser determination.

 

The table below provides more details on the treatment of transactions with a third country dimension when it comes to the calculation of the systematic internalisers’ thresholds.

 

 

 

Case Investment Firm (IF)

Counterparty/

Client

Execution place Mifir transparency

Count for SI

determination

(numerator)

Count for total trading within the EU

(denominator of SI calculations)

1 EU IF EU/non-EU Comparable third country TV No No No
2 EU IF non-EU OTC Yes Yes Yes
3 non-EU Branch of the EU IF EU/non-EU Comparable third country TV No No No
4 non-EU Branch of the EU IF non-EU OTC Yes Yes Yes
5 non-EU Subsidiary of the EU IF EU/non-EU non-EU TV/OTC No No No
6 non-EU Subsidiary of the EU IF EU/non-EU EU TV Yes No Yes
7 non-EU firm EU/non-EU EU TV Yes No Yes
8 EU branch of the non-EU firm EU/non-EU EU TV Yes No Yes
9 EU branch of the non-EU firm EU/non-EU Comparable third country TV No No No
10 EU branch of the non-EU firm non-EU OTC Yes Yes Yes
11 EU subsidiary of the non-EU firm EU/non-EU EU TV Yes No Yes
12 EU subsidiary of the non-EU firm EU/non-EU Comparable third country TV No No No
13 EU subsidiary of the non-EU firm non-EU OTC Yes Yes Yes

 

 

 

 

ESMA provided also a detailed explanation of the table‘s positions - see box below.

 

 

 

- Case 1 – EU investment firm (IF) trading on a comparable third country trading venue (TV): The transaction is treated as executed “on venue”. Therefore, the MiFIR transparency requirements do not apply (to avoid double reporting) and the transaction is not counted for the SI-determination. For transactions concluded on non-compliant third country TVs, case 2 applies.

 

- Case 2 – EU IF trading with a non-EU counterparty/client OTC: An OTC- transaction, i.e. either a transaction concluded on a non-comparable third country TV or a pure OTC-transaction, that involves an EU IF is subject to the transparency requirements and has to be published through an APA. The transaction counts for the SI-determination (both for the numerator and the denominator).

 

- Case 3 – non-EU branch of an EU IF trading on a comparable third country TV: The trade is treated as executed “on venue”. Therefore, the same treatment as under case 1 applies, i.e. MiFIR transparency requirements do not apply and the trade is not counted for the SI-determination. For transactions concluded on non-compliant third country TVs, case 4 applies.

 

- Case 4 - non-EU branch of an EU IF trading with a non-EU counterparty/client OTC: Non-EU branches of EU IF are treated like their EU parent company. Therefore, the same treatment as under case 2 applies. An OTC-transaction, i.e. either a transaction concluded on a non-comparable third country TV or a pure OTC- transaction, is subject to the transparency requirements and has to be published through an APA. The transaction counts for the SI-determination of the parent company (both the numerator and the denominator).

 

- Case 5 – non-EU subsidiary of an EU IF trading on a non-EU TV or OTC: Subsidiaries are independent legal entities and subject to the regulatory regime of the third country in which they are established. Therefore, the MiFIR transparency requirements do not apply. The transaction does not count for the SI determination.

 

- Case 6 – non-EU subsidiary of an EU IF trading on an EU TV: The transparency requirements apply at the level of the trading venue. Therefore, the MiFIR transparency requirements will apply and the transaction will be included in the denominator (total trading in the EU) for determining the SI activity. Since subsidiaries are independent legal entities they are subject to the regulatory regime of the third country in which the subsidiary is established and do not have to perform the SI test. The transaction does hence not count for the numerator for the SI-determination.

 

- Case 7 – non-EU firm trading on an EU TV: The transparency requirements apply at the level of the trading venue. Therefore, the transparency requirements will apply and the transaction will be included in the denominator (total trading in the EU) for determining the SI activity. However, it does not count for the numerator.

 

- Case 8 – EU branch of a non-EU firm trading on an EU TV: The transparency requirements apply at the level of the trading venue. Therefore, the transparency requirements will apply. Transactions on trading venues do not count for the numerator for the SI-determination, but are counted in the denominator (total trading within the EU).

 

- Case 9 – EU branch of a non-EU firm trading on a comparable third country TV: The trade is treated as executed “on venue”. Therefore, the same treatment as under case 1 applies. MiFIR transparency requirements do not apply (to avoid double reporting) and the transaction is not counted for the SI-determination (since they are executed “on venue”). For transactions concluded on a non-comparable third country TVs, case 10 applies.

 

- Case 10 – EU branch of a non-EU firm trading with a non-EU counterpart/client OTC: Where a non EU-firm is required to establish a branch in accordance with Article 39 of MiFID II, this branch has to apply, in accordance with Article 41(2) of MiFID II, with the requirements of Articles 16-20, 23-25 and 27, Article 28(1) and Articles 30-32 of MiFID II and Articles 3 to 26 of MiFIR and the measures adopted pursuant thereto. Therefore, EU branches of non-EU firms are subject to the transparency requirements and have to report their trades to APAs. Furthermore, the transactions count for the SI determination (numerator and denominator).

 

- Case 11 – EU subsidiary of a non-EU firm trading on an EU TV: The transparency requirements apply at the level of the trading venue. Therefore, the transparency requirements will apply. Transactions on trading venues do not count for the numerator for the SI-determination, but are counted in the denominator (total trading within the EU).

 

- Case 12 – EU subsidiary of a non-EU firm trading on a comparable third country TV: The transaction is considered as executed “on venue” i. Therefore, the same treatment as under case 1 applies; MiFIR transparency requirements do not apply and the trade is not counted for the SI-determination. For transactions concluded on non-comparable third country TVs, case 13 applies.

 

- Case 13 – EU subsidiary of a non-EU firm trading with a non-EU counterparty/client OTC: Subsidiaries are independent legal entities and subject to the regulatory regime of the country where they are established. Therefore, EU- subsidiaries of non-EU firms are subject to the full MiFID II/MiFIR requirements. The transaction is subject to MiFIR transparency and counts for the SI-determination (both numerator and denominator).

 

 

 

 

Source of data, assessment periods and notification requirement

 

 

To carry out necessary calculations information about the total volume of trading or total number of transactions in the same financial instrument in the European Union are needed.

 

The access to such data was problematic and ESMA (the European financial regulator) initially expected such services will be developed in the MiFID II implementation phase.

 

However, in the Questions and Answers on MiFID II and MiFIR, Transparency topics of 4 November 2016 (ESMA/2016/1424) ESMA communicated, it intends to publish the necessary information within a month after the end of each assessment period as defined under Article 17 of the Commission Delegated Regulation 2017/565 of 25 April 2016 – i.e. by the first calendar day of months of February, May, August and November every year.

 

 

Article 15(1) MiFIR, second subparagraph

 

Member States shall require that firms that meet the definition of systematic internaliser notify their competent authority. Such notification shall be transmitted to ESMA. ESMA shall establish a list of all SIs in the Union.

 

Given that Article 15(1) MiFIR requires that firms that meet the definition of systematic internaliser notify their competent authority, ESMA stressed that after the first assessment, investment firms will have to perform the calculations and comply with the systematic internaliser regime (including notification to their National Competent Authorities) no later than two weeks after the publication by ESMA – i.e. by the fifteenth calendar day of the months of February, May, August and November every year.

 

Transitional rules

 

In the absence of transitional provisions in the aforementioned Commission Delegated Regulation (EU) 2017/565 of 25 April 2016, ESMA specified the necessary timelines in the said Q&As document of 4 November 2016.

 

ESMA promised to publish the necessary EU wide data for the first time by 1 August 2018 covering a period from 3 January 2018 to 30 June 2018 (in the letter of 19 June 2017 (ESMA70-156-158) ESMA confirmed the necessary IT infrastructure is on schedule to meet this deadline).

 

In that case investment firms would have to perform their first assessment and, where appropriate, comply with the systematic internaliser obligations (including notifying their National Competent Authority) by 1 September 2018.

 

Subsequently, on 12 July 2018 ESMA published details of its action plan (within its updated Q&As on MiFID II and MiFIR transparency topics) for systematic internaliser regime calculations ahead of their publication on 1 August 2018.

ESMA’s action plan focused on equity, equity-like instruments and bonds while postponing the publication for derivatives and other instruments to 1 February 2019.

ESMA was required to amend its original action plan as data completeness for the various asset classes had not reached adequate levels when ESMA conducted its completeness analyses. Given the complexity and size of the task, ESMA then decided to focus on improving completeness for a select number of asset classes while postponing the publication for others.

 

Originally, the ESMA’s schedule for the first-time publication of the necessary EU wide data was as follows:


- 1 August 2018 - covering a period from 3 January 2018 to 30 June 2018 for equity, equity-like and bond instruments (investment firms had to perform their first assessment and, where appropriate, comply with the SI obligations by 1 September 2018),


- 1 February 2019 - covering a period from 1 July 2018 to 31 December 2018 for ETCs, ETNs, SFPs, securitised derivatives, emission allowances and derivatives (with the deadline for the SIs to comply with the obligations from 1 March 2019).

 

ESMA planned to update publications on a quarterly basis in respect of a rolling six months assessment period and expected investment firms to self-assess and comply after a reduced two week period.

 

However, on 30 January 2019 ESMA updated its Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35 and decided that:

 

- the EU wide data for ETCs, ETNs, SFPs, securitised derivatives, emission allowances and derivatives will not be published until at the latest 2020,


- no assessment has to be performed by investment firms for ETCs, ETNs, SFPs, securitised derivatives, emission allowances and derivatives until at the latest 2020.

 

Moreover, on 20 July 2018 ESMA has provided access to the relevant templates.

 

On 1 August 2019 ESMA has published the total number of trades and total volume over the period January-June 2019 for the purpose of the SI calculations for 22,961 equity and equity-like instruments and for 333,459 bonds. The results have been published only for instruments for which trading venues submitted data for at least 95% of all trading days over the 6-month observation period. The data publications also incorporate OTC trading to the extent it has been reported to ESMA.

 

 

Data for the systematic internaliser calculations are available here.

 

 

schedule icon

Required content of the notification from systematic internalisers to their National Competent Authorities

 


In the Questions and Answers on MiFID II and MiFIR transparency topics (ESMA70-872942901-35) ESMA explained that the notification from systematic internalisers to their National Competent Authorities (NCA) should contain information that is at least provided at the level of the MiFIR identifier for the instruments and classes of instruments for which the investment firm is a systematic internaliser, as specified:

 

- in field 4 of table 2 of Annex III of RTS 1 (i.e. shares, depositary receipts, exchange traded funds, certificates and other equity-like financial instruments), and


- in field 3 of table 2 of Annex IV of RTS 2 (i.e. bonds, ETNs, ETCs, structured finance products, securitised derivatives, derivatives, and emission allowances).

 

This is without prejudice of the possibility for NCA to require the submission of more granular information if considered appropriate (Answer to the Question 6 updated on 31 May 2017).

 

As regards the MiFIR identifiers:

 

A. Field 4 of table 2 of Annex III of Commission Delegated Regulation (EU) 2017/587 (RTS 1) specifies the following details to be reported and format for reporting for equity instruments:

 

1. Details to be reported:

- Shares as referred to in Article 4(44)(a) of Directive 2014/65/EU,

- Depositary receipts as defined in Article 4(45) of Directive 2014/65/EU,
- ETF as defined in Article 4(46) of Directive 2014/65/EU,
- Certificates as defined in Article 2(1)(27) of Regulation (EU) No 600/2014,
- Other equity-like financial instrument is a transferable security which is an equity instrument similar to a share, ETF, depositary receipt or certificate but other than a share, ETF, depositary receipt or certificate;

 

2. Format for reporting:

- SHRS = shares,
- ETFS = ETFs,
- DPRS = depositary receipts,
- CRFT = certificates,
- OTHR = other equity-like financial instruments.

 

B. Field 3 of table 2 of Annex IV of Commission Delegated Regulation (EU) 2017/583 (RTS 2) specifies the following details to be reported and format for reporting for non-equity instruments:

 

1. Details to be reported:

- Securitised derivatives as defined in Table 4.1 in Section 4 of Annex III,
- Structured Finance Products (SFPs) as defined in Article 2(1)(28) of Regulation (EU) No 600/2014,
- Bonds (for all bonds except ETCs and ETNs) as defined in Article 4(1)(44)(b) of Directive 2014/65/EU,
- ETCs as defined in Article 4(1)(44)(b) of Directive 2014/65/EU and further specified in Table 2.4 of Section 2 of Annex III,
- ETNs as defined in Article 4(1)(44)(b) of Directive 2014/65/EU and further specified in Table 2.4 of Section 2 of Annex III,
- Emission allowances as defined in Table 12.1 of Section 12 of Annex III,
- Derivative as defined in Annex I, Section C (4) to (10) of Directive 2014/65/EU;

 

2. Format for reporting:

- ‘SDRV’ — Securitised derivatives,
- ‘SFPS’ — Structured Finance Products (SFPs),
- ‘BOND’ — Bonds,
- ‘ETCS’ — ETCs,
- ‘ETNS’ — ETNs,
- ‘EMAL’ — Emission Allowances,

- ‘DERV’ — Derivative.

 

See below the examples of the EU Member States national regulators’ requirements and forms for the systematic internaliser’s notification:

 

- UK FCA notification for systematic internalisers (and guide),

 

- Systematic internaliser notification pursuant to section 79 sentence 1 of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG), BaFinWpHG), BaFin,

 

- Spanish CNMV notification form of activity of systematic internalisation.

 

Notification’s validity

 

In the Answer to the Question 6 ESMA on 31 May 2017 (Questions and Answers on MiFID II and MiFIR transparency topics (ESMA70-872942901-35)) ESMA determined that the obligation of the investment firm to follow the obligations for systematic internalisers after crossing the relevant thresholds in a financial instrument will last for three months after crossing the relevant thresholds in a financial instrument at the relevant quarterly assessment.

 

The obligation period will be slightly shorter for the first assessment in 2018, which covers 1 September to 15 November 2018.

 

Notification of the systematic internaliser’s change of status

 

The above Answer to the Question 6 of 31 May 2017 also clarifies that investment firms are required to notify their NCA in case of a change in status, i.e. where an investment firm passed the thresholds for an instrument with a particular MiFIR identifier in the previous period, but did not meet the thresholds for any instrument with the same MiFIR identifier in the consecutive assessment period, it should notify its CA of its change of status.

 

Where there is no change in the systematic internaliser status from one assessment period to the next (i.e. where the investment firms is still above the threshold or decides to voluntarily opt-in as systematic internaliser for any instrument with the same MiFIR identifier), the firm does not have to notify its NCA thereof.

 

Illiquid instruments

 

The above timeline applies also to investment firms trading in illiquid instruments.

 

While it is possible for those firms to carry out part of the test based on data at their disposal, the complete determination of the SI activity necessitates an assessment of the investment firms OTC-trading activity in a particular instrument in relation to overall trading in the Union.

 

In order to ensure a consistent assessment and to ensure that all investment firms are treated in the same manner, for all instruments, irrespective of their liquidity status, the assessment should therefore be performed by 1 September 2018.

 

Newly issued instruments

 

Similarly, although Commission Delegated Regulation (EU) 2007/565 of 25 April 2016 allows shorter look-back periods for newly issued instruments compared to the six months described above, ESMA considers that it is important to ensure a level playing field between all instruments and, therefore, suggests to apply the schedule proposed above also to newly issued instruments - i.e. first publication by ESMA of the necessary EU-wide data by 1 August 2018 and earliest deadline to comply, where necessary, with the SI regime set on 1 September 2018.

 

 

OptionalityOpt-in to the systematic internaliser regime

 

 

Distinctive feature of the new MiFID II definition of the systematic internaliser is that it allows an investment firm to choose to opt-in under the systematic internaliser regime even when it doesn't meet all or any of the quantitative criteria, provided it complies in full with the applicable requirements.

 

Investment firms will be able to opt-in to the systematic internaliser regime for all financial instruments from 3 January 2018, for example, as a means to comply with the trading obligation for shares.

 

 

Systematic internalisers in non-TOTV instruments

 

 

On 14 November 2018 ESMA has explained whether the status of investment firms qualifying as a systematic internaliser in instruments that are not traded on a trading venue (non-TOTV instruments).

 

In an answer to the Question 11 in the Questions and Answers on MiFID II and MiFIR transparency topics (ESMA70-872942901-35) ESMA firstly observed that Article 4(1)(20) of MiFID II as further specified in Articles 12-17 of Commission Delegated Regulation (EU) 2017/565 does not limit the concept of systematic internalisers to instruments that are traded on a trading venue (TOTV) but includes all financial instruments, i.e. TOTV and non-TOTV instruments. Hence, an investment firm may qualify as a systematic internaliser in any financial instrument.

 

However, with respect to non-TOTV instruments, ESMA has acknowledged that it might be challenging for investment firms to access reliable and comprehensive sources of EU wide information preventing de facto the systematic internaliser test to be carried out (ESMA is only publishing information on TOTV instruments for determining whether an investment firm meets the thresholds to be considered as a systematic internaliser).

 

ESMA, moreover, said in this regard:

 

“There are circumstances where an investment firm may still be a systematic internaliser for non-TOTV instruments. This would notably be the case for investment firms that opt voluntarily into the systematic internaliser regime. In addition, it is possible that an investment firm by virtue of qualifying as a systematic internaliser in a TOTV instrument automatically becomes a systematic internaliser in non-TOTV instruments. For instance, according to Article 13 of Commission Delegated Regulation (EU) 2017/565 an investment firm meeting the thresholds for one bond automatically becomes a systematic internaliser in all bonds (i.e. TOTV and non- TOTV bonds) issued by the same entity for the same bond type.


The scope of the quoting obligations under Articles 14-18 of MiFIR is limited to TOTV instruments. In consequence, systematic internalisers in non-TOTV instruments are not subject to the quoting obligations under Articles 14-18 of MiFIR. They remain however required to notify their competent authority as prescribed under the second subparagraph of Article 15(1) and Article 18(4) of MiFIR.


It is possible that the TOTV status of a financial instrument changes over time, in particular a non-TOTV instrument may become TOTV at some point. ESMA expects systematic internalisers in non-TOTV instruments to monitor the TOTV status of those instruments and comply with the quoting obligations under Articles 14-18 of MiFIR as soon as an instrument becomes TOTV.”

 

 

Systematic internaliser and an OTF interrelations - connectivity forbidden

 

 

The operation of an OTF and systematic internalisation within the same legal entity is not allowed under MiFID II.

 

An OTF is also not allowed to connect with a systematic internaliser in a way which enables orders in an OTF and orders or quotes in a systematic internaliser to interact.

 

 

Tick-size regime exemption

 

 

Systematic internalisers are exempt from the MiFID II tick-size regime, which means they are allowed to trade shares, depositary receipts and exchange-traded funds in different price increments than public markets.

 

In particular, the SIs have flexibility to set tick sizes, the advantage that the exchanges and dark pools do not possess.

 

That means that, for example, while a stock exchange might quote a share at $10.00, an SI might be able to quote it at $9.99999 (Bloomberg, “MiFID II may triple dark trading in Europe as new venues soar”).

 

This is perceived by some as an unlevel playing field, although, others argue that the SIs’ remaining tick-sizes flexibility can strongly contribute to a deeper market and tighter spreads.

 

However, ESMA reserved on 3 October 2017 (Answer to Question 23 in Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38) that price improvements on quoted prices are only be justified when “they are meaningful and reflect the minimum tick size applicable to the same financial instrument traded on a trading venue”.

 

This is without prejudice to SIs’ ability to quote any price level when dealing in sizes above standard market size.

 

In the ESMA’s opinion “marginal price improvements on quoted prices would challenge the efficient valuation of equity instruments without bringing any real benefits to investors”.

 

Moreover, in the Consultation Paper, Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1) of 9 November 2017 (ESMA70-156-275) ESMA proposed to amend Article 10 of RTS 1 to clarify that, for equity instruments subject to the minimum tick size regime under Commission Delegated Regulation 2017/588 of 14 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards on the tick size regime for shares, depositary receipts and exchange-traded funds (RTS 11), SI quotes would only be considered to reflect the prevailing market conditions where those quotes reflect the price increments applicable to EU trading venues trading the same instruments.

 

Technically, it is proposed to replace Article 10 of the Commission Delegated Regulation (EU) 2017/587 (which determines whether prices quoted by systematic internalisers in accordance with the obligation to make public firm quotes reflect prevailing market conditions) by the following wording:

 

‘The prices published by a systematic internaliser shall reflect prevailing market conditions where they are close in prices to quotes of equivalent sizes for the same financial instrument on the most relevant market in terms of liquidity as determined in accordance with Article 4 for that financial instrument and where the price levels could be traded on a trading venue at the time of publication.’

 

It is noteworthy, the scope of the above ESMA’s amendments is restricted by the scope of the MiFID II tick-size regime, which relates to precisely delineated financial instrumenets i.e. shares, depositary receipts and exchange-traded funds.

 

 

Systematic internaliser as the option for the execution of the trading obligation for shares

 

 

According to MiFIR, trading obligation requires investment firms (with some exceptions) to undertake all trades in shares including trades dealt on own account, and also trades dealt when executing client orders, on a regulated market, MTF, systematic internaliser or equivalent third-country trading venue (note that MiFIR trading obligation for derivatives - as opposite to shares - does not include systematic internaliser as an approved type of marketplace).

 

The option for trades to be done on a systematic internaliser assumes that if the investment firm itself meets the relevant criteria specified in MiFIR to be deemed a systematic internaliser in that particular share, the trade may be dealt in that way; however, if it is not deemed a systematic internaliser in that particular share, the investment firm may still undertake the trade on another systematic internaliser once it is in conformity with its best execution obligations and the option is available thereto.

 

 

Obligation for systematic internalisers to make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives pursuant to MiFIR

 

 

 

"MiFID also introduced transparency provisions for investment firms trading the most liquid shares when acting as market-makers outside an RM or MTF. Investment firms acting in this capacity on a frequent, systematic and organised basis (something to be assessed on the qualitative basis) had to inform their national regulator that they were 'systematic internalisers' (SIs). In respect of shares deemed to have 'liquid market' in size up to 'standard market size' SIs have to publish quotes which are visible to the market as a whole. Business can only be done at prices away from these quotes where the transaction being conducted is larger than that customarily undertaken by a retail investor, and where the client they are dealing is a professional client. ...

 

MiFID II significantly revises this regime. For trading in shares, the determination of whether an investment firm is SI will be based on whether a firms trading crosses certain quantitative thresholds. This will increase the number of SIs (there are currently 9 in the UK). Price improvement will also be allowed for dealings with retail clients in justified circumstances. The regime is also being extended to exchange traded funds and other instruments that resemble shares, and bonds and derivatives. In respect of the latter the transparency requirement will apply to dealings in the liquid instruments below the Size Specific to the Instrument (SSTI), which will be set in a technical standard, and the obligation will be to quote in response to a request to a client, with the posted quote being available to other clients of the firm to the extent possible with good risk management when trading on risk in this manner. For bonds and derivatives there will also be quantitative criteria to identify SIs."

 

UK HM Treasure MiFID II Consultation Impact Assessment, p. 8

 

 

The main purpose of the systematic internaliser regime is said to ensure that internalisation of order flow by investment firms does not undermine the efficiency of the price formation process for shares admitted to trading on a regulated market (ESMA's Discussion Paper on MiFID II/MiFIR of 22 May 2014, ESMA/2014/548, p. 94).

 

Also the Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions ({C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p 73) underlines the purpose of the systematic internaliser legal framework is to "ensure that firms which deal on own account of a large magnitude by executing client orders are also subject to trade transparency requirements on a level playing field with trading venues (while at the same time taking into account the different market participants' characteristics). This is because such trade execution has a material impact on price formation."


SIs are subject to the obligation to make public firm quotes, subject to certain conditions, both in respect of equity instruments and non-equity instruments, however, while for equity instruments, the MiFIR provisions are further specified via a Commission Delegated Regulation, there are no equivalent Level 2 measures for non-equity instruments.

 

When it comes to the pre-trade transparency obligations imposed by MiFIR on systematic internalisers in respect of bonds, structured finance products, emission allowances and derivatives, the key issue are the thresholds, which are set by the secondary legislation in respect of each instrument.

 

Due to the complexity, the respective legal framework is described separately - see systematic internaliser’s pre-trade transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives.

 

 

Compliance costs

 

 

As a result of modified SI requirements under MiFID II a wider range of firms will need to put in place arrangements for making quotes publicly available and for managing the risks associated with providing liquidity.

 

Moreover, the increase in costs for liquidity provision might lead to some firms withdrawing from liquidity provision (Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015, CP15/43, p. 57).

 

The said costs come, however, in exchange for the benefits of greater transparency of the SI framework.

 

 

ESMA's register of systematic internalisers - migrating to the new regime

 

 

Under MiFID I, according to Article 21(4) of Commission Regulation 1287/2006 of 10 August 2006 (Level 2 legislation), each competent authority had to ensure the maintenance and publication of a list of all systematic internalisers, in respect of shares admitted to trading on a regulated market, which it had authorised as investment firms, and review the list at least annually.

