Głowacki Law Firm

Systematic internaliser’s pre-trade transparency for bonds, structured finance products, emission allowances and derivatives

 

 

MiFID II requirements for systematic internalisers (SIs) acknowledge the fact that internalisation of order flow by SIs has a material impact on price formation.

 

Consequently, the main purpose of the respective legal regime is to ensure that SI’s client orders are subject to trade transparency requirements on a level playing field with trading venues, while taking into account the different market participants' characteristics.

 

Legal framework stipulating requirements for systematic internalisers to make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives can be assessed as a rather complex, the respective provisions being dispersed across MiFIR, secondary legislation as well as regulatory clarifications.

 

The prices quoted by systematic internalisers are required to be such as to ensure that the systematic internaliser complies with its obligations under Article 27 of the MiFID II (obligation to execute orders on terms most favourable to the client), where applicable, and must reflect prevailing market conditions in relation to prices at which transactions are concluded for the same or similar instruments on a trading venue.

 

To understand systematic internaliser’s obligations with respect to pre-trade transparency for bonds, structured finance products, emission allowances and derivatives it is useful to highlight some key important distinctions:

 

1. Systematic internaliser in non-equity instruments, provides a quote to a client, in principle, on request;


2. When such request was made and the SI’s quote was delivered to the requesting client, there is the case to specify the instances and procedures when the said quote:


- is “made public”,


- is “available to their other clients” (within the same or other categories of clients).

 

3. Making quotes “available to their other clients” means that the quotes are disclosed and may be acted upon by other SI’s clients (Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35, Answer 9 updated on 3 October 2017). The respective provision is Article 18(5) MiFIR.

It is the voluntary decision of the SIs whether they make the quote available to other categories of clients.

 

4. When the SI’s quotes are “made public” (Article 18(1) and 18(8) MiFIR) the quotes are only disclosed and can not be acted upon.

  

 

Scope of the requirements - exceptions

 

 

The systematic internalisers’ obligation to publish a firm quote do not apply to financial instruments that fall below the liquidity threshold (Article 18(6) and Article 9(4) MiFIR).

 

Requirements to make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives do not apply to systematic internalisers when they deal in sizes above the size specific to the financial instrument (SSTI - Article 18(10) and Article 9(5)(d) MiFIR).

 

When the quoted size is above the SSTI systematic internalisers are also freed from the requirement to enter into transactions under the published conditions with any other client to whom the quote is made available (Article 18(6) and Article 9(5)(d) MiFIR).

 

 

Systematic internalisers’ obligation to publish firm quotes

 

 

The extent of the obligation for systematic internalisers to make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives is dependent on the liquidity of the market at issue.

 

Liquid markets

 

In the case of liquid markets as defined in MiFIR systematic internalisers must make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives traded on a trading venue for which they are systematic internalisers when the following conditions are fulfilled (Article 18(1)(a) of MiFIR):


(a) they are prompted for a quote by a client of the systematic internaliser;


(b) they agree to provide a quote.

 

The above requirements are neutral concerning the technology used for prompting quotes.

 

A systematic internaliser can be prompted for and provide quotes through any electronic system, client orders routed by an automated order router (AOR) including.

 

Illiquid markets

 

According to MiFIR (Article 18(2)), in relation to products traded on a trading venue for which there is not a liquid market, systematic internalisers must disclose quotes to their clients on request only if they agree to provide a quote.

 

This obligation may be waived where the following conditions are met:

 

(a) orders that are large in scale (LIS) compared with normal market size and orders held in an order management facility of the trading venue pending disclosure;

 

(b) actionable indications of interest in request-for-quote and voice trading systems that are above a size specific to the instrument (SSTI), which would expose liquidity providers to undue risk and takes into account whether the relevant market participants are retail or wholesale investors;

 

(c) when it comes to derivatives which are not subject to the trading obligation and to other financial instruments for which there is not a liquid market.

