Systematic Internalisers

What is a Systematic Internaliser (SI)?

SIs are defined as “investment firms which, on an organised, frequent, systematic and substantial basis, deal on own account when executing client orders outside a regulated market, an MTF or an OTF”. The original definition had been introduced by MiFID in 2007, then however being limited to the trading in shares and with no quantitative specification as to the systemic relevance.

To this end, the definition now includes the trading venue category “OTF” and the term ”substantial” effectuating that the SI regime will be applicable to equity-like instruments (depositary receipts, ETFs, certificates and other similar financial instruments) and non-equity instruments (derivatives, bonds, structured finance products and emission allowances).

The substantiality will be calculated by either an investment firms OTC trading volume in a specific instrument vs. its total trading volume in this instrument or, alternatively, by an investment firm’s OTC trading volume in a specific instrument vs. the total trading in the European Union in this instrument. In addition, a systematic internaliser should not be allowed to bring together third party buying and selling interests in functionally the same way as a trading venue.

What are the Systemic Internaliser criteria for equity and equity-like instruments?

Frequent and systematic

The investment firm internalises on a frequent and systematic basis if the number of OTC transactions executed by the investment firm on own account when executing client orders in liquid instruments is, during the last six months equal or larger than 0.4 per cent of the total number of transactions in the relevant financial instrument in the Union executed on any trading venue or OTC during the same period. At a minimum the investment firm shall deal on own account in such instrument on average on a daily basis to be considered as meeting the frequent and systematic basis criteria.

For shares, depositary receipts, ETFs, certificates and other similar financial instruments for which there is not a liquid market as determined in accordance with Article 2(1)(17)(b) of MiFIR the condition is deemed to be met when the investment firm deals on own account OTC in the same financial instrument on average on a daily basis during the last six months.

Substantial basis

The investment firm internalises on a substantial basis if the size of OTC trading carried out by the investment firm on own account when executing client orders is, during the last six months, equal or larger than either:

• 15 per cent of the total turnover in that financial instrument executed by the investment firm on own account or on behalf of clients and carried out on any trading venue or OTC; or
• 0.4 per cent of the total turnover in that financial instrument executed in the European Union and carried out on any EU trading venue or OTC

The investment firm shall assess whether it meets the conditions above on a quarterly basis based on data from the last six months. These assessments shall be performed on the first working day of the months of January, April, July and October. Newly issued instruments shall only be considered when historical data covers a period of at least three months.

When the conditions above are both met, the investment firm shall comply within two months with all requirements set in Articles 13, 14, 15 and 16 of MiFIR.

When setting the numerical thresholds to be used to assess the frequent, systematic and substantial basis, ESMA advises the European Commission to clarify and, where appropriate, take into consideration the interlinks that might exist between the systematic internaliser regime and the trading obligation for shares as defined under Article 23 of MiFIR.

What are the Systemic Internaliser criteria for bonds?

Frequent and systematic

The investment firm internalises on a frequent and systematic basis if the number of transactions executed by the investment firm on own account OTC in liquid instruments is, during the last six months, equal or larger than 2 to 3 per cent of the total number of transactions in the relevant financial instrument in the European Union executed on any trading venue or OTC during the same period. At a minimum the investment firm shall deal on own account in such instrument on average once a week to be considered as meeting the frequent and systematic basis criteria.

For instruments for which there is not a liquid market the condition is deemed to be met when the investment firm dealt on own account OTC in the same financial instrument on average once a week during the last six months.

Substantial basis

The investment firm internalises on a substantial basis if the size of OTC trading carried out by the investment firm on own account, during the last six months, is equal or larger than either:

• 25 per cent of the total nominal amount traded in that financial instrument executed by the investment firm on own account or on behalf of clients and carried out on any trading venue or OTC; or
• 0.5 to 1.5 per cent of the total nominal amount traded in that financial instrument executed in the European Union and carried out on any EU trading venue or OTC.

The investment firm shall assess whether it meets the conditions above on a quarterly basis based on data from the last six months. These assessments shall be performed on the first working day of the months of January, April, July and October. Newly issued instruments shall only be considered when historical data covers a period of at least six weeks.

When the conditions above are both met, the investment firm shall comply within two months with all requirements related to systematic internalisation and in particular Article 18 of MiFIR.

What are the Systemic Internaliser criteria for structured finance products?