 

According to Article 34(5) of the said Regulation ESMA had to publish on its website the consolidated list of every systematic internaliser.

 

The list published by ESMA represented the consolidation of national lists communicated by national competent authorities. The list was regularly updated.

 

Systematic internalisers were not popular form of business venture under MiFID I.

 

The ESMA’s register of systematic internalisers under MiFID I, as visited on 7 May 2016, evidenced the following actors: Danske Bank, FINECOBANK s.p.a., Goldman Sachs International, Nordea Bank Danmark A/S, Knight Capital Europe Limited, Citigroup Global Markets Limited, Citigroup Global Markets U.K. Equity Limited, SOCIETE GENERALE, UBS Ltd, UBS AG (London Branch), Credit Suisse Securities Europe Ltd.

 

As of 13 May 2017 the said list was literally the same, with the exception of Societe Generale, which was substituted by the Societe Generale Option Europe - SGOE on 1 June 2016.

 

The firms listed on the ESMA SI‘s register did not represent under the MiFID I a large proportion of equity trading within the European Union (Commission Staff Working Document Executive Summary of the Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 3).

 

Under MiFID II legal framework the legal base for setting up by ESMA of the register of systematic internalisers in the European Union are:

 

- Article 15(1) MiFIR (for shares, depository receipts, ETFs, certificates and other similar financial instruments), and


- Article 18(4) MiFIR (for bonds, structured finance products, emission allowances and derivatives).

 

The register contains in addition some information on the type of asset classes in which the investment firm is a systematic internaliser, but does not include information on an instrument-by-instrument basis.

 

This register contains also data related to European Economic Area (EEA) / European Free Trade Association (EFTA) States.

 

Given the significantly extended scope of asset classes within the reach of systematic internalisers under MiFID II, as well as the paradigm shift from qualitative to quantitative SI's criteria, the SI’s register under MiFID II is far more spacious than its MiFID I counterpart.

 

It is, moreover, noteworthy, the broker-crossing networks will be banned under MiFID II, forcing banks to find alternatives.

 

Some commentators observe (Bloomberg, “MiFIDʼs Controversial Dark-Trade Workaround Has Some Crying Foul”) that once MiFID kicks in, three-quarters of investment firms expect to trade via SIs, albeit “in a tentative fashion”.

 

They also underline the advantages of having SI status, in particular the fact that banks and high-speed traders will be able to do as many trades as they want via their SIs without those transactions counting toward MiFID II’s strict limits on dark-pool trading.

 

That provides an incentive to trade with SIs instead of conventional dark pools.

 

As the aforementioned ESMA's Q&As document of 4 November 2016 underlines, in accordance with Article 94 of MiFID II, the systematic internaliser definition and the transparency regime applicable to internalisers in shares admitted to trading on a regulated market under MiFID I has been repealed by MiFID II on 3 January 2018.

 

Firms, following the publication of the data of the first six months from 3 January 2018, will have to determine whether their activity is frequent, systematic and substantial on the basis of the available data published in accordance with the rules in the said Q&As.

 

ESMA‘s register of systematic internalisers under MiFID II, as visited on 9 January 2018, evidenced 37 entities registered as SIs.

 

Steven Maijoor, ESMA Chair, while referring to 109 systematic internalisers authorised and included in the ESMA register on 21 June 2018 assessed this demonstrates that MiFID II delivers on its ambition to impose a set of transparency and organisational rules on all kinds of trading, be it multilateral or bilateral, thereby contributing to levelling the playing field (ESMA70-156-427).

 

 

 

Systematic internalisers for shares, depositary receipts, ETFs, certificates and other similar financial instruments

 

An investment firm shall be considered to be a systematic internaliser in accordance with Article 4(1)(20) of Directive 2014/65/EU in respect of each share, depositary receipt, exchange traded fund (ETF), certificate and other similar financial instrument where it internalises according to the following criteria:

 

(a) on a frequent and systematic basis in the financial instrument for which there is a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months:

 

(i) the number of OTC transactions carried out by it on own account when executing client orders is equal to or larger than 0.4% of the total number of transactions in the relevant financial instrument executed in the Union on any trading venue or OTC during the same period;

 

(ii) the OTC transactions carried out by it on own account when executing client orders in the relevant financial instrument take place on average on a daily basis;

 

(b) on a frequent and systematic basis in the financial instrument for which there is not a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months the OTC transactions carried out by it on own account when executing client orders takes place on average on a daily basis;

 

(c) on a substantial basis in the financial instrument where the number of OTC trades carried out by it on own account when executing client orders is, during the past 6 months, equal to or larger than either:

 

(i) 15% of the total turnover in that financial instrument executed by the investment firm on own account or on behalf of clients and executed on a trading venue or OTC;

 

(ii) 0.4% of the total turnover in that financial instrument executed in the Union on a trading venue or OTC.

 

Article 12 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

 

 

 

Systematic internalisers for bonds

 

An investment firm shall be considered to be a systematic internaliser in accordance with Article 4(1)(20) of Directive 2014/65/EU in respect of all bonds belonging to a class of bonds issued by the same entity or by any entity within the same group where, in relation to any such bond, it internalises according to the following criteria:

 

(a) on a frequent and systematic basis in a bond for which there is a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months:

 

(i) the number of OTC transactions carried out by it on own account when executing client orders is equal to or larger than 2.5% of the total number of transactions in the relevant bond executed in the Union on any trading venue or OTC during the same period;

 

(ii) the OTC transactions carried out by it on own account when executing client orders in the relevant financial instrument take place on average once a week;

 

(b) on a frequent and systematic basis in a bond for which there is not a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months the OTC transactions carried out by it on own account when executing client orders takes place on average once a week;

 

(c) on a substantial basis in a bond where the number of OTC trades carried out by it on own account when executing client orders is, during the past 6 months, equal to or larger than either:

 

(i) 25% of the total nominal amount traded in that bond executed by the investment firm on own account or on behalf of clients and executed on a trading venue or OTC;

 

(ii) 1% of the total nominal amount traded in that bond executed in the Union on a trading venue or OTC.

 

Article 13 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

 

 

 

Systematic internalisers for structured finance products

 

An investment firm shall be considered to be a systematic internaliser in accordance with Article 4(1)(20) of Directive 2014/65/EU in respect of all structured finance products belonging to a class of structured finance products issued by the same entity or by any entity within the same group where, in relation to any such structured finance product, it internalises according to the following criteria:

 

(a) on a frequent and systematic basis in a structured finance product for which there is a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months:

 

(i) the number of OTC transactions carried out by it on own account when executing client orders is equal to or larger than 4% of the total number of transactions in the relevant structured finance product executed in the Union on any trading venue or OTC during the same period;

 

(ii) the OTC transactions carried out by it on own account when executing client orders in the relevant financial instrument take place on average once a week;

 

(b) on a frequent and systematic basis in a structured finance product for which there is not a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months the OTC transactions carried out by it on own account when executing client orders takes place on average once a week;

 

(c) on a substantial basis in a structured finance product where the number of OTC trades carried out by it on own account when executing client orders is, during the past 6 months, equal to or larger than either:

 

(i) 30% of the total nominal amount traded in that structured finance product executed by the investment firm on own account or on behalf of clients and executed on a trading venue or OTC;

 

(ii) 2.25% of the total nominal amount traded in that structured finance product executed in the Union on a trading venue or OTC.

 

Article 14 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

 

 

 

Systematic internalisers for derivatives

 

An investment firm shall be considered to be a systematic internaliser in accordance with Article 4(1)(20) of Directive 2014/65/EU in respect of all derivatives belonging to a class of derivatives where, in relation to any such derivative, it internalises according to the following criteria:

 

(a) on a frequent and systematic basis in a derivative for which there is a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months:

 

(i) the number of OTC transactions carried out by it on own account when executing client orders is equal to or larger than 2.5% of the total number of transactions in the relevant class of derivatives executed in the Union on any trading venue or OTC during the same period;

 

(ii) the OTC transactions carried out by it on own account when executing client orders in this class of derivatives take place on average once a week;

 

(b) on a frequent and systematic basis in a derivative for which there is not a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months the OTC transactions carried out by it on own account in the relevant class of derivatives when executing client orders takes place on average once a week;

 

(c) on a substantial basis in a derivative where the number of OTC trades carried out by it on own account when executing client orders is, during the past 6 months, equal to or larger than either:

 

(i) 25% of the total nominal amount traded in that class of derivatives executed by the investment firm on own account or on behalf of clients and executed on a trading venue or OTC; or

 

(ii) 1% of the total nominal amount traded in that class of derivatives executed in the Union on a trading venue or OTC.

 

Article 15 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

 

 

 

Systematic internalisers for emission allowances

 

An investment firm shall be considered to be a systematic internaliser in accordance with Article 4(1)(20) of Directive 2014/65/EU in respect of emission allowances where, in relation to any such instrument, it internalises according to the following criteria:

 

(a) on a frequent and systematic basis in an emission allowance for which there is a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months:

 

(i) the number of OTC transactions carried out by it on own account when executing client orders is equal to or larger than 4% of the total number of transactions in the relevant type of emission allowances executed in the Union on any trading venue or OTC during the same period;

 

(ii) the OTC transactions carried out by it on own account when executing client orders in this type of emission allowances take place on average once a week;

 

(b) on a frequent and systematic basis in an emission allowance for which there is not a liquid market in accordance with Article 2(1)(17)(b) of Regulation (EU) No 600/2014 where during the past 6 months the OTC transactions carried out by it on own account in the relevant type of emission allowances when executing client orders takes place on average once a week;

 

(c) an investment firm internalises on a substantial basis in an emission allowance where the number of OTC trades carried out by it on own account when executing client orders is, during the past 6 months, equal to or larger than either of the following:

 

(i) 30% of the total nominal amount traded in that type of emission allowances executed by the investment firm on own account or on behalf of clients and executed on a trading venue or OTC;

 

(ii) 2.25% of the total nominal amount traded in that type of emission allowances executed in the Union on a trading venue or OTC.

 

Article 16 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

 

 

 

Relevant assessment periods

 

The conditions set out in Articles 12 to 16 shall be assessed on a quarterly basis on the basis of data from the past 6 months. The assessment period shall start on the first working day of the months of January, April, July and October.

 

Newly issued instruments shall only be considered in the assessment when historical data covers a period of at least three months in the case of shares, depositary receipts, ETFs, certificates and other similar financial instruments, and six weeks in the case of bonds, structured finance products and derivatives.

 

Article 17 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

 

 

 

Recitals 18 and 19 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

(18) In order to ensure the objective and effective application of the definition of systematic internalisers in the Union in accordance with Article 4(1)(20) of Directive 2014/65/EU, further specifications should be provided on the applicable pre-set limits for the purposes of what constitutes frequent systematic and substantial over the counter (OTC) trading. Pre-set limits should be set at an appropriate level to ensure that OTC trading of such a size that it had a material effect on price formation is within scope while at the same time excluding OTC trading of such a small size that it would be disproportionate to require the obligation to comply with the requirements applicable to systematic internalisers.


(19) Pursuant to Directive 2014/65/EU, a systematic internaliser should not be allowed to bring together third party buying and selling interests in functionally the same way as a trading venue. A systematic internaliser should not consist of an internal matching system which executes client orders on a multilateral basis, an activity which requires authorisation as a multilateral trading facility (MTF). An internal matching system in this context is a system for matching client orders which results in the investment firm undertaking matched principal transactions on a regular and not occasional basis.

 

 

 

 

Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35

 

Questions and Answers on MiFID II and MiFIR Systematic Internaliser Regime

 

Question 1 [Last update: 03/11/2016 - outdated]

 

By when will ESMA publish information about the total number and the volume of transactions executed in the Union and when do investment firms have to perform the assessment whether they should be considered as systematic internalisers for the first time in 2018 as well as for subsequent periods?

 

Answer 1

 

Commission Delegated Regulation of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive does not provide for any transitional provision which would allow the systematic internaliser regime to be fully applicable as of 3 January 2018. In the absence of such provisions, the first calculations are expected to be performed only when, in accordance with Article 17 of the Commission Delegated Regulation of 25.4.2016, there will be 6 months of data available.

 

In accordance with the clarifications provided below:

 

(i) ESMA will publish the necessary data (EU wide data) for the first time by 1 August 2018 covering a period from 3 January 2018 to 30 June 2018.


(ii) Investment firms will have to perform their first assessment and, where appropriate, comply with the systematic internaliser obligations (including notifying their National Competent Authority (NCA)) by 1 September 2018.

 

This timeline applies also to investment firms trading in illiquid instruments. While it is possible for those firms to carry out part of the test based on data at their disposal, the complete determination of the SI activity necessitates an assessment of the investment firms OTC-trading activity in a particular instrument in relation to overall trading in the Union. In order to ensure a consistent assessment and to ensure that all investment firms are treated in the same manner, for all instruments, irrespective of their liquidity status, the assessment should therefore be performed by 1 September 2018.

 

Similarly, although Commission Delegated Regulation of 25.4.2016 allows shorter look-back periods for newly issued instruments compared to the six months described above, ESMA considers that it is important to ensure a level playing field between all instruments and, therefore, suggests to apply the schedule proposed above also to newly issued instruments - i.e. first publication by ESMA of the necessary EU-wide data by 1 August 2018 and earliest deadline to comply, where necessary, with the SI regime set on 1 September 2018.

 

It is nevertheless important to stress that investment firms should be able to opt-in to the systematic internaliser regime for all financial instruments from 3 January 2018, for example, as a means to comply with the trading obligation for shares.

 

In accordance with Article 94 of MiFID II, the systematic internaliser definition and the transparency regime applicable to internalisers in shares admitted to trading on a regulated market under MiFID I will be repealed by MiFID II by 3 January 2018. Those firms, following the publication of the data of the first six months from 3 January 2018, will also have to determine whether their activity is frequent, systematic and substantial on the basis of the available data published in accordance with this note.

 

For subsequent assessments, ESMA intends to publish the necessary information within a month after the end of each assessment period as defined under Article 17 of the Commission Delegated Regulation of 25.4.2016 – i.e. by the first calendar day of months of February, May, August and November every year. After the first assessment, investment firms are expected to perform the calculations and comply with the systematic internaliser regime (including notification to their NCA) no later than two weeks after the publication by ESMA – i.e. by the fifteenth calendar day of the months of February, May, August and November every year.

 

Question 1 [Last update: 30/01/2019] *modified*


By when will ESMA publish information about the total number and the volume of transactions executed in the Union and when do investment firms have to perform the assessment whether they should be considered as systematic internalisers for the first time in 2018 as well as for subsequent periods?


Answer 1


Commission Delegated Regulation (EU) No 2017/56518 does not provide for any transitional provision which would allow the systematic internaliser regime to be fully applicable as of 3 January 2018. In the absence of such provisions, the first calculations are expected to be performed only when, in accordance with Article 17 of the Commission Delegated Regulation (EU) No 2017/565, there will be 6 months of data available.
In accordance with the clarifications provided below:
a) ESMA will publish the necessary data (EU wide data) for the first time by:
i. 1 August 2018 covering a period from 3 January 2018 to 30 June 2018 for equity, equity-like and bond instruments;
ii. The EU wide data for ETCs, ETNs, SFPs, securitised derivatives, emission allowances and derivatives will not be published untill at the latest 2020.
b) Investment firms will have to perform their first assessment and, where appropriate, comply with the systematic internaliser obligations (including notifying their NCA) by:
i. 1 September 2018 for equity, equity-like and bond instruments;
ii. No assessment has to be performed for ETCs, ETNs, SFPs securitised derivatives, emission allowances and derivatives untill at the latest 2020.
This timeline applies also to investment firms trading in illiquid instruments. While it is possible for those firms to carry out part of the test based on data at their disposal, the complete determination of the SI activity necessitates an assessment of the investment firms OTC- trading activity in a particular instrument in relation to overall trading in the Union. In order to ensure a consistent assessment and to ensure that all investment firms are treated in the same manner, for all instruments, irrespective of their liquidity status, the assessment should therefore be performed by 1 September 2018 for equity, equity like and bond instruments. The assessment does not need to be performed for ETCs, ETNs, SFPs, securitised derivatives, emission allowances and derivatives untill at the latest 2020.

Similarly, although Commission Delegated Regulation (EU) No 2017/565 allows shorter look- back periods for newly issued instruments compared to the six months described above, ESMA considers that it is important to ensure a level playing field between all instruments and, therefore, suggests to apply the schedule proposed above also to newly issued instruments - i.e. first publication by ESMA of the necessary EU-wide data by 1 August 2018 for equity, equity like and bond instruments and earliest deadline to comply, where necessary, with the SI regime set on 1 September 2018 for equity, equity like and bond instruments.


It is nevertheless important to stress that investment firms should be able to opt-in to the systematic internaliser regime for all financial instruments from 3 January 2018, for example, as a means to comply with the trading obligation for shares. For equity, equity-like and bond instruments for which the overall trading in the Union will not be published, the opt-in regime will remain a possibility for investment firms to become an SI. The same is true as far as ETCs, ETNs, SFPs, securitised derivatives, emission allowances and derivatives are concerned.

 

For subsequent assessments, ESMA intends to publish the necessary information within a month after the end of each assessment period as defined under Article 17 of the Commission Delegated Regulation (EU) No 2017/565 – i.e. by the first calendar day of months of February, May, August and November every year. After the first assessment, investment firms are expected to perform the calculations and comply with the systematic internaliser regime (including notification to their NCA) no later than two weeks after the publication by ESMA – i.e. by the fifteenth calendar day of the months of February, May, August and November every year.

 

Question 2 [Last update: 31/01/2017]


 

Do the calculations to identify if an investment firm is systematic internaliser have to be carried out at legal entity level or a group level? How are branches of investment firms being treated?

 

Answer 2

 

The definition of systematic internaliser under Article 4(1)(20) of MiFID II refers to "investment firms" established in the EU and, therefore, the calculations should be carried out at legal entity level. For EU investment firms operating branches in the Union, the activity of those branches would need to be consolidated for the purpose of the systematic internaliser calculations.

 

Question 3 [Last update: 31/01/2017]

 

i. Should investment firms, when determining if they are a systematic internaliser, include (i) transactions that are not contributing to the price formation process and/or are not reportable and (ii) primary market transactions?

 

ii. Should investment firms, when determining if they are a systematic internaliser, include trades executed on own account on a trading venue but following an order from the client?

 

iii. Are off order book trades that are reported to a regulated market, MTF or OTF under its rules excluded from the quantitative thresholds for determining when an investment firm is a systematic internaliser?

 

Answer 3

 

i. Article 13 of RTS 1 and Article 12 of RTS 2 exempt investment firms from reporting certain types of transactions for the purposes of post-trade transparency. ESMA is of the view that those types of transactions should not be part of the calculations for the purposes of the definition of the systematic internaliser regime, both for the numerator and the denominator of the quantitative thresholds specified in the Commission delegated regulation [add reference number once published on the OJEU]. The types of transactions included in Articles 13 of RTS 1 and 12 of RTS 2 are technical and cannot be characterised as transactions where an investment firm is executing a client order by dealing on own account. More importantly, the lack of a reporting obligation for those types of transactions would be a considerable challenge for competent authorities to supervise and for investment firms to comply with the systematic internaliser regime. 
Primary market transactions in securities as well as creation and redemption of ETFs' units should not be included in the calculations.

 

ii. Article 12(6) of RTS 1 and in Article 7(7) of RTS 2 clarify that two matching trades entered at the same time and for the same price with a single party interposed are considered as a single transaction. An investment firm may, on the back of a client order, execute a trade on own account on a trading venue and back it immediately to the original client. While the trade can be broken down into two transactions - the first transaction executed on own account by the investment firm on the trading venue and the second transaction executed between the investment firm and the client - such transactions should be considered economically as one trade. ESMA is of the view that where the market leg is executed on a trading venue and immediately backed to the client at the same price, the investment firm is not deemed to execute a client trade outside a regulated market, an MTF or an OTF. Therefore, only one trade should be counted for the denominator for determining the systematic internaliser activity (total trading in the EU), and no trade should be included in the numerator when determining whether an investment firms is a systematic internaliser. 
However, in case the market leg transaction is not immediately backed to the client or in case the price is not the same, the trades should be counted as two for the denominator and the trade with the client should be counted for the numerator.

 

iii. An investment firm dealing on a trading venue is not deemed to act as a systematic internaliser. A trading venue is a multilateral system that operates in accordance with the provisions of Title II of MiFID II concerning MTFs and OTFs or the provisions of Title III concerning regulated markets. According to recital (7) of MiFIR a market which is composed by a set of rules that governs aspects related to membership, admission of instruments to trading, trading between members, reporting and, where applicable, transparency obligations is a regulated market or an MTF.

A transaction is deemed to be executed on a trading venue if it is carried out through the systems or under the rules of that trading venue. There is no requirement for the transactions to be executed on an electronic order book for the trade to be subject to the trading venue's rules. Therefore, only off order book transactions that benefit from a waiver from pre-trade transparency should be considered as executed on a trading venue, and should not count for the numerator when determining whether an investment firm is a systematic internaliser.

 

Question 4 [Last update: 03/10/2017]

 

a) On which level is the systematic internaliser threshold to be calculated for derivatives? On a sub-class level or on a more granular level?


b) On which level is the systematic internaliser threshold to be calculated for structured finance products (SFPs)?


c) What constitutes a 'class of bonds' under Article 13 of Commission Delegated Regulation of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive? Do senior, subordinated or convertible bonds from the same issuer constitute different classes?

 

d) On which level is the systematic internaliser threshold to be calculated for emission allowances?

 

e) To which sub-class should the number of transactions and the nominal amount traded of a derivative be allocated when a derivative contract (ISIN) changes over the observation period from one sub-class to another? (added on 8 July 2020)

 

Answer 4

 

a) The calculation should be performed at the most granular class level as identified in RTS 2. Where an investment firm meets the thresholds for such a class, it should be considered as a systematic internaliser for all derivatives within that most granular class. 
With respect to equity derivatives, the sub-classes as defined in Table 6.2 of Annex III of RTS 2 for LIS and SSTI should be used.


b) For SFPs, calculations should be performed at ISIN level and where, for a specific ISIN, an investment firm is above the thresholds prescribed, it should be considered a systematic internaliser for all SFPs issued by the same entity or by any entity within the same group.

 

c) A class of bonds issued by the same entity, or by any entity within the same group is a subset of a class of bonds in table 2.2 of Annex III of RTS 2 (sovereign bond, other public bond, convertible bond, covered bond, corporate bond, other bond). Hence, where an investment firm passes the relevant thresholds in a bond it will be considered to be a systematic internaliser in all bonds belonging to the same class of bonds according to table 2.2. of Annex III of RTS 2 issued by the same entity, or by any entity within the same group.


It is therefore possible to distinguish between, for instance, corporate bonds and convertible bonds as different classes of bonds, but the debt seniority of a bond does not constitute a different class.

 

d) The calculation should be performed at the level of the emission allowance type. In other words, both the numerator and the denominator shall refer to the same sub-asset class level as identified in RTS 2.

 

e) A derivative contract (ISIN) might change sub-class over its life. This occurs whenever the segmentation criteria include one or more of the following (i) the time-to-maturity bucket (ii) being on-the-run or off-the-run. Therefore, it is necessary to clarify when performing the SI test to which sub-class the number of transactions and the nominal amount traded of an ISIN should be allocated where the contract is changing sub-class during the observation period.

More specifically, investment firms shall perform the SI test for all financial instruments (ISINs) traded over the 6-month observation period and which have not expired on the first day of February, May, August, December which are the months by which the publication of the relevant data of the denominator are published by ESMA.

After having identified the instruments for which the test shall be performed, investment firsts can either follow the two-step approach presented below or perform a one-step approach as per step 2.

STEP 1 – perform the SI-test on basis of the sub-class to which the ISIN belongs to on the first day of February, May, August, December and allocate all the transactions executed and the related nominal amount traded of the ISIN to that sub-class. If the SI test is not passed, the investment firm is not required to perform step 2.

STEP 2 – if the SI test under step 1 is passed, the investment firm should re-perform (for all the ISINs allocated to sub-classes that passed step 1) the test by allocating the transactions executed and the nominal amount traded of an ISIN to the relevant sub-class to which the contract belongs to on a specific day over the observation period. This implies that transactions in the same ISIN, which changes sub-class during the observation period will be partially allocated to the initial sub-class and partially to the new sub-class once the change has occurred. For example, if over the observation period 1 October Year (t) and 31 March Year (t+1) a bond future contract on a 10 year bond XYZ and 9 months maturity which goes from time to maturity bucket 3 (6 months – 1 year) to time to maturity bucket 2 (3 months – 6 months) on 12 December Year (t), all transactions and nominal amount traded recorded between 1 October and 11 December Year (t) will be counted in the sub-class of bond futures with the same underlying bond XYZ with a long term and with time to maturity in bucket 3. All transactions and nominal amount traded recorded between 12 December Year (t) and 31 March Year (t+1) will be counted in the sub-class of bond futures with the same underlying bond XYZ with a long term and with time to maturity in bucket 2.

