What’s a Systematic Internaliser (SI)?
Data Enrichment
Compliance Support
Reduce Costs
A Systematic Internaliser (SI) is basically an investment firm that deals on its own account (using its own proprietary capital) without operating a multilateral system (i.e. is a sole dealer).
The table below breaks down the main elements of the Systematic Internaliser, as defined under Article 4(1)(20) of MiFID II. Note, there is no obvious difference in the definition between the FCA and ESMA.
| Element of definition & other questions | Application |
|---|---|
| Investment firm | Legal person whose occupation or business is the provision of investment services or performance of investment activities (Article 4(1)(1) of MiFID II). |
| Dealing: • ‘Organised, • Frequent, • Systematic, and • Substantial basis’ | Measured by: (i) number of OTC trades on own account as a proportion of number of derivatives executed in the European Union (EU) (at least 2.5%) on any trading venue or OTC; and transactions occur at least once per week (Article 15(a) of regulation EU/ 2017/565); or (ii) size of OTC trading on own account as a proportion of total turnover of the investment firm (5%) or total turnover in the EU (1%) (Article 15(c) of regulation EU/ 2017/565). |
| Execute client orders | The investment firm is taken to execute the client order where the counterparty is not an authorised financial institution. |
| Outside of a regulated market (RM), multilateral trading facility (MTF) or organised trading facility (OTF) | The SI cannot bring together third-party interests in the same way as a trading venue (a facility where third-party buying and selling interests interact) – this would require authorisation as an MTF. |
| When does the SI regime apply? | When the pre-set limits for frequent and systematic and substantial basis are crossed or the investment firm opts-in to the SI regime. Under MiFID I, the SI regime applied solely to shares/equities, whereas under MiFID II it applies to a broader range of equities and non-equities. Note, FX brokers and CFD brokers are unlikely to be classified as SIs due to the products they offer. |
| When will counterparties become SIs? | The status of a firm as an SI needs to be measured against the relevant criteria on a quarterly basis, based on data from the past six months. For equity, bonds and non-equity instruments – ESMA publishes information on the total number and the volume of transactions executed in the EU on the ESMA website in spreadsheet format which can be accessed here. The date by which investment firms must undertake their assessment and comply with SI obligations where appropriate (including notifying their NCA) can be found at the link referenced immediately prior. Quarterly updates for subsequent assessments – ESMA will publish data by the first calendar day of February, May, August and November. Investment firms are expected to perform the calculations and comply with the SI regime by the fifteenth calendar day of February, May, August and November respectively. |
What are the differences between SIs and Trading Venues?
| SI | Trading Venue |
|---|---|
| Deal on own account | Execution only |
| Considered a counterparty | Not considered a counterparty but a facility |
| Single dealer | Multilateral dealer platform |
| Does not engage in matched principal trading (MPT) regularly | All trades are principal to principal |
| Registered as SI and corresponding authorisations and obligations | Registered as a regulated market or investment firm |
SIs and trading venues mainly differ in that the trading venue does not deal on its own account (as it deals with client capital) and is not considered a counterparty like SIs, but a facility.
Trading venues are multilateral dealer platforms and registered as an RM or investment firm, whereas SIs are sole dealers and registered as an SI with corresponding authorisations and obligations. Importantly, SIs cannot engage in matched principal trading (MPT) on a regular basis or other types of de facto riskless back-to-back transactions outside a Trading Venue (pursuant to Delegated Regulation 2017/5812) as opposed to the trading venue which can.
Note that an occasional and non-regular basis is where the investment firm:
- operates a system intended to match client orders;
- has a recurrent or significant source of revenue derived from non-risk facing activities; or
- markets or promotes its matched principal basis.
