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?
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.
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.’
— TR MiFID II Insights (@mifidii) March 29, 2017
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.
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)
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.
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.
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.
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.
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.
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.
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.
Investment firms will not only be able to comply with the systematic internaliser regime, but thrive in the new MiFID II world.
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.”