Each Investment Firm (IF) is required to make a quarterly assessment on its previous 6 months’ data to determine if it qualifies as a Systematic Internaliser (SI). Where an IF is classified as a SI, it will be obliged to meet the pre- and post-trade transparency requirements. In this article, we guide you through the assessment process.

What is a Systematic Internaliser?

As defined in Article 4(1)(20) of Directive 2014/65/EU (“MiFID II”), a SI is an investment firm which executes client orders OTC (or off exchange) on its own account on a frequent, systematic and substantial basis.

What does a “frequent, systematic and substantial basis” mean?

The definition of frequent, systematic and substantial basis, as per EU Regulation 2017/565, depends on the instruments that have been traded, measured over a 6-month period.

  • Systematic basis – the number of OTC client executions taking place on own account as a proportion of the number of transactions in the relevant instrument or class executed in the European Union (EU) on any trading venue or OTC (ESMA publishes data on its website by the first calendar day of February, May, August and November every year)
  • Frequent basis – on average how often OTC client executions take place own account
  • Substantial basis – the size of OTC client executions on own account as a proportion of total turnover of the IF or total turnover across the EU

When is an IF considered a SI?

The table below shows the criteria that qualifies an IF to be a SI. A few examples are in the tables that follow.

InstrumentWhere there is a Liquid MarketWhere there is not a liquid market
Systematic basis (minimum)Frequent basisFrequent basis
Substantial basis


Frequent and Systematic BasisSubstantial basis (minimum)
• shares
• depositary receipts
• ETFs
• certificates
• other similar financial instruments
0.4%Daily15% of IF’s total turnover
OR
0.4% of EU’s total turnover
Daily15% of IF’s total turnover
OR
0.4% of EU’s total turnover
bonds2.5%Weekly25% of IF’s total turnover
OR
1% of EU’s total turnover
Weekly25% of IF’s total turnover
OR
1% of EU’s total turnover
structured Finance Products4%Weekly30% of IF’s total turnover
OR
2.25% of EU’s total turnover
Weekly30% of IF’s total turnover
OR
2.25% of EU’s total turnover
derivatives2.5%Weekly25% of IF’s total turnover
OR
1% of EU’s total turnover
Weekly25% of IF’s total turnover
OR
1% of EU’s total turnover
emission Allowances4%Weekly30% of IF’s total turnover
OR
2.25% of EU’s total turnover
Weekly30% of IF’s total turnover
OR
2.25% of EU’s total turnover
*Liquid Market is defined in Article 2(1)(17)(b) of Regulation (EU) No 600/2014

Example 1

ABC Broking has the ‘dealing on own account’ authorisation on their licence and deals on their own account.

ConditionsMeet Criteria?
Step 1 – determine if there is a liquid market
Offers DAX ETFsThere is a liquid market
Step 2 – determine if there is a frequent, systematic and substantial basis
Systematic basisInternalises 10% of all orders receivedYes – 10% > 0.4%
Frequent basisDeal with OTC transactions on own account everydayYes – daily
Substantial basisThe total turnover they internalise over 6 months is EUR 500 billion and the total turnover they have during the same period is EUR 1.5 trillionYes – 500 billion/1.5 trillion = 33% > 15%
Step 3 - conclusion
Yes – ABC Broking is considered a SI in this instrument as all criteria have been met.

Example 2

DEF Broking has the ‘dealing on own account’ authorisation on their licence and deals on their own account.

ConditionsMeet Criteria?
Step 1 – determine if there is a liquid market
Offers illiquid bondsThere is not a liquid market
Step 2 – determine if there is a frequent, systematic and substantial basis
Frequent and Systematic basisDeal with OTC transactions on own account every weekYes – weekly
Substantial basisThe total turnover they internalise over 6 months is EUR 200 billion and the total turnover in EU during the same period is EUR 10 trillionYes – EUR 200 billion/EUR 10 trillion = 2 % > 1 % (substantial basis)
Step 3 - conclusion
Yes – DEF Broking is considered a SI in this instrument as all criteria have been met.

Example 3

XYZ Broking has the ‘dealing on own account’ authorisation on their licence and deals on their own account

ConditionsMeet Criteria?
Step 1 – determine if there is a liquid market
Offers Vodafone sharesThere is a liquid market
Step 2 – determine if there is a frequent, systematic and substantial basis
Systematic basisInternalises 20% of all orders receivedYes – 20% > 0.4%
Frequent basisDeal with OTC transactions on own account once a week No – weekly, it needs to be daily in order to meet the criteria
Substantial basisThe total turnover they internalise over 6 months is EUR 10 billion and the total turnover they have during the same period is EUR 500 billionNo – 200 billion/10 trillion =2 % < 15%
Step 3 - conclusion
No - XYZ Broking is not considered a SI in this instrument as not all criteria have been met.

How does an IF become a SI?

As illustrated above in the examples, if the threshold is met in any of the relevant instruments, an IF will become as SI in that specific instrument and has an obligation to notify their local NCA of the status.

As IFs are able to opt-in to, or opt-out of, the SI regime for different asset classes at any time, they are required to notify their NCA in any one of the following circumstances:

  1. opt-in to act as SI;
  2. ceased to be a SI where they previously opted-in;
  3. ceased acting as SIs in all the classes of financial instruments previously notified;
  4. started acting as SIs in a class of financial instruments; or
  5. ceased acting as SIs in a class of financial instruments.

What does a SI have to do differently to an IF?

SIs are subject to pre- and post-trade transparency requirements.  They must make public pre-trade quotes (on request or by choice) through a Trading Venue, Approved Publication Arrangement (“APA”) or on the firm’s website.  Accordingly, SIs will need to establish means for responding to requests for quotes. 

They are also subject to post-trade transaction reporting requirements, whereby a wide range of information in relation to the trades executed needs to be reported to an Approved Reporting Mechanism (“ARM”).  SIs will need to have systems in place for gathering and reporting relevant data.

Additionally, IFs should also create and maintain a list of all financial instruments for which they are a SI and the list should be made available if at any time their NCA request to access such information.

If you have any questions, please contact us.

Emma Ladlow

Emma works in our Sydney office. At TRAction, she works on implementing changes to regulations, improving and expanding our regulatory reporting services and helping with new business initiatives. She has over 7 years’ experience in the finance industry with more than 5 years’ experience specialised in transaction reporting. She worked for one of the largest financial services organisations in the UK and then moved to Australia in November 2018 to join TRAction.