 

Question 5 [Last update: 31/05/2017]

 

a) Can systematic internalisers meet their quoting obligations under Article 18(1) of MiFIR 
for liquid instruments by providing executable quotes on a continuous basis?


b) Can client orders routed by an automated order router (AOR) system be considered as 'prompting for a quote' according to Article 18(1)(a) of MiFIR?


c) For how long should quotes provided by systematic internalisers be firm, or executable?

 

d) What are the obligations for systematic internalisers dealing in non-equity instruments for which there is no liquid market under Article 18(2) of MiFIR?

 

e) Which arrangements should systematic internalisers use when publishing firm quotes? Should these be the same arrangements as for equity instruments?

 

f) Should systematic internalisers disclose their identity when publishing firm quotes?


Answer 5

 

a) The systematic internaliser regime for non-equity instruments is predicated around a protocol whereby the systematic internaliser provides a quote or quotes to a client on request. However, nothing prevents the systematic internaliser, especially in the most liquid instruments, to stream prices to clients. Where those prices are firm, i.e. executable by clients up to the displayed size (provided the size is less than the size specific to the instrument), the systematic internaliser would be deemed to have complied with the quoting obligation under Article 18(1) of MiFIR. The systematic internaliser can, in justified cases, execute orders at a better price than the streaming quote.

 

b) Yes. The provisions in Article 18 of MiFIR are neutral concerning the technology used for prompting quotes. A systematic internaliser can be prompted for and provide quotes through any electronic system.


c) The quote should remain valid for a reasonable period of time allowing clients to execute against it. A systematic internaliser may update its quotes at any time, provided at all times that the updated quotes are the consequence of, and consistent with, genuine intentions of the systematic internaliser to trade with its clients in a non-discriminatory manner.

 

d) Where a systematic internaliser receives a request from a client for a quote for an instrument which is traded on a trading venue and for which there is not a liquid market, and the systematic internaliser agrees to provide that quote, the systematic internaliser does not have an obligation to make this quote available to other clients and to make it public. However, Article 18(2) of MiFIR requires the systematic internaliser to disclose to clients on request the quotes provided in illiquid financial instruments. That obligation can be met by allowing clients, on a systematic or on a request basis, to have access to those quotes.

This is without prejudice to the possibility for systematic internalisers to benefit from a waiver for this obligation where, as set out in the last sentence of Article 18(2) of MiFIR, the conditions in Article 9(1) of MiFIR are met.

 

e) Article 13 of the Commission Delegated Regulation (EU) No 2017/567 specifies how systematic internalisers should make their quotes public and easily accessible for equity instruments. There are no corresponding provisions on the publication arrangements for systematic internalisers for non-equity instruments, but Article 18(8) of MiFIR requires the quotes to be “made public in a manner which is easily accessible to other market participants”.

ESMA considers that systematic internalisers should use the same means and arrangements when publishing firm quotes in non-equity instruments as for equity instruments as specified in Article 13 of the Commission Delegated Regulation (EU) No 2017/567. Furthermore, the quotes should be made public in a machine-readable format as specified in the above mentioned Regulation and the quotes should be time-stamped as specified in Article 9(d) of RTS 1.

 

f) Yes, as for equity instruments, systematic internalisers should disclose their identity when making quotes public through the facilities of a regulated market or an APA.

 

Question 6 [Last update: 31/05/2017]

 

a) What information should the notification from systematic internalisers to their NCA contain?

 

b) For what period of time should an investment firm follow the obligations for systematic internalisers after crossing the relevant thresholds in a financial instrument?

 

c) When/How often do investment firms have to notify their NCAs of their systematic internaliser status?

 

Answer 6

 

a) The notification from systematic internalisers to their NCA should contain information that is at least provided at the level of the MiFIR identifier as specified in field 4 of table 2 of Annex III of RTS 1 (i.e. shares, depositary receipts, exchange traded funds, certificates and other equity-like financial instruments) and in field 3 of table 2 of Annex IV of RTS 2 (i.e. bonds, ETNs, ETCs, structured finance products, securitised derivatives, derivatives, and emission allowances) for the instruments and classes of instruments for which the investment firm is a systematic internaliser. This is without prejudice of the possibility for CAs to require the submission of more granular information if considered appropriate.

 

b) The obligation will last for three months after crossing the relevant thresholds in a financial instrument at the relevant quarterly assessment. The obligation period will be slightly shorter for the first assessment in 2018, which covers 1 September to 15 November 2018.

 

c) Investment firms are required to notify their NCA in case of a change in status, i.e. where an investment firm passed the thresholds for an instrument with a particular MiFIR identifier in the previous period, but did not meet the thresholds for any instrument with the same MiFIR identifier in the consecutive assessment period, it should notify its CA of its change of status. Where there is no change in the systematic internaliser status from one assessment period to the next (i.e. where the investment firms is still above the threshold or decides to voluntarily opt-in as systematic internaliser for any instrument with the same MiFIR identifier), the firm does not have to notify its NCA thereof.

 

Question 7 [Last update: 03/10/2017]

 

For the purpose of the SI determination, when should an investment firm be considered as “executing client orders” when dealing on own account outside of trading venues?

 

Answer 7

 

For the purposes of the SIs’ determination, ESMA considers that in all circumstances where an investment firm is dealing with a counterparty that is not a financial institution authorised or regulated under Union law or under the national law of a Member State (‘financial institution’), the investment firm is deemed to be executing a client order and the transaction should count towards the calculations (both the numerator and the denominator). Where the investment firm is dealing with a financial institution, ESMA considers that one party to the transaction will always act in a client capacity. Therefore, in order to determine when an investment firm is “executing client orders” when dealing on own account outside of trading venues, investment firms need to assess which of the two parties to the transactions acts in the capacity of executing client orders.

 

Investment firms may determine this either on a transaction by transaction basis or by type of transactions or type of counterparties. Different indicators could be used for determining which party executed a client order: e.g. whether an investment firm has classified the counterparty as a professional client, who initiated the trade or who received the instruction to deal and the extent to which the counterparty relied on the other party to conclude the transaction.

 

Question 8 [Last update: 03/10/2017]

 

What are the limitations to the commercial policy for restricting access to quotes in accordance with Article 18(5) of MiFIR?

 

Answer 8

 

The commercial policy needs to be set out and made available to clients in advance. The commercial policy should determine meaningful categories of clients to which quotes are made available. Systematic internalisers should only be able to group clients based on non-discriminatory criteria taking into consideration the counterparty risk, or the final settlement of the transaction.

 

Furthermore, a number of provisions safeguard the ability of the systematic internaliser to properly manage risk. For example, a systematic internaliser may update its quotes at any time (Article 18(3) of MiFIR) and can limit the number of transactions they undertake to enter into with clients pursuant any given quote (Article 18(7) of MiFIR).

 

Question 9 [Last update: 03/10/2017]

 

Are systematic internalisers allowed to limit the number of transactions they undertake to enter into with clients pursuant to any given quote under Article 18(7) of MiFIR to one transaction?

 

Answer 9

 

Yes, Systematic internalisers may limit the number of transactions they undertake to enter into with clients to one transaction. As a minimum the quote provided to a client following the request for such a quote should be potentially executable by any other clients where for example the requesting client has decided not to trade against it (or to execute only part of it). In any case, should SIs decide to establish non-discriminatory and transparent limits on the number of transactions they undertake to enter into with clients, they should make these limits public and provide a justification.

 

 

Systematic internaliser qa

 

 

Question 10 [Last update: 15/11/2017]


Which types of prices will be considered compliant as firm quotes for derivatives and bonds?

 

Answer 10


According to Table 2 of Annex II of Commission Delegated Regulation (EU) 2017/583, the traded price of the transaction excluding, where applicable, commission and accrued interest, must be reported for the purpose of post-trade transparency.
In regard to quotes for the purpose of pre-trade transparency, ESMA is of the view that they should be aligned with post-trade transparency publication in case the transaction was finally executed and therefore the information to be made public should be the traded quote. ESMA expects that the quote published is the real traded quote established by normal market practice, including all the product features or other components of the quote such as the counterparty or liquidity risk.
ESMA expects that SIs make available to their clients any relevant risk adjustments and commissions applicable to the cohort within which they (the clients) fall in order for the clients to determine with a degree of certainty the price that would be applicable to them.

 

Question 11 [Last update: 14/11/2018]

 

Is it possible for investment firms to qualify as a systematic internaliser in instruments that are not traded on a trading venue (non-TOTV instruments)? If yes, are systematic internalisers in non-TOTV instruments subject to the quoting obligations under Articles 14-18 of MiFIR?

 

Answer 11


Article 4(1)(20) of MiFID II as further specified in Articles 12-17 of Commission Delegated Regulation (EU) 2017/565 does not limit the concept of systematic internalisers to instruments that are traded on a trading venue (TOTV) but includes all financial instruments, i.e. TOTV and non-TOTV instruments. Hence, an investment firm may qualify as a systematic internaliser in any financial instrument.


However, ESMA is only publishing information on TOTV instruments for determining whether an investment firm meets the thresholds to be considered as a systematic internaliser. With respect to non-TOTV instruments, ESMA therefore appreciates that it might be challenging for investment firms to access reliable and comprehensive sources of EU wide information preventing de facto the systematic internaliser test to be carried out.


There are circumstances where an investment firm may still be a systematic internaliser for non-TOTV instruments. This would notably be the case for investment firms that opt voluntarily into the systematic internaliser regime. In addition, it is possible that an investment firm by virtue of qualifying as a systematic internaliser in a TOTV instrument automatically becomes a systematic internaliser in non-TOTV instruments. For instance, according to Article 13 of Commission Delegated Regulation (EU) 2017/565 an investment firm meeting the thresholds for one bond automatically becomes a systematic internaliser in all bonds (i.e. TOTV and non- TOTV bonds) issued by the same entity for the same bond type.


The scope of the quoting obligations under Articles 14-18 of MiFIR is limited to TOTV instruments. In consequence, systematic internalisers in non-TOTV instruments are not subject to the quoting obligations under Articles 14-18 of MiFIR. They remain however required to notify their competent authority as prescribed under the second subparagraph of Article 15(1) and Article 18(4) of MiFIR.


It is possible that the TOTV status of a financial instrument changes over time, in particular a non-TOTV instrument may become TOTV at some point. ESMA expects systematic internalisers in non-TOTV instruments to monitor the TOTV status of those instruments and comply with the quoting obligations under Articles 14-18 of MiFIR as soon as an instrument becomes TOTV.

 

 

General Q&As on transparency topics

 

Question 8 [Last update: 03/10/2017]

 

Do real time post-trade transparency requirements apply equally to trading venues and systematic internalisers?

 

Answer 8

 

Yes, the requirements in Articles 6 and 10 of MiFIR as further specified in Article 14 of RTS 1 and Article 7 of RTS 2 apply to both trading venues and investment firms. ESMA expects that trading venues and investment firms, in particular systematic internalisers, that use expedient systems publish transactions as close to real time as technically possible. In particular, since systematic internalisers are competing with trading venues over customers’ order flow, it is important to provide for a level playing field. Therefore, trading venues and systematic internalisers using similar technology and systems should process transactions for post-trade publication at the same speed.

 

Third country issues

 

Question 2 [Last update: 15/11/2017]

 

How are transactions with a third country dimension treated for the purpose of the transparency requirements (Articles 3,4, 6-11, 20, 21 of MiFIR and as further specified in RTS 1 and 2), and for the systematic internaliser regime (Article 4(1)(20) of MiFID II and Articles 12-16 of Commission Delegated Regulation (EU) No 2017/565)?

 

Answer 2

 

MiFID II and MiFIR do not provide specific guidance on the treatment of transactions with a third country dimension, i.e. trades executed by EU investment firms outside the EU and trades by branches or subsidiaries of non-EU firms within the EU, for the purposes of the MiFIR transparency regime and the determination of systematic internalisers. ESMA considers it important to clarify how those MiFID II / MiFIR requirements should apply to transactions with a third country dimension.


Transactions with a third country dimension in this context include transactions where at least one counterparty is an investment firm (IF) authorised in the EU or where the trade is executed on an EU trading venue by a non-EU firm. Transactions where both counterparties are not authorised EU investment firms and that are executed outside the EU are in any case not subject to the MiFIR transparency requirements and do not count for the systematic internaliser determination.


The following general principles should apply:


1. Transactions concluded on EU trading venues


The transparency requirements always apply to transactions concluded on EU trading venues, irrespective of the origin of counterparties trading on the trading venue and regardless whether the counterparties to the transaction are authorised as EU investment firm or not.


2. Transactions executed on non-EU venues


ESMA already published an Opinion (ESMA70-154-165, here) providing guidance in particular with respect to transactions concluded on third-country venues by EU investment firms. The opinion clarifies that only transactions concluded on third-country venues meeting the criteria established in the ESMA’s opinion and listed in the Annex of the opinion (“comparable third country trading venues” thereafter) should not be subject to the MiFIR transparency regime. Transactions concluded on other third-country trading venues should be treated as OTC transactions and reported through an APA.


