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MiFID II SI Status Unclear
Traders Magazine Online News, September 5, 2017
Amended regulation still does not adequately define systematic internalisers, despite the new type of venue coming into force in January, according to Steve Grob, director of group strategy at Fidessa.
Systematic internalisers were originally set up for equities under the MiFID regulations in 2007 for all off-venue trading in the European Union. However only nine banks became SIs and very few trades took place on the back of an SI quote as off-venue trading moved to broker crossing networks.
As a result, MiFID II prohibits broker crossing networks and the regulation extends SIs to other asset classes, including fixed income, as regulators aim to capture over-the-counter trading activity, increase transparency and ensure that the internalisation of order flow does not undermine price formation on regulated trading venues. MiFID II, which comes into force into January, makes it compulsory for firms committing capital on a frequent basis, or that accounts for more than 0.4% of trading in a stock to register as an SI. They will have pre-trade transparency requirements and must continuously publish competitive, two-way quotes up to the standard market size for each stock.
However there were concerns that “frequent” commitment of capital was not adequately defined and that again, firms could escape having to register as SIs. This week the EU Commission adopted regulation which was meant to clarify the definition of SIs:
https://twitter.com/HoganLovellsFIS/status/902854747421593601
Grob said in a blog that that SIs will not be allowed to “regularly” engage in “pre-arranged matching of trades via de facto riskless back-to-back transactions” but there is still no definition of regularly.
“Presumably this will be interpreted differently according to the velocity of a stock and/or its underlying liquidity,” he added. “And, bear in mind, the SI regime stretches over OTC derivatives transactions too which are even broader in their trading scope – so, no chance for confusion there then.”
Grob continued there is no definition of “riskless”, which varies between different stocks and instruments. “So the only way I could absolutely prove that I was really taking on risk would be to hold onto a position (even if I had the other side) until the price did indeed move against me. Again, hardly a satisfactory outcome for anybody,” he added .
Consultancy Tabb Group estimated that up to 20 equity SI operators will be registered when MiFID II comes into force in a report last month.
Last month 13 venues in Europe received Swift market identifier codes for systematic internalisers according to a public data from ISO 10383, the organization which holds the database of the codes for trading venues. Eight of the SI codes were for the UK - Jane Street Financial, ANZ Banking Group, Credit Suisse, Deutsche Bank, HSBC, RBC and Standard Chartered. The remaining four were from Italy (Fineco Bank), Germany (HSBC), France (Natixis, Exane BNP Paribas) and Luxembourg (RBC).
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