What’s a Systematic Internaliser?
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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 page, we guide you through the assessment process:
- What is a Systematic Internaliser?
- What does a ‘frequent, systematic and substantial basis’ mean?
- When is an IF considered a SI?
- How does an IF become a SI?
- What does a SI have to do differently to an IF?
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 every year 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.
| 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 a SI in this instrument as not all criteria have been met. | ||
How does an IF become a SI?
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:
- opt-in to act as SI;
- ceased to be a SI where they previously opted-in;
- ceased acting as SIs in all the classes of financial instruments previously notified;
- started acting as SIs in a class of financial instruments; or
- 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.
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