 

ESMA specified its views on the obligations for systematic internalisers dealing in non-equity instruments for which there is no liquid market in the Answer 5d (updated on 31 May 2017, Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35).

 

According to ESMA, “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.”

 

Types of prices considered compliant as firm quotes

 

In the answer to the Question 10 (Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35, updated on 15 November 2017) ESMA has presented its stance as regards types of prices considered compliant as firm quotes.

 

ESMA referred, firstly, to the fact that 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 explained 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, moreover, 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.

 

Making quotes public "on a reasonable commercial basis”

  

MiFIR requires that the quotes published by the SIs are made public in a manner which is easily accessible to other market participants "on a reasonable commercial basis" (Article 18(8) MiFIR).

 

The meaning and scope of this phrase is specified in Articles 6 - 11 of 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.

 

According to these provisions:

 

1.  the price of market data must be based on the cost of producing and disseminating such data and may include a reasonable margin (Article 7);

 

2.   the cost of producing and disseminating market data may include an appropriate share of joint costs for other services provided by systematic internalisers (Article 7);

 

3. market data use be made 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 (Article 8);

 

4. any differentials in prices charged to different categories of customers must 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 (Article 8);

 

5. systematic internalisers must have scalable capacities in place to ensure that customers obtain timely access to market data at all times on a non-discriminatory basis (Article 8);

 

6. systematic internalisers are required to charge for the use of market data according to the use made by the individual end-users of the market data (‘per user basis’), this obligation may be waived where to charge on a per user basis would be disproportionate to the cost of making that data available, having regard to the scale and scope of the data, in case of a refusal to make market data available on a per user basis grounds must be provided and published on the SI’s webpage (Article 9);


7. systematic internalisers are required to put arrangements in place to ensure that each individual use of market data is charged only once (Article 9);


8. systematic internalisers must make market data available without being bundled with other services (Article 10);


9. prices for market data must be charged on the basis of the level of market data disaggregation provided for in Article 12(1) of MiFIR (Article 10);


10. systematic internalisers must 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, the disclosure must 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 systematic internalisers (Article 11).

 

If systematic internalisers make market data available to the public free of charge the above provisions do not apply (with the exception of the requirement to make market data available on the same terms and conditions to all customers falling within the same category in accordance with published objective criteria and without being bundled with other services).

  

Streaming prices to clients

 

On 31 January 2017 ESMA explained that 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.

 

Quotes “made public in a manner which is easily accessible to other market participants”

 

 

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

 

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.

 

ESMA’s answer to Question 5 (updated on 31 May 2017, Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35) specifies ESMA’s views on systematic internalisers’ obligations to make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives in comparison to arrangements applying as regards equity instruments.

 

ESMA referred firstly to Article 13 of the Commission Delegated Regulation (EU) No 2017/567 which stipulates how systematic internalisers should make their quotes public and easily accessible for equity instruments.

 

ESMA observed that 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”.

 

That said 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 Commission Delegated Regulation (EU) No 2017/567 and the quotes should be time-stamped as specified in Article 9(d) 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).

 

ESMA has explicitly confirmed in the said Q&As that, as for equity instruments, also with respect to bonds, structured finance products, emission allowances and derivatives systematic internalisers are required to disclose their identity when making quotes public through the facilities of a regulated market or an APA.

 

 

Making the firm quotes published available to other SI’s clients

 

 

According to Article 18(5) of MiFIR systematic internalisers are required to make the firm quotes published available to their other clients.

 

 

Article 18(5) MiFIR

 

Systematic internalisers shall make the firm quotes published in accordance with paragraph 1 available to their other clients. Notwithstanding, they shall be allowed to 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. To that end, systematic inter­nalisers shall have in place clear standards for governing access to their quotes. Systematic internalisers may refuse to enter into or discontinue business relationships with clients on the basis of commercial considerations such as the client credit status, the counterparty risk and the final settlement of the transaction.

 

“Making quotes available to their other clients” means that the quotes are disclosed and may be acted upon by other SI’s clients (Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35, Answer 9 updated on 3 October 2017).

 

Notwithstanding, SIs are allowed to 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.

 

To that end, systematic inter­nalisers must have in place clear standards for governing access to their quotes.

 

Systematic internalisers may refuse to enter into or discontinue business relationships with clients on the basis of commercial considerations such as the client credit status, the counterparty risk and the final settlement of the transaction.

 

Answering to the question regarding the limitations to the commercial policy for restricting access to quotes in accordance with Article 18(5) of MiFIR (Question 8 updated on 3 October 2017, Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35) ESMA said:

 

“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).”

 

 

Systematic internaliser qa

 

 Source of the diagram: Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35

 

 

SI’s requirement to enter into transactions under the published conditions

 

 

According to Article 18(6) MiFIR, systematic internalisers are required to enter into transactions under the published conditions with any other client to whom the quote was made available in accordance with the above rules when the quoted size is at or below the size specific to the instrument (SSTI).

 

 

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

 

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.

 

The SSTI is defined in this regard by Article 16 of 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, which, in turn, cross-refers to Annex III of the RTS 2 (see - Liquidity assessment, LIS and SSTI thresholds for non-equity financial instruments (Annex III to the 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).

 

Systematic internalisers are allowed to establish non-discriminatory and transparent limits on the number of transactions they undertake to enter into with clients pursuant to any given quote (Article 18(7) MiFIR).

 

In the Answer 9 (updated on 3 October 2017, Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35) ESMA underlined systematic internalisers are 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 even 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.

 

Moreover, MiFIR clearly stipulates (Article 18(5)) that systematic internalisers may refuse to enter into or discontinue business relationships with clients on the basis of commercial considerations such as the client credit status, the counterparty risk and the final settlement of the transaction.

 

In “justified cases”, SIs may execute orders at a better price than the quoted prices provided that this price falls within a public range close to market conditions.

 

In the Answer 23 (updated on 3 October 2017, Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38) ESMA has explained what are those “justified cases” with respect to pre-trade transparency framework for systematic internalisers in shares, depositary receipts, ETFs, certificates and other similar financial instruments.

 

The respectve SI’s pre-trade transparency framework for bonds, structured finance products, emission allowances and derivatives was not mentioned by ESMA on this occasion, but - given that Article 15(2) of MiFIR is analogous in that regard to Article 18(5) - it seems that the parallels may be extended also to the latter regime.

 

In the said Answer 23 ESMA indicated that the purpose of these provisions is to ensure the efficient valuation of the respective instruments and to maximise the possibility for investment firms to obtain the best deal for their clients.

 

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.

 

 

Update of the SI’s quotes

 

 

Systematic internalisers may update their quotes at any time.

 

ESMA referred specifically to the issue for how long the quotes provided by systematic internalisers should be firm or executable.

 

The authority's answer was that "the quote should remain valid for a reasonable period of time allowing clients to execute against it."

 

ESMA added that 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.

 

 

Withdrawal of the SI’s quotes

 

 

Systematic internalisers may withdraw their quotes under exceptional market conditions.

 

 

Application of the systematic internaliser pre-trade obligations on a package order level

 

 

In the answer to the Question 4c (Non-equity transparency, updated on 3 October 2017, Questions and Answers on MiFID II and MiFIR transparency topics, ESMA70-872942901-35) ESMA explained that for pre-trade transparency obligations to apply at package order level, including for an exchange for physical, an investment firm must be a systematic internaliser in all financial instrument components of the order.

 

Where an investment firm is prompted for a quote for a package order for which it is a systematic internaliser only for some components, the investment firm can decide either to provide a firm quote for the whole package or only for the components for which it is a systematic internaliser.

 

 

 

Article 18 MiFIR

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

 

1. Investment firms shall make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives traded on a trading venue for which they are systematic internalisers and for which there is a liquid market when the following conditions are fulfilled:
(a) they are prompted for a quote by a client of the systematic internaliser;
(b) they agree to provide a quote.

