MiFID II brought a fourth category of execution venue to the fore in the form of the Systematic Internaliser (SI) regime, which saw the existing MiFID I application expanded to cover non-equities markets, along with the introduction of quantitative thresholds to classify qualifying entities. The move not only created a whole new raft of trade reporting obligations, but has catalyzed a rapidly changing competitive environment for investment firms.
A Systematic Internaliser refers to an investment firm which, on an “organised, frequent systematic and substantial basis,” deals on its own account when executing client orders outside MiFID II-defined multilateral trading venues such as regulated markets, Multilateral Trading Facilities and Organised Trading Facilites. The regime is designed to improve competition and promote choice by enabling financial institutions to operate as local exchanges, matching customer orders internally rather than going through a central exchange.
But it has not all been plain sailing. ESMA was expected to publish calculations for qualifying thresholds by August 1, 2018 in advance of a full implementation by September 1. This would see the requirement shifting from voluntary to mandatory registration for those breaching certain volume thresholds. However, other firms that do not automatically qualify can still decide to opt in for SI status if preferred.
Yet that process has now been delayed and only firms trading in equity, equity-like and bond instruments had to meet the deadline, while those trading in derivatives, securitised derivatives and emission allowances saw implementation pushed back to February 2019.
No matter which implementation deadline applies, however, the SI regime presents a number of key structural and technological challenges to consider. Buy-side firms needed to understand which SIs to trade with and establish connections to them. Meanwhile, sell-side firms needed to decide whether to become an SI and establish appropriate reporting mechanisms to Approved Publication Arrangements (APAs).
So far, the MiFID II environment is evolving in interesting ways – SI registrations surged from around 20, before MiFID II, to more than 100 and rising, during the first quarter of 2018, even as registration remained voluntary. Fascinatingly, bonds and derivatives are now the top SI types.
This is just the beginning – the SI environment is set to change much more as the year progresses. Despite the six-month delay in derivatives implementation, there is much that firms can be doing to prepare for SI declaration, if they have not done so already.
For sell-side firms, early registration to smooth out the teething process is recommended. Firms should communicate their SI status to clients clearly and rapidly, using marketing tools to help their buy-side firms understand why they should use the firm’s SI. They should ensure they keep tabs on their competitors in the SI space and obtain intelligence about SI activity in the market.
One of the most compelling arguments for voluntary SI registration is that with SIs bearing the trade reporting burden, clients are keener to work with SI-registered counterparties rather than report their own obligations. For SIs however, this means that compliance is key, and all processes and controls must be documented, including Know Your Customer (KYC) processes for OTC counterparties – required for compliance with anti-money laundering as well as bribery and corruption rules.
It might be a step-by-step process, but as of September 1 the SI regime is already halfway to completion. Firms trading derivatives might have a six-month reprieve, but this is no time to rest on your laurels. Proper preparation, along with careful observation of progress now that all the relevant information for the equity and bond markets have been released, will enable firms to be more agile in meeting these new requirements.
To support this, understanding and enabling an appropriate technological environment is crucial. With MiFID II’s Article 2 affirming that all clients using the same services must be on an equal footing, it is of vital and growing importance for trading venues to be working with a data centre operator that can provide the right technology in the right location, as well as the expertise in understanding MiFID II’s specific requirements in this area.
Interxion’s central location yields major speed advantages for multi-venue trading strategies and enables optimal order book aggregation/ consolidation under MiFID II. Its London data centre campus houses all the major POPs for connectivity to all of Europe’s major exchanges, multilateral trading facilities (MTFs) and broker routing systems. The campus also has a pan-European network of data centres for local access to markets in Germany, Netherlands, France, Italy, Spain, and others. Interxion’s community of independent software vendors (ISVs) – offering time-synchronisation, everything from time stamping and order aggregation, to pre-trade risk controls and more – provide on-site access to key value-added services to facilitate high-performance trading and regulatory compliance under MiFID II.
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