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. TRAction guides you through the assessment process.
What is a Systematic Internaliser (SI)?
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 (off exchange or outside a regulated market (RM), multilateral trading facility (MTF) or organised trading facility (OTF)) 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.
What are the differences between SIs and Trading Venues?
While trading venues are facilities in which multiple third-party buying and selling interests interact in the system, a Systematic Internaliser is not permitted to bring together third-party buying and selling interests in functionally the same way as a trading venue. Such activity requires authorisation as an MTF. The main differences in characteristics are as follows:
|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) on a regular basis||All trades are principal to principal|
|Registered as SI and corresponding authorisations and obligations||Registered as regulated market or investment firm|
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: