RegTech Intelligence

Providing clarity on MiFID II, one guidance note at a time (part 1: systematic internalisers)

With the MiFID II/R implementation deadline less than 420 days away, financial institutions are trying to find the smartest ways to comply with this new regulation.  JWG can make this process much easier through the collaborative effort of our MiFID II Implementation Group (MIG).

About MIG

The MIG is a JWG-facilitated weekly meeting of industry experts who are all directly involved with MiFID II implementation.  The group engages in collaborative issue identification, standard setting and guidance.  Along with this groupwide communication that provides a Q&A service of regulatory questions, we also provide access to our MiFID II instance of RegDelta, which includes tagged and annotated MiFID II documents complete with reference interpretations.  More recently, JWG and members of the MIG have been working on the production of guidance notes, which provide an analysis of key issues and operational direction on how to solve them.

JWG has seven guidance notes in production this year, each of which tackles a different difficult part of MiFID II implementation.  In this first article, we focus on what we’ve found those complex areas to be for Systematic Internalisers (SI).

migSystematic Internalisers domain model

For each guidance note that JWG produces, we agree a common view of how to interpret the obligations.  This domain model clarifies the seven key capabilities required for SIs.  Each capability is built to manage many different matters of MiFID II.

In this summary article, we have highlighted five out of the 45 key considerations, which have been addressed in our guidance note on systematic internalisers.

Parameters and data required for SI determination


If an investment firm deals, on an organised, frequent systematic and substantial basis, on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system, they will be defined as a ‘systematic internaliser’.  Firms that meet this definition will be required to notify their competent authority.

Key questions

  • When will investment firms receive market data in order to determine whether they are a SI?
  • How often should firms notify their status to their national competent authority?

Regarding the first question, the industry was given some clarity on 3 November 2016 when ESMA added a question to their Q&A on MiFID II and MiFIR transparency topics:

By when will ESMA publish information about the total number and the volume of transactions executed in the Union and when do investment firms have to perform the assessment whether they should be considered as systematic internalisers for the first time in 2018 as well as for subsequent periods?

The answer specifies that ESMA will publish the necessary data (EU-wide data) for the first time by 1 August 2018 covering a period from 3 January 2018 to 30 June 2018.  This means that investment firms will have to perform their first assessment and, where appropriate, comply with the systematic internaliser obligations (including notifying their National Competent Authority (NCA)) by 1 September 2018.

Whilst the regulators are working to provide clarity on the industry’s known unknowns surrounding the SI obligations, there are still a number of unanswered questions.

Traded on a trading venue classification


If a systematic internaliser (SI) is prompted for a quote by a client, or if they have agreed to provide a quote, they must make public the ‘firm’ quotes in respect to bonds, structured finance products, emission allowances and derivatives traded on a trading venue.

Key questions

  • What is the definition of the term ‘traded on a trading venue’? Should the definition include financial instruments that are ‘tradeable’ on a venue, i.e., not only those currently being traded?
  • Will a ‘golden source’ of financial instruments traded on a trading venue be provided?
  • How will information on suspended or removed instruments be communicated to SIs?

Define what counts as a ‘firm quote’


SIs should be able to decide, based on their commercial policy, the clients to whom they give access to their quotes dependent on their