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Will MiFID II change your Systematic Internaliser status?

Thomas Kennedy

12 Apr 2017

Mifid II. Photographer: Rebecca Cook
Photographer: Rebecca Cook

The extension of the Systematic Internaliser regime under MiFID II will require investment firms to determine whether their activity exceeds certain thresholds, including for non-equity asset classes. How can they prepare?

Under new MiFID II regulations, more investment firms will find themselves having to determine whether they are a Systematic Internaliser (SI) or not. In other words, do they trade on a frequent, systematic and substantial basis?

Find out more Thomson Reuters MiFID II SI Determination

If their activity exceeds certain thresholds, placing them in the SI category, they face obligations under MiFID rules. That’s why it’s important firms have the right tools and methodologies to determine SI status.

MiFID II Systematic Internaliser

What is the SI regime?

The aim of MiFID I was to make trading more transparent, increase competition and provide a greater level of investor protection. Its implementation mainly focused on equities.

However, MiFID II has significantly upped the ante and brought non-equity asset classes into the scope.

This has exacerbated the pressure and stress on already stretched IT resources on both the sell-side and the buy-side ahead of the January 2018 deadline set by the European Securities and Markets Authority (ESMA).

One of the biggest challenges facing the sell-side is when it deals on its own account.

According to MiFID II/MiFIR regulations, ‘Systematic Internaliser means an investment firm which, on an organised, frequent systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system.’

Register for our webinar — SI Determination Under MiFID II

SI thresholds

The SI regime was in force in MIFID I but opting into it was very subjective.

For example, the definition did not have quantitative thresholds to check whether or not you should classify your activity as trading on a frequent, systematic and substantial basis.

MiFID II. What is a Systematic Internaliser?

Under MiFID II, the thresholds are much more clearly defined

If a firm becomes an SI then it means they have the following obligations:

  • Pre-trade transparency (MiFIR Art. 14)
  • Quote and trade matching (MiFIR Art. 15)
  • Best execution reporting (RTS 27 of MiFID II)
  • Reference data reporting (MiFIR Art. 27)

SI determinations

SIs are determined at the legal entity level.

Legal entities will have to aggregate all trades by its branch offices as they contribute to the SI numerator. Firms will need to have a good source of legal entity data.

MiFID II SI determination
All entities at branch (issuer) level are included in SI determination

The SI determination per asset class covers five categories, ranging from bonds, equities and derivatives through to emission allowances and structured financial products (SFPs).

Newly issued financial instruments will come into the scope of SI when there is enough historical data to do the assessment.

For bonds, SFPs, derivatives and emission allowances this will be six weeks of data. In the case of equities, three months of data.

Register for our webinar — SI Determination Under MiFID II

Systematic Internaliser MiFID II SI
Determination per asset class includes emission allowances and structured financial products.

SI denominator

The SI denominator will be published by ESMA at the beginning of the next month following the end of every assessment period.

Thomson Reuters will leverage its real-time market data network to estimate total market size at a per instrument or sub-asset class level.

Investment firms can estimate the total market size in near real time for both equity and non-equity markets through Thomson Reuters aggregated market data.

Thomson Reuters is able to collect the total number and volume of trades in the EU from trading venues and Approved Publication Arrangements (APAs). Instrument definitions are aligned with the SI threshold criteria.

MiFID II Thomson Reuters Velocity Analytics dashboard
A Thomson Reuters Velocity Analytics dashboard

Find out more Thomson Reuters MiFID II SI Determination

Key regulatory dates

1 August 2018: ESMA will publish information on the total number and the volume of transactions executed in the European Union for the first time, covering the period from 3 January 2018 to 30 June 2018.

1 September 2018: Investment firms must undertake their first assessment and, where appropriate, comply with the SI obligations (including notifying their National Competent Authority).

Quarterly updates: For subsequent assessments, ESMA will publish data by the first calendar day of February, May, August and November.

MIFID SI go-live timeline
MIFID SI go-live timeline

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.

Assessment periods

The assessment period will start on the first working day of the months of January, April, July and October.

The challenge with managing the SI status is the frequency of the publication of the SI denominator data from ESMA.

Investment firms could breach the thresholds and only find out they have become a SI retrospectively and will therefore need a live view of market liquidity and activity.

MIFID II Key assessment dates for managing SI status
Key assessment dates for managing SI status

Enhanced platform

Thomson Reuters has made key enhancements to its data analytics platform, Thomson Reuters Velocity Analytics, in order to provide ultra-high-speed processing of real-time, streaming and historical data that will help EU and non-EU financial markets participants meet their MiFID II obligations in relation to the SI regime.

Thomson Reuters Elektron: our complete market data and technology offering

The enhanced platform, which is powered by Kx’s market-leading technology, has a broad range of other uses for MiFID II, such as best execution compliance and transaction costs analysis.

Investment firms will not only be able to comply with the systematic internaliser regime, but thrive in the new MiFID II world.

MiFID II Thomson Reuters Velocity Analytics dashboard
A Thomson Reuters Velocity Analytics dashboard

Find out more Thomson Reuters MiFID II SI Determination

Brennan Carley, head of enterprise propositions at Thomson Reuters, said MiFID II compliance was fundamentally a data challenge.

He added: “The work we have been doing to completely re-engineer Velocity Analytics will support financial markets participants looking for best execution, transaction costs analysis, and other high performance trading analytics.

“We want to make it as easy and cost-effective as possible for our clients to comply with the MiFID II requirements and take advantage of their existing infrastructure investments, while helping them to prepare for new opportunities for their businesses post-January 2018.”

MIFID II

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