 

2. In relation to bonds, structured finance products, emission allowances and derivatives traded on a trading venue for which there is not a liquid market, systematic internalisers shall disclose quotes to their clients on request if they agree to provide a quote. That obligation may be waived where the conditions specified in Article 9(1) are met.

 

3. Systematic internalisers may update their quotes at any time. They may withdraw their quotes under exceptional market conditions.

 

4. 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 systematic internalisers in the Union.

 

5. Systematic internalisers shall make the firm quotes published in accordance with paragraph 1 available to their other clients. Notwithstanding, they shall be allowed to 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. To that end, systematic inter­nalisers shall have in place clear standards for governing access to their quotes. Systematic internalisers may refuse to enter into or discontinue business relationships with clients on the basis of commercial considerations such as the client credit status, the counterparty risk and the final settlement of the transaction.

 

6. Systematic internalisers shall undertake to enter into transactions under the published conditions with any other client to whom the quote is made available in accordance with paragraph 5 when the quoted size is at or below the size specific to the financial instrument determined in accordance with Article 9(5)(d).

Systematic internalisers shall not be subject to the obligation to publish a firm quote pursuant to paragraph 1 for financial instruments that fall below the threshold of liquidity determined in accordance with Article 9(4).

 

7. Systematic internalisers shall be allowed to establish non-discriminatory and transparent limits on the number of transactions they undertake to enter into with clients pursuant to any given quote.

 

8. The quotes published pursuant to paragraph 1 and 5 and those at or below the size referred to in paragraph 6 shall be made public in a manner which is easily accessible to other market participants on a reasonable commercial basis.

 

9. The quoted price or prices shall be such as to ensure that the systematic internaliser complies with its obligations under Article 27 of Directive 2014/65/EU, where applicable, and shall reflect prevailing market conditions in relation to prices at which transactions are concluded for the same or similar financial instruments on a trading venue.

However, in justified cases, they may execute orders at a better price provided that the price falls within a public range close to market conditions.

 

10. Systematic internalisers shall not be subject to this Article when they deal in sizes above the size specific to the financial instrument determined in accordance with Article 9(5)(d).

 

 

 

 

Article 9 MiFIR 

Waivers for non-equity instruments

 

1. Competent authorities shall be able to waive the obligation for market operators and investment firms operating a trading venue to make public the information referred to in Article 8(1) for:
(a) orders that are large in scale compared with normal market size and orders held in an order management facility of the trading venue pending disclosure;
(b) actionable indications of interest in request-for-quote and voice trading systems that are above a size specific to the financial instrument, which would expose liquidity providers to undue risk and takes into account whether the relevant market participants are retail or wholesale investors;
(c) derivatives which are not subject to the trading obligation specified in Article 28 and other financial instruments for which there is not a liquid market.


2. Before granting a waiver in accordance with paragraph 1, competent authorities shall notify ESMA and other competent authorities of the intended use of each individual waiver and provide an explanation regarding their functioning. Notification of the intention to grant a waiver shall be made not less than four months before the waiver is intended to take effect. Within two months following receipt of the notification, ESMA shall issue an opinion to the competent authority in question assessing the compatibility of the waiver with the requirements established in paragraph 1 and specified in the regulatory technical standards adopted pursuant to paragraph 5. Where that competent authority grants a waiver and a competent authority of another Member State disagrees, that competent authority may refer the matter back to ESMA, which may act in accordance with the powers conferred on it under Article 19 of Regulation (EU) No 1095/2010. ESMA shall monitor the application of the waivers and submit an annual report to the Commission on how they are applied in practice.


3. Competent authorities, may, either on their own initiative or upon request by other competent authorities, withdraw a waiver granted under paragraph 1 if they observe that the waiver is being used in a way that deviates from its original purpose or if they consider that the waiver is being used to circumvent the requirements established in this Article.
Competent authorities shall notify ESMA and other competent authorities of such withdrawal without delay and before it takes effect, providing full reasons for their decision.