Frequent and systematic

The investment firm internalises on a frequent and systematic basis if the number of transactions executed by the investment firm on own account OTC in liquid instruments, during the last six months, is equal or larger than 3 to 5 per cent of the total number of transactions in the relevant financial instrument in the European Union executed on any trading venue or OTC during the same period. At a minimum the investment firm shall deal on own account in such instrument on average once a week to be considered as meeting the frequent and systematic basis criteria.

For instruments for which there is not a liquid market the condition is deemed to be met when the investment firm dealt on own account OTC in the same financial instrument on average once a week during the last six months.

Substantial basis

The investment firm internalises on a substantial basis if the size of OTC trading carried out by the investment firm on own account, during the last six months, is equal or larger than either:

• 30 per cent of the total nominal amount traded in that financial instrument executed by the investment firm on own account or on behalf of clients and carried out on any trading venue or OTC; or
• 1.5 to 3 per cent of the total nominal amount traded in that financial instrument executed in the European Union and carried out on any EU trading venue or OTC

The investment firm shall assess whether it meets the conditions above on a quarterly basis based on data from the last six months. These assessments shall be performed on the first working day of the months of January, April, July and October. Newly issued instruments shall only be considered when historical data covers a period of at least six weeks.

When the conditions above are both met, the investment firm shall comply within two months with all requirements related to systematic internalisation and in particular Article 18 of MiFIR.

What are the Systemic Internaliser criteria for derivatives?

Frequent and systematic

The investment firm internalises on a frequent and systematic basis if the number of transactions executed by the investment firm on own account OTC in a specific class of derivatives, during the last six months, is equal or larger than 2 to 3 per cent of the total number of transactions in the relevant class of derivatives in the European Union executed on any trading venue or OTC during the same period. At a minimum the investment firm shall deal on own account in such class of derivatives on average once a week to be considered as meeting the frequent and systematic basis criteria.

For classes of derivatives for which there is not a liquid market the condition is deemed to be met when the investment firm dealt on own account OTC in the same class of derivatives on average once a week during the last six months.

Substantial basis

The investment firm internalises on a substantial basis if the size of OTC trading carried out by the investment firm on own account is, during the last six months, equal or larger than either:

• 25 per cent of the total notional amount traded in that financial instrument executed by the investment firm on own account or on behalf of clients and carried out on any trading venue or OTC; or
• 0.5 to 1.5 per cent of the total notional amount traded in that financial instrument executed in the European Union and carried out on any EU trading venue or OTC.

The investment firm shall assess whether it meets the conditions above on a quarterly basis based on data from the last six months. These assessments shall be performed on the first working day of the months of January, April, July and October. Newly issued instruments shall only be considered when historical data covers a period of at least six weeks.

When the conditions above are both met, the investment firm shall comply within two months with all requirements related to systematic internalisation and in particular Article 18 of MiFIR.

What are the Systemic Internaliser criteria for emission allowances?

Frequent and systematic

The investment firm internalises on a frequent and systematic basis if the number of transactions executed by the investment firm on own account OTC in liquid emission allowances, during the last six months, is equal or larger than 3 to 5 per cent of the total number of transactions in the relevant type of emission allowances in the Union executed on any trading venue or OTC during the same period. At a minimum the investment firm shall deal on own account in this type of emission allowances on average once a week to be considered as meeting the frequent and systematic basis criteria.

For instruments for which there is not a liquid market the condition is deemed to be met when the investment firm dealt on own account OTC in the same type of emission allowances on average once a week during the last six months.

Substantial basis

The investment firm internalises on a substantial basis if the size of OTC trading carried out by the investment firm on own account, during the last six months, is equal or larger than either:

• 30 per cent of the total nominal amount traded in that type of emission allowances executed by the investment firm on own account or on behalf of clients and carried out on any trading venue or OTC; or
• 1.5 to 3 per cent of the total nominal amount traded in that type of emission allowances executed in the European Union and carried out on any EU trading venue or OTC.

The investment firm shall assess whether it meets the conditions above on a quarterly basis based on data from the last six months. These assessments shall be performed on the first working day of the months of January, April, July and October. When the conditions above are both met, the investment firm shall comply within two months with all requirements related to systematic internalisation and in particular Article 18 of MiFIR.

Thresholds for non-equity financial instruments¹

* and at least once a week

* and at least once a week

* and at least once a week

* and at least once a week

¹⁾ according to ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014 | ESMA /2014/1569)