The features and restrictions of MiFID II Trading Venues are set out below:
| MiFID II Trading Venues | Features | Restrictions |
|---|---|---|
| Regulated Market (RM) | • Operated by market operator • Authorised by a national competent authority (NCA) under MiFID II (Title III) as an RM • No discretion in execution rules • Examples: London Stock Exchange, Euronext London, Cyprus Stock Exchange | Cannot: • deal on own account • act as matched principal |
| Multilateral Trading Facility (MTF) | • Operated by investment firm or market operator • Authorised by NCA under MiFID II (Title II) as investment firm • No discretion in execution rules • Examples: UBS MTF, Sigma X | Cannot: • deal on own account • act as matched principal |
| Organised Trading Facility (OTF) | • Not an RM or an MTF • Authorised by NCA under MiFID II (Title II) as investment firm • Interests in bonds, structured finance products, emission allowances or derivatives • Has discretion in execution rules • Examples: Cube Investing, Mariana Capital, Reyker | • Cannot deal on own account • Can act as matched principal in limited circumstances • Needs to be licenced • Conduct of business requirements |
| What about OTC Transactions? | Financial instruments whose immediate underlying is admitted to trading on a trading venue are also subject to MiFID II requirements, even when these instruments are traded off-venue e.g., OTC derivatives contracts that are deemed to be ‘economically equivalent’ to the venue-listed instruments. | |
What does an SI have to do differently to an investment firm?
Investment firms need to notify their NCA of their SI status including any changes to their position (e.g. ceasing to be an SI) or in the class of its financial instruments. 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 and also establish a means for responding to such 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 report relevant data. They should also create and maintain a list of all financial instruments for which they are an SI and is available at any time if their NCA requests access to such information.
When is an investment firm considered an SI?
| Instrument | Where there is a Liquid Market | Where there is not a liquid market | |||
|---|---|---|---|---|---|
| Systematic basis (minimum) | Frequent basis | Frequent basis Substantial basis | Frequent and Systematic Basis | Substantial basis (minimum) | |
| • shares • depositary receipts • ETFs • certificates • other similar financial instruments | 0.4% | Daily | 15% of IF’s total turnover OR 0.4% of EU’s total turnover | Daily | 15% of IF’s total turnover OR 0.4% of EU’s total turnover |
| bonds | 2.5% | Weekly | 25% of IF’s total turnover OR 1% of EU’s total turnover | Weekly | 25% of IF’s total turnover OR 1% of EU’s total turnover |
| structured Finance Products | 4% | Weekly | 30% of IF’s total turnover OR 2.25% of EU’s total turnover | Weekly | 30% of IF’s total turnover OR 2.25% of EU’s total turnover |
| derivatives | 2.5% | Weekly | 25% of IF’s total turnover OR 1% of EU’s total turnover | Weekly | 25% of IF’s total turnover OR 1% of EU’s total turnover |
| emission Allowances | 4% | Weekly | 30% of IF’s total turnover OR 2.25% of EU’s total turnover | Weekly | 30% 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.
| Conditions | Meet Criteria? | |
|---|---|---|
| Step 1 – determine if there is a liquid market | ||
| Offers DAX ETFs | There is a liquid market | |
| Step 2 – determine if there is a frequent, systematic and substantial basis | ||
| Systematic basis | Internalises 10% of all orders received | Yes – 10% > 0.4% |
| Frequent basis | Deal with OTC transactions on own account everyday | Yes – daily |
| Substantial basis | The 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 trillion | Yes – 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.
| Conditions | Meet Criteria? | |
|---|---|---|
| Step 1 – determine if there is a liquid market | ||
| Offers illiquid bonds | There is not a liquid market | |
| Step 2 – determine if there is a frequent, systematic and substantial basis | ||
| Frequent and Systematic basis | Deal with OTC transactions on own account every week | Yes – weekly |
| Substantial basis | The total turnover they internalise over 6 months is EUR 200 billion and the total turnover in EU during the same period is EUR 10 trillion | Yes– 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.
| Conditions | Meet Criteria? | |
|---|---|---|
| Step 1 – determine if there is a liquid market | ||
| Offers Vodafone shares | There is a liquid market | |
| Step 2 – determine if there is a frequent, systematic and substantial basis | ||
| Systematic basis | Internalises 20% of all orders received | Yes – 20% > 0.4% |
| Frequent basis | Deal with OTC transactions on own account once a week | No – weekly, it needs to be daily in order to meet the criteria |
| Substantial basis | No – weekly, it needs to be daily in order to meet the criteria | No – 200 billion/10 trillion =2 % < 15% |
| Step 3 – conclusion | ||
| No – XYZ Broking is not considered an SI in this instrument as not all criteria have been met. | ||
Can't find the answers
you're looking for?
Get in touch with us for assistance.