3. OTC transactions involving an EU investment firm


If one of the parties of an OTC-transaction is an IF authorised in the EU, the transaction is considered as executed within the EU: the MiFIR transparency requirements apply and the transaction will be included for the systematic internaliser determination.


4. Transactions of non-EU subsidiaries of EU IFs


Subsidiaries are independent legal entities and subject to the regulatory regime of the third country in which they are established. Therefore, the MiFIR transparency requirements do not apply, unless the transaction is concluded on an EU trading venue. The transactions undertaken by such subsidiaries do not count for the Systematic internaliser determination.

 

5. Transactions involving a non-EU branch of an EU IF

 

Contrary to subsidiaries, branches do not have legal personality. Therefore, transactions by non-EU branches of EU IFs are treated as transactions of the EU parent company and, therefore, have to be made transparent under the MiFIR rules.

 

The table below provides more details on the treatment of transactions with a third country dimension for the purpose of the MiFID transparency requirements and the determination of whether an investment firm is a systematic internaliser (SI):

 

Case Investment Firm (IF)

Counterparty/

Client

Execution place Mifir transparency

Count for SI

determination

(numerator)

Count for total trading within the EU

(denominator or SI calculations)

1 EU IF EU/non-EU Comparable third country TV No No No
2 EU IF non-EU OTC Yes Yes Yes
3 non-EU Branch of the EU IF EU/non-EU Comparable third country TV No No No
4 non-EU Branch of the EU IF non-EU OTC Yes Yes Yes
5 non-EU Subsidiary of the EU IF EU/non-EU non-EU TV/OTC No No No
6 non-EU Subsidiary of the EU IF EU/non-EU EU TV Yes No Yes
7 non-EU firm EU/non-EU EU TV Yes No Yes
8 EU branch of the non-EU firm EU/non-EU EU TV Yes No Yes
9 EU branch of the non-EU firm EU/non-EU Comparable third country TV No No No
10 EU branch of the non-EU firm non-EU OTC Yes Yes Yes
11 EU subsidiary of the non-EU firm EU/non-EU EU TV Yes No Yes
12 EU subsidiary of the non-EU firm EU/non-EU Comparable third country TV No No No
13 EU subsidiary of the non-EU firm non-EU OTC Yes Yes Yes

 

Detailed explanation of the table

 

- Case 1 – EU investment firm (IF) trading on a comparable third country trading venue (TV): The transaction is treated as executed “on venue”. Therefore, the MiFIR transparency requirements do not apply (to avoid double reporting) and the transaction is not counted for the SI-determination. For transactions concluded on non-compliant third country TVs, case 2 applies.

 

- Case 2 – EU IF trading with a non-EU counterparty/client OTC: An OTC- transaction, i.e. either a transaction concluded on a non-comparable third country TV or a pure OTC-transaction, that involves an EU IF is subject to the transparency requirements and has to be published through an APA. The transaction counts for the SI-determination (both for the numerator and the denominator).

 

- Case 3 – non-EU branch of an EU IF trading on a comparable third country TV: The trade is treated as executed “on venue”. Therefore, the same treatment as under case 1 applies, i.e. MiFIR transparency requirements do not apply and the trade is not counted for the SI-determination. For transactions concluded on non-compliant third country TVs, case 4 applies.

 

- Case 4 - non-EU branch of an EU IF trading with a non-EU counterparty/client OTC: Non-EU branches of EU IF are treated like their EU parent company. Therefore, the same treatment as under case 2 applies. An OTC-transaction, i.e. either a transaction concluded on a non-comparable third country TV or a pure OTC- transaction, is subject to the transparency requirements and has to be published through an APA. The transaction counts for the SI-determination of the parent company (both the numerator and the denominator).

 

- Case 5 – non-EU subsidiary of an EU IF trading on a non-EU TV or OTC: Subsidiaries are independent legal entities and subject to the regulatory regime of the third country in which they are established. Therefore, the MiFIR transparency requirements do not apply. The transaction does not count for the SI determination.

 

- Case 6 – non-EU subsidiary of an EU IF trading on an EU TV: The transparency requirements apply at the level of the trading venue. Therefore, the MiFIR transparency requirements will apply and the transaction will be included in the denominator (total trading in the EU) for determining the SI activity. Since subsidiaries are independent legal entities they are subject to the regulatory regime of the third country in which the subsidiary is established and do not have to perform the SI test. The transaction does hence not count for the numerator for the SI-determination.

 

- Case 7 – non-EU firm trading on an EU TV: The transparency requirements apply at the level of the trading venue. Therefore, the transparency requirements will apply and the transaction will be included in the denominator (total trading in the EU) for determining the SI activity. However, it does not count for the numerator.

 

- Case 8 – EU branch of a non-EU firm trading on an EU TV: The transparency requirements apply at the level of the trading venue. Therefore, the transparency requirements will apply. Transactions on trading venues do not count for the numerator for the SI-determination, but are counted in the denominator (total trading within the EU).

 

- Case 9 – EU branch of a non-EU firm trading on a comparable third country TV: The trade is treated as executed “on venue”. Therefore, the same treatment as under case 1 applies. MiFIR transparency requirements do not apply (to avoid double reporting) and the transaction is not counted for the SI-determination (since they are executed “on venue”). For transactions concluded on a non-comparable third country TVs, case 10 applies.

 

- Case 10 – EU branch of a non-EU firm trading with a non-EU counterpart/client OTC: Where a non EU-firm is required to establish a branch in accordance with Article 39 of MiFID II, this branch has to apply, in accordance with Article 41(2) of MiFID II, with the requirements of Articles 16-20, 23-25 and 27, Article 28(1) and Articles 30-32 of MiFID II and Articles 3 to 26 of MiFIR and the measures adopted pursuant thereto. Therefore, EU branches of non-EU firms are subject to the transparency requirements and have to report their trades to APAs. Furthermore, the transactions count for the SI determination (numerator and denominator).

 

- Case 11 – EU subsidiary of a non-EU firm trading on an EU TV: The transparency requirements apply at the level of the trading venue. Therefore, the transparency requirements will apply. Transactions on trading venues do not count for the numerator for the SI-determination, but are counted in the denominator (total trading within the EU).

 

- Case 12 – EU subsidiary of a non-EU firm trading on a comparable third country TV: The transaction is considered as executed “on venue” i. Therefore, the same treatment as under case 1 applies; MiFIR transparency requirements do not apply and the trade is not counted for the SI-determination. For transactions concluded on non-comparable third country TVs, case 13 applies.

 

- Case 13 – EU subsidiary of a non-EU firm trading with a non-EU counterparty/client OTC: Subsidiaries are independent legal entities and subject to the regulatory regime of the country where they are established. Therefore, EU- subsidiaries of non-EU firms are subject to the full MiFID II/MiFIR requirements. The transaction is subject to MiFIR transparency and counts for the SI-determination (both numerator and denominator).

 

 

 

 

Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38

 

Questions and Answers on MiFID II and MiFIR Systematic Internaliser Regime

 

Question 26 [Last update: 28/03/2017]

 

Recital 19 of the Commission Delegated Regulation (EU) 2017/565 clarifies the conditions under which an SI may engage in matched principal trading to execute client orders. To what extent can SIs engage in other types of riskless back-to-back transactions?

 

Answer 26

 

Recital 19 of the Commission Delegated Regulation (EU) 2017/565 is not limited to internal matching of client orders through matched principal trading but more generally prevents SIs from operating any system that would “bring together third party buying and selling interests in functionally the same way as a trading venue”. The prohibition for an SI to operate an internal matching system for matching client orders is just one example, as opposed to the unique circumstance, under which an SI would actually be operating functionally in the same way as a trading venue and would be required to seek authorisation as such.

 

Based on the SI definition provided in Article 4(1)(20) of MiFID II, ESMA understands that the trading activity of a SI is characterised by risk-facing transactions that impact the Profit and Loss account of the firm. By undertaking such risk-facing transactions, SIs are a valuable source of liquidity to market participants. In that regard, ESMA notes that the MiFIR pre-trade transparency provisions for SIs seek to avoid submitting SI to undue risks based on the assumption and understanding that SIs are indeed facing risks when trading.

 

In contrast to the above, ESMA is of the view that arrangements operated by an SI would be functionally similar to a trading venue where they meet the following criteria:

 

a) The arrangements would extend beyond a bilateral interaction between the SI and a client, with a view to ensuring that the SI de facto does not undertake risk-facing transactions. This would be the case, for instance, where an SI would have agreements with other liquidity providers so that the SI would do a riskless back-to back transaction with one of those liquidity providers whenever a transaction is executed with a client, or where it would only execute one transaction contingent on another one. A similar outcome would be reached from the reverse situation where one or more liquidity providers would be streaming quotes to an SI. The quotes would then be forwarded by the SI to its clients to be executed against, resulting again in no risk back-to-back transactions which could involve multiple parties. The concept of de facto riskless back-to-back transactions is not confined to pairs of transactions in the same financial instrument. Other arrangements, for example where one leg is a securities transaction and the other is a derivative which references that security, could also be deemed as having the objective or consequence of carrying out de facto riskless back-to-back transactions.

 

By crossing client trading interests with other liquidity providers’ quotes, via matched principal trading or another type of riskless back-to-back transaction, so that it is de facto not trading on risk, the SI would actually organise an interaction between its client orders on the one hand and the SI or other liquidity providers’ quotes on the other hand. The SI would be bringing together multiple third party buying and selling trading interests in a way functionally similar to the operator of a trading venue.

 

b) The arrangements in place are used on a regular basis and qualify as a system or facility, as opposed to ad-hoc transactions. The existence of a system would be easily identified where, for instance, the arrangement in place would be underpinned by technological developments to increase speed and efficiency and legal agreements would be in place between the SI and liquidity providers. The operation of a system could also include circumstances where there is an understanding with third parties that trade by trade hedging will be available on a regular basis. ESMA recalls that MiFID II/MiFIR is technology neutral and applies to voice systems as well as to electronic and hybrid systems;

 

c) The transactions arising from bringing together multiple third party buying and selling interests are executed OTC, outside the rules of a trading venue.

 

ESMA highlights that the above does not prevent SIs from hedging the positions arising from the execution of client orders as long as it does not lead to the SI de facto executing non risk-facing transactions and bringing together multiple third party buying and selling interests. ESMA is of the view that an SI would not be bringing together multiple third party buying and selling interests as foreseen in Recital 19 where hedging transactions would be executed on a trading venue.


Question 27 [Last update: 03/04/2017]

 

Recital (19) of the Commission Delegated Regulation (EU) 2017/565 foresees that a SI can undertake matched principal trading provided it does so on an occasional, and not a regular, basis. How is “occasional basis” expected to be assessed?

 

Answer 27

 

As stated under Answer 15, ESMA is of the view that a SI activity is characterised by risk- facing transactions that impact the Profit and Loss account of the firm.

 

Where an SI would receive, and execute, two potentially matching buying and selling interests from clients as one matched principal trade or where it would try to find the buyer for a sell order (or the other way around) and execute the first leg contingent on the second leg, those transactions would not qualify as risk facing transactions. As such, they could only be executed by an SI on an occasional basis, as provided for by Recital (19) of the Commission Delegated Regulation (EU) 2017/565.

 

ESMA is of the view that an SI would not be undertaking matched principal trading on an occasional and non-regular basis if it meets any of the following criteria:

 

a) the investment firm operates one or more systems or arrangements, be they automated or not, intended to match opposite client orders. The investment firm may accidentally receive two opposite matching buying and selling interests and match them but it should not have systems in place aimed at increasing opportunities for client order matching;


b) when executing client orders, non-risk facing activities account for a recurrent or significant source of revenue for the investment firm’s trading activity;


c) the investment firm markets, or otherwise promotes, its matched principal trading activities.

 

Question 28 [Last update: 07/07/2017]

 

Should a system providing quote streaming and order execution services to multiple SIs be authorised as a multilateral system?

 

Answer 28

 

Articles 14(1) and 18(1) of MIFIR require SIs to make public firm quotes, which may be published through an APA. Some prospective APAs propose setting up arrangements which, on top of their APA services, provide a suite of quote streaming and order execution services to SIs and their clients. Clients cannot interact with more than one SI via a single message but can send multiple messages to multiple SIs participating in the service provided.

 

Article 4(19) of MiFID II defines a multilateral system as” [...] any system or facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system”. Article 1(7) of MiFID II requires all multilateral systems to operate as either a RM, an MTF or an OTF.


In line with the criteria set out in Q&A 3 on OTFs published on 3 April 2017 for identifying multilateral trading systems, ESMA notes that:


a) If a system allows multiple SIs to send quotes to multiple clients and allows clients to request execution against multiple SIs, then this meets the interaction test foreseen in Article 4(1)(19) even if there is no aggregation across individual SI quote streams;


b) The arrangements described above have the characteristics of a system as they are embedded in an automated facility; and,


c) Those arrangements are not limited to pooling potential buying and selling interests from SIs but also cater for the direct execution of the selected SI quotes. Genuine trade execution would be taking place on the system provided.


Accordingly, a system that provides quote streaming and order execution services for multiple SIs should be considered a multilateral system and would be required to seek authorisation as a regulated market, MTF or OTF in accordance with Article 1(7) of MiFID II.


ESMA reminds that if a firm were to arrange transactions on one system and provide for the execution of the transactions on another system, the disconnection between arranging and executing would not waive the obligation for the firm operating those systems to seek authorisation as a trading venue.

 

Question 29 [Last update: 03/10/2017]

 

Article 15(2) of MiFIR sets out that “in justified cases”, systematic internalisers may execute orders at a better price than the quoted prices provided that the price falls within a public range close to market conditions. What are those justified cases?

 

Answer 29

 

Articles 14, 15, and 17 of MiFIR establish a comprehensive pre-trade transparency framework for systematic internalisers (SIs) in shares, depositary receipts, ETFs, certificates and other similar financial instruments. As set out in Article 17(3) of MiFIR, the implementing measures further aim at ensuring the efficient valuation of those instruments and maximising the possibility for investment firms to obtain the best deal for their clients.

 

Whilst Article 15(2) of MiFIR provides that in justified cases, systematic internalisers may execute orders at a better price than the quote published, ESMA considers that price improvements on those quotes are only justified where they would serve similar purposes as those referred on Article 17(3) of MiFIR.

 

ESMA notes that marginal price improvements on quoted prices would challenge the efficient valuation of equity instruments without bringing any real benefits to investors. As a consequence, and to ensure that price improvements do not undermine the efficient pricing of instruments traded, price improvements on quoted prices would only be justified when they are meaningful and reflect the minimum tick size applicable to the same financial instrument traded on a trading venue.

 

This is without prejudice to SIs’ ability to quote any price level when dealing in sizes above standard market size.

 

Question 30 [Last update: 01/04/2019]

 

Can a EU branch of a third-country firm operate an SI?

 

Answer 30

 

MiFID II does not prohibit a branch, including the EU branch of a third-country firm, from operating as an SI in the EU. In this case the branch should fulfil all relevant MiFID II / MiFIR provisions and in particular the obligations attached to SI activity, i.e. Article 14 to 27 of MiFIR. The branch should also meet the criteria set out in the Q&A on ‘centralised risk management within a group for the operation of an SI’.
However, as clarified under Article 47(3) of MiFIR, in the absence of an equivalence decision by the European Commission, branches can only operate as SIs in the Member State where they have been authorised. Those branches can therefore only actively serve clients that are located in this Member State.
A branch of a third-country firm is subject to the supervision of the competent authority in the Member State where the authorisation was granted, which is expected to use the supervisory powers under Article 69 of MiFID II, to ensure the compliance by the branch with the SI regime and the related obligations. In this respect, it is also recalled that article 70(2) of MiFID II also require Member States to “ensure that where obligations apply to [...] branches of third-country firms in the case of an infringement, sanctions and measures can be applied, subject to the conditions laid down in national law in areas not harmonised by this Directive, to the members of the investment firms’ and market operators’ management body, and any other natural or legal persons who, under national law, are responsible for an infringement”.

 

Question 31 [Last update: 01/04/2019]

 

How does the concept of “risk-facing activity” apply to an EU branch of a third-country firm that operates as an SI in the EU?

 

Answer 31

 

As clarified in Q&As above, ESMA is of the view that based on the SI definition provided in Article 4(1)(20) of MiFID II, the trading activity of a SI is characterised by risk-facing transactions that impact the Profit and Loss of the SI.
ESMA considers that the SI should carry out a degree of risk on an independent basis. Accordingly, ESMA is of the view that an EU branch of a third-country firm, in order to comply with the SI regime, should at least meet the following criteria:
• Risk management
The EU branch should not transfer the risk resulting from its SI activity through a de facto riskless back-to-back booking for hedging purposes whenever a transaction is executed with a client. Any transactions undertaken in an SI capacity should impact the Profit and Loss of the branch.
• Quote provision
The EU branch should have control over the provision of quotes. This would require the EU branch to have the ability to define its own pricing model through dedicated parameters, set its quotes, define its pricing model update and withdraw its quotes on an independent basis. The EU branch should also have traders located in the EU assigned to the SI activity and providing quotes to EU clients.
• Specific commercial policy
The EU branch should have documentation signed with its clients and a dedicated commercial policy with respect to its SI activity including a definition of the objective, non-discriminatory criteria governing access to its quotes.
• Reporting
The EU branch should have a dedicated MIC code for the purpose of the relevant reporting obligations (including those covered by Article 14(5) of RTS 22 and the Guidelines on transaction reporting section 5.14.4 and 5.17.3) to be done in its SI capacity.

 

 

 

 

Articles 6 - 16 and Recitals 9 - 15 of the Commission Delegated Regulation (EU) 2017/567 of 18 May 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions

 

Chapter II
Data provision obligation for trading venues and systematic internalisers

 

Article 6
Obligation to provide market data on a reasonable commercial basis
(Article 13(1), 15(1) and 18(8) of Regulation (EU) No 600/2014)


1. For the purposes of making market data containing the information set out in Articles 3, 4, 6 to 11, 15 and 18 of Regulation (EU) No 600/2014 available to the public on a reasonable commercial basis, market operators and investment firms operating a trading venue and systematic internalisers shall, in accordance with Articles 13(1), 15(1) and 18(8) of Regulation (EU) No 600/2014, comply with the obligations set out in Articles 7 to 11 of this Regulation.


2. Articles 7, 8(2), 9, 10(2) and 11 shall not apply to market operators or investment firms operating trading venues or to systematic internalisers that make market data available to the public free of charge.


Article 7
Obligation to provide market data on the basis of cost
(Article 13(1), 15(1) and 18(8) of Regulation (EU) No 600/2014)


1. The price of market data shall be based on the cost of producing and disseminating such data and may include a reasonable margin.


2. The cost of producing and disseminating market data may include an appropriate share of joint costs for other services provided by market operators or investment firms operating a trading venue or by systematic internalisers.


Article 8
Obligation to provide market data on a non-discriminatory basis
(Article 13(1), 15(1) and 18(8) of Regulation (EU) No 600/2014)


1. Market operators and investment firms operating a trading venue and systematic internalisers shall make market data available at the same price and on the same terms and conditions to all customers falling within the same category in accordance with published objective criteria.


2. Any differentials in prices charged to different categories of customers shall be proportionate to the value which the market data represents to those customers, taking into account:


(a) the scope and scale of the market data including the number of financial instruments covered and their trading volume;


(b) the use made by the customer of the market data, including whether it is used for the customer's own trading activities, for resale or for data aggregation.


3. For the purposes of paragraph 1, market operators and investment firms operating a trading venue and systematic internalisers shall have scalable capacities in place to ensure that customers obtain timely access to market data at all times on a non-discriminatory basis.


Article 9
Obligations in relation to per user fees
(Article 13(1), 15(1) and 18(8) of Regulation (EU) No 600/2014)


1. Market operators and investment firms operating a trading venue and systematic internalisers shall charge for the use of market data according to the use made by the individual end-users of the market data (‘per user basis’). Market operators and investment firms operating a trading venue and systematic internalisers shall put arrangements in place to ensure that each individual use of market data is charged only once.


2. By way of derogation from paragraph 1, market operators and investment firms operating a trading venue and systematic internalisers may decide not to make market data available on a per user basis where to charge on a per user basis is disproportionate to the cost of making that data available, having regard to the scale and scope of the data.


3. Market operators and investment firms operating a trading venue and systematic internalisers shall provide grounds for the refusal to make market data available on a per user basis and shall publish those grounds on their webpage.


Article 10
Obligation to keep data unbundled and to disaggregate market data
(Article 13(1), 15(1) and 18(8) of Regulation (EU) No 600/2014)


1. Market operators and investment firms operating a trading venue and systematic internalisers shall make market data available without being bundled with other services.


2. Prices for market data shall be charged on the basis of the level of market data disaggregation provided for in Article 12(1) of Regulation (EU) No 600/2014.


Article 11
Transparency obligation
(Article 13(1), 15(1) and 18(8) of Regulation (EU) No 600/2014)


1. Market operators and investment firms operating a trading venue and systematic internalisers shall disclose the price and other terms and conditions for the provision of the market data in a manner which is easily accessible to the public.


2. The disclosure shall include the following:


(a) current price lists, including:
— fees per display user;
— non-display fees;
— discount policies;
— fees associated with licence conditions;
— fees for pre-trade and for post-trade market data;
— fees for other subsets of information, including those required in accordance with Commission Delegated Regulation (EU) 2017/572;
— other contractual terms and conditions regarding the current price list;


(b) advance disclosure with a minimum of 90 days' notice of future price changes;


(c) information on the content of the market data including:

(i) the number of instruments covered;
(ii) the total turnover of instruments covered;
(iii) pre-trade and post-trade market data ratio;
(iv) information on any data provided in addition to market data;
(v) the date of the last licence fee adaption for market data provided;


(d) revenue obtained from making market data available and the proportion of that revenue compared to the total revenue of the market operator and investment firm operating a trading venue or systematic internalisers;


(e) information on how the price was set, including the cost accounting methodologies used and the specific principles according to which direct and variable joint costs are allocated and fixed joint costs are apportioned, between the production and dissemination of market data and other services provided by market operators and investment firms operating a trading venue or systematic internalisers.

 

Chapter III

 

Data publication obligation for systematic internalisers

 

Article 12

Obligation for systematic internalisers to make quotes public on a regular and continuous basis during normal trading hours

(Article 15(1) of Regulation (EU) No 600/2014)

 

For the purposes of Article 15(1) of Regulation (EU) No 600/2014, a systematic internaliser shall be considered to make public its quotes on a regular and continuous basis during normal trading hours only where the systematic internaliser makes the quotes available at all times during the hours which the systematic internaliser has established and published in advance as its normal trading hours.


Article 13

Obligation for systematic internalisers to make quotes easily accessible

(Article 15(1) of Regulation (EU) No 600/2014)

 

1. Systematic internalisers shall specify and update on their website's homepage which of the publication arrangements set out in Article 17(3)(a) of Regulation (EU) No 600/2014 they use to make public their quotes.


2. Where systematic internalisers make their quotes public through the arrangements of a trading venue or an APA, the systematic internaliser shall disclose their identity in the quote.


3. Where systematic internalisers employ more than one arrangement to make public their quotes, publication of the quotes shall occur simultaneously.


4. Systematic internalisers shall make public their quotes in a machine-readable format. Quotes shall be considered to be published in a machine-readable format where the publication meets the criteria set out in Commission Delegated Regulation (EU) 2017/571.


5. Where systematic internalisers make public their quotes through proprietary arrangements only, the quotes shall also be made public in a human-readable format. Quotes shall be considered to be published in a human-readable format where:


(a) the content of the quote is in a format which can be understood by the average reader;


(b) the quote is published on the systematic internaliser's website and the website's homepage contains clear instructions for accessing the quote.


6. Quotes shall be published using the standards and specifications set out in Commission Delegated Regulation (EU) 2017/587.


Article 14

Execution of orders by systematic internalisers

(Article 15(1), 15(2) and 15(3) of Regulation (EU) No 600/2014)

 

1. For the purposes of Article 15(1) of Regulation (EU) No 600/2014, exceptional market conditions are considered to exist where to impose on a systematic internaliser an obligation to provide firm quotes to clients would be contrary to prudent risk management and, in particular, where:


(a) the trading venue where the financial instrument was first admitted to trading or the most relevant market in terms of liquidity halts trading for that financial instrument in accordance with Article 48(5) of Directive 2014/65/EU;


(b) the trading venue where the financial instrument was first admitted to trading or the most relevant market in terms of liquidity allows market making obligations to be suspended;


(c) in the case of an exchange traded fund, a reliable market price is not available for a significant number of instruments underlying the ETF or the index;


(d) a competent authority prohibits short sales in that financial instrument according to Article 20 of Regulation (EU) No 236/2012 of the European Parliament and of the Council.


2. For the purposes of Article 15(1) of Regulation (EU) No 600/2014, a systematic internaliser may update its quotes at any time, provided at all times that the updated quotes are the consequence of, and consistent with, genuine intentions of the systematic internaliser to trade with its clients in a non-discriminatory manner.


3. For the purposes of Article 15(2) of Regulation (EU) No 600/2014, a price falls within a public range close to market conditions where the following conditions are fulfilled:


(a) the price is within the bid and offer quotes of the systematic internaliser;


(b) the quotes referred to in point (a) reflect prevailing market conditions for the relevant financial instrument in accordance with Article 14(7) of Regulation (EU) No 600/2014.


4. For the purposes of Article 15(3) of Regulation (EU) No 600/2014, execution in several securities shall be considered part of one transaction where the criteria laid down in Delegated Regulation (EU) 2017/587 are fulfilled.


5. For the purposes of Article 15(3) of Regulation (EU) No 600/2014, an order shall be considered subject to conditions other than the current market price where the criteria laid down in Delegated Regulation (EU) 2017/587 are fulfilled.


Article 15

Orders considerably exceeding the norm

(Article 17(2) of Regulation (EU) No 600/2014)

 

1. For the purposes of Article 17(2) of Regulation (EU) No 600/2014, the number or volume of orders shall be considered to considerably exceed the norm where a systematic internaliser cannot execute the number or volume of those orders without exposing itself to undue risk.


2. Investment firms acting as systematic internalisers shall determine in advance and in a manner that is objective and consistent with their risk management policy and procedures referred to in Article 23 of Commission Delegated Regulation (EU) 2017/565 (9), when the number or volume of orders sought by clients is considered to expose the firm to undue risk.


3. For the purposes of paragraph 2, a systematic internaliser shall establish, maintain and implement as part of its risk management policy and procedures, a policy for identifying the number or volume of orders that it can execute without being exposed to undue risk, taking into account both the capital that the firm has available to cover the risk for that type of trade and the prevailing conditions in the market.


4. In accordance with Article 17(2) of Regulation (EU) No 600/2014, the policy referred to in paragraph 3 shall be non-discriminatory to clients.


Article 16

Size specific to the instrument

(Article 18(6) of Regulation (EU) No 600/2014)

 

For the purposes of Article 18(6) of Regulation (EU) No 600/2014, the size specific to the instrument in respect of instruments traded on request for quote, voice, hybrid or other trading forms shall be as set out in Annex III to Commission Delegated Regulation (EU) 2017/583 (10).

 

Recitals 9 - 15

 

(9) This Regulation further specifies the conditions which systematic internalisers must fulfil to comply with the obligation to make quotes public on a regular and continuous basis during normal trading hours and easily accessible to other market participants to ensure that market participants wishing to access the quotes may effectively access them.


(10) Where systematic internalisers publish quotes through more than one means of publication they should provide their quotes simultaneously through each arrangement to ensure that the quotes published are consistent and that market participants may access the information at the same time. Where systematic internalisers make quotes public through the arrangements of a regulated market or a Multilateral Trading Facility (MTF) or through a data reporting services provider they should disclose their identity in the quote in order to enable market participants to direct their orders to it.


(11) This Regulation further specifies various technical aspects of the scope of the transparency obligations of systematic internalisers in order to ensure a consistent and uniform application across the Union. It is necessary that the exception to systematic internalisers' obligation to make public their quotes on a regular and continuous basis be strictly limited to situations where the continued provision of firm prices to clients may be contrary to the prudent management of the risks the investment firm is exposed to in its capacity as systematic internalisers, having regard to other mechanisms which may provide additional safeguards against such risks.


(12) In order to ensure that the exception to systematic internalisers obligations to execute the orders at the quoted prices at the time of reception of the order in accordance with Article 15(2) of Regulation (EU) No 600/2014 is limited to transactions which by their nature do not contribute to price formation, this Regulation further specifies exhaustively the conditions for what constitutes transactions in several securities as part of one transaction and orders subject to conditions other than the current market prices.

 

(13) The criterion specifying that a price falls within a public range close to market conditions reflects the need to ensure that execution by systematic internalisers contribute to price formation whilst not impeding on the possibility for systematic internalisers to offer price improvement in justified cases.


(14) In order to ensure that customers have access to systematic internalisers quotes in a non-discriminatory way but at the same time ensuring a proper risk management which takes into account the nature, scale and complexity of the activities of individual firms, it is necessary to specify that the number or volume of orders from the same client should be regarded as considerably exceeding the norm where a systematic internaliser cannot execute those orders without exposing itself to undue risk, something which should be defined in advance as a part of the firm's risk management policy and be based on objective factors and be stated in writing and made available to customers or potential customers.


(15) Since liquidity providers and systematic internalisers both trade on own account and incur comparable levels of risks, it is appropriate to determine the size specific to the instrument in a uniform way for these categories. Therefore, the size specific to the instrument for the purposes of Article 18(6) of Regulation (EU) No 600/2014 should be the size specific to the instrument determined in accordance with Article 9(5)(d) of Regulation (EU) No 600/2014 and as further specified in regulatory technical standards in accordance with this provision.

 

 

 

 

chronicle   Regulatory chronicle

 

 

 

 

16 July 2020

 

ESMA MiFIR report on systematic internalisers in non-equity instruments, ESMA70-156-2756

 

ESMA MiFID II/MiFIR Review Report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares, ESMA70-156-2682

 

13 July 2020

 

Notice to Stakeholders, Withdrawal of the United Kingdom and EU rules in the field of markets in financial instruments, REV1 - Replaces the notice dated 8 February 2018

 

8 July 2020

 

ESMA updates its Q&As on MiFID II and MiFIR transparency, the new Q&A document provides technical clarifications for the performance of the mandatory systematic internaliser (SI) test.

The Q&A specifies how the number of transactions and the nominal amount traded of a derivative shall be allocated when a derivative contract changes over the observation period from one sub-class to another.

 

30 April 2020


ESMA publishes annual bond transparency calculations, systematic internalisers calculations and new bond liquidity data

 

28 April 2020

 

ESMA publishes templates for quarterly non-equity systematic internaliser datainternaliser data

 

23 March 2020

 

SMSG Response to ESMA’s Consultation Paper concerning MiFIR report on Systematic Internalisers, ESMA22-106-2355

 

3 February 2020

 

ESMA consults on MiFIR transparency regime for systematic internalisers

 

ESMA Consultation Paper, MiFIR report on Systematic Internalisers in non-equity documents, ESMA70-156-1757

 

31 January 2020

 

ESMA publishes data for the systematic internaliser calculations for equity, equity-like instruments and bonds

 

1 August 2019

 

ESMA has published data for the systematic internaliser calculations for equity, equity-like instruments and bonds

 

3 June 2019

 

ESMA updates Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35, among others, on:
- the mandatory as well as voluntary SI regime; and,
- quoting obligation for SI in non-TOTV instruments.

 

Also obsolete Q&As pertaining to either 3 January 2018, or the following 12 months were updated (in particular Q&A 6(b) of section 7 on the compliance with the SI regime and notification to NCAs).

 

10 May 2019

 

ESMA publishes data for the systematic internaliser calculations for equity, equity-like instruments and bonds

 

26 April 2019

 

ESMA updates publication schedule for transparency calculations in May and June 2019

 

1 April 2019


Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35 updated

 

Added Q&As on SI regime 30 and 31

 

30 January 2019

 

Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35 updated:

- the EU wide data for ETCs, ETNs, SFPs, securitised derivatives, emission allowances and derivatives will not be published by ESMA until at the latest 2020,

- no assessment has to be performed by investment firms for ETCs, ETNs, SFPs, securitised derivatives, emission allowances and derivatives until at the latest 2020.

 

14 November 2018

 

Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35 updated

 

ESMA’s clarification on the status of investment firms qualifying as a systematic internaliser in instruments that are not traded on a trading venue (non-TOTV instruments)

 

31 October 2018

 

ESMA publishes data for the systematic internaliser calculations for equity, equity-like instruments and bonds

 

20 September 2018

 

ESMA Opinion, Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1), ESMA70-156-769

 

20 July 2018

 

ESMA has provided access to the template which will be used to publish the first set of figures necessary for investment firms to assess whether they are systematic internalisers in specific financial instruments on 1 August 2018

 

12 July 2018

 

ESMA sets out action plan for systematic internaliser regime calculations and publications (plan focuses on equity, equity-like instruments and bonds while postponing the publication for derivatives and other instruments to 1 February 2019)

 

Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35 updated

 

28 March 2018

 

- Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38

The phrase is added:

“The concept of de facto riskless back-to-back transactions is not confined to pairs of transactions in the same financial instrument. Other arrangements, for example where one leg is a securities transaction and the other is a derivative which references that security, could also be deemed as having the objective or consequence of carrying out de facto riskless back-to-back transactions.”

 

- Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35 updated

 

26 March 2018

 

ESMA’s Final Report, Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1), ESMA70-156-354 - ESMA did not amend its proposal following the consultation

 

9 November 2017

 

- ESMA Consultation Paper, Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1), ESMA70-156-275 - amendment to the SI‘s tick-size exemption

 

- MIFID II: ESMA consults on systematic internalisers’ quote rules

 

28 August 2017

 

Commission Delegated Regulation (EU) 2017/2294 of 28 August 2017 amending Delegated Regulation (EU) 2017/565 as regards the specification of the definition of systematic internalisers for the purposes of Directive 2014/65/EU

New Article 16a has been inserted into the Delegated Regulation (EU) 2017/565 with the following wording:
“Article 16a
Participation in matching arrangements
An investment firm shall not be considered to be dealing on own account for the purposes of Article 4(1)(20) of Directive 2014/65/EU where that investment firm participates in matching arrangements entered into with entities outside its own group with the objective or consequence of carrying out de facto riskless back-to-back transactions in a financial instrument outside a trading venue.”

 

 

 

 

 

 

IMG 0744

Documentation

 

 

 

 

 

 

ESMA’s Final Report, Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1), 26 March 2018, ESMA70-156-354

 

ESMA Consultation Paper, Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1), 09 November 2017, ESMA70-156-275

 

MIFID II: ESMA consults on systematic internalisers’ quote rules, 09 November 2017

 

Commission Delegated Regulation of 28.8.2017 amending Delegated Regulation (EU) 2017/565 as regards the specification of the definition of systematic internalisers for the purposes of Directive 2014/65/EU (C(2017)5812)

 

ESMA's Opinion OTC derivatives traded on a trading venue (TOTV), 22 May 2017, ESMA70-156-117

 

Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38

 

ESMA's letter to the European Commission on MiFID II systematic internalisers operating broker crossing networks, 1 February 2017, ESMA70-872942901-19

 

Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35

 

Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive

 

Commission Delegated Regulation (EU) 2017/575 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards concerning the data to be published by execution venues on the quality of execution of transactions, OJ L 87, 31.3.2017, p. 152–165

 

Commission Delegated Regulation (EU) 2017/576 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution, OJ L 87, 31.3.2017, p. 166–173

 

Commission Delegated Regulation (EU) 2017/567 of 18 May 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions, OJ L 87, 31.3.2017, p. 90–116

 

Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives (RTS 2)

 

Commission Delegated Regulation (EU) 2017/587 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and on transaction execution obligations in respect of certain shares on a trading venue or by a systematic internaliser (RTS 1)

 

ESMA's Discussion Paper on MiFID II/MiFIR of 22 May 2014, ESMA/2014/548

 

Final Report ESMA's Technical Advice to the Commission on MiFID II and MiFIR of 19 December 2014 (ESMA /2014/1569)

 

Regulatory technical and implementing standards – Annex I, 28 September 2015 (ESMA/2015/1464)

 

UK HM Treasure MiFID II Consultation Impact Assessment, p. 8

 

Cost Benefit Analysis – Annex II Draft Regulatory and Implementing Technical Standards MiFID II/MiFIR, 28 September 2015 (ESMA/2015/1464)

 

 

 

 

 

 

clip2

Links

 

 

 

 

 

 

ESMA‘s register of systematic internalisers under MiFID II

 

Data for the systematic internaliser calculations

 

ESMA’s template to be used to publish the first set of figures necessary for investment firms to assess whether they are systematic internalisers in specific financial instruments on 1 August 2018

 

German Federal Financial Supervisory Authority (BaFin) website on systematic internalisation

 

Systematic internaliser notification pursuant to section 79 sentence 1 of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG), BaFinWpHG), BaFin

 

Christoph Kumpan, Hendrik Müller-Lankow, The multilateral single-dealer system - an oxymoron under MiFID II?, 13 September 2017

 

ITG, MiFID II: Systematic Internalisers and Liquidity Unbundling

 

MiFID II may triple dark trading in Europe as new venues soar

 

MiFIDʼs Controversial Dark-Trade Workaround Has Some Crying Foul

 

Nasdaq says SIs have unfair advantages

 

EU Commission to address MiFID II systemic internaliser loophole

 

Financial Instruments Reference Data System (FIRDS)

 

Delay to SI regime presents 'new unknowns' for industry

 

ISDA MiFID CP Submission