4. The competent authority responsible for supervising one or more trading venues on which a class of bond, structured finance product, emission allowance or derivative is traded may, where the liquidity of that class of financial instrument falls below a specified threshold, temporarily suspend the obligations referred to in Article 8. The specified threshold shall be defined on the basis of objective criteria specific to the market for the financial instrument concerned. Notification of such temporary suspension shall be published on the website of the relevant competent authority.


The temporary suspension shall be valid for an initial period not exceeding three months from the date of its publication on the website of the relevant competent authority. Such a suspension may be renewed for further periods not exceeding three months at a time if the grounds for the temporary suspension continue to be applicable. Where the temporary suspension is not renewed after that three-month period, it shall automatically lapse.


Before suspending or renewing the temporary suspension under this paragraph of the obligations referred to in Article 8, the relevant competent authority shall notify ESMA of its intention and provide an explanation. ESMA shall issue an opinion to the competent authority as soon as practicable on whether in its view the suspension or the renewal of the temporary suspension is justified in accordance with the first and second subparagraphs.


5. ESMA shall develop draft regulatory technical standards to specify the following:
(a) the parameters and methods for calculating the threshold of liquidity referred to in paragraph 4 in relation to the financial instrument. The parameters and methods for Member States to calculate the threshold shall be set in such a way that when the threshold is reached, it represents a significant decline in liquidity across all venues within the Union for the financial instrument concerned based on the criteria used under Article 2(1)(17);
(b) the range of bid and offer prices or quotes and the depth of trading interests at those prices, or indicative pre-trade bid and offer prices which are close to the price of the trading interest, to be made public for each class of financial instrument concerned in accordance with Article 8(1) and (4), taking into account the necessary calibration for different types of trading systems as referred to in Article 8(2);
(c) the size of orders that are large in scale and the type and the minimum size of orders held in an order management facility pending disclosure for which pre-trade disclosure may be waived under paragraph 1 for each class of financial instrument concerned;
(d) the size specific to the financial instrument referred to in paragraph 1(b) and the definition of request-for-quote and voice trading systems for which pre-trade disclosure may be waived under paragraph 1;
When determining the size specific to the financial instrument that would expose liquidity providers to undue risk and takes into account whether the relevant market participants are retail or wholesale investors, in accordance with paragraph 1(b), ESMA shall take the following factors into account:
(i) whether, at such sizes, liquidity providers would be able to hedge their risks;
(ii) where a market in the financial instrument, or a class of financial instruments, consists in part of retail investors, the average value of transactions undertaken by those investors;
(e) the financial instruments or the classes of financial instruments for which there is not a liquid market where pre-trade disclosure may be waived under paragraph 1.


ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015.


Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

 

  

 

Articles 6 - 11 and 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.

   

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.


 

 

 

Questions and Answers on MiFID II and MiFIR Systematic Internaliser Regime

 

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

 

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 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.

 

 

Non-equity transparency

 

 

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

 

When does an investment firm apply the systematic internaliser obligations on a package order level?

 

Answer 4c

 

For pre-trade transparency obligations to apply at package order level, including for an exchange for physical, an investment firm must be a systematic internaliser in all financial instrument components of the order. Where an investment firm is prompted for a quote for a package order for which it is a systematic internaliser only for some components, the investment firm can decide either to provide a firm quote for the whole package or only for the components for which it is a systematic internaliser.

 

 

 

 

Questions and Answers on MiFID II and MiFIR Systematic Internaliser Regime

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

 

Question 22 [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 22

 

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 23 [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 23

 

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.

 

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

 

MiFIR Article 18 and Article 9

 

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, Articles 6 - 11 and 16

 

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), Annex III

 

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)

 

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

 

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

 

 

 

 

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Last Updated on Saturday, 06 July 2019 19:55
 

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