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Systematic internaliser (SI) in MiFID II - a counterparty, not a trading venue - Page 3

 

 

 

 

 

 

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Question 1 [Last update: 03/11/2016 - outdated]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

 

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.

 

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 20 [Last update: 03/04/2017]

 

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 20


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 21 [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 21

 

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 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.

 

 

 

 

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

Systematic internaliser regulatory chronicle 

 

 

 

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

 

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)

 

 

 

 

 

 

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    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 

 

 

 

 



Last Updated on Saturday, 10 August 2019 20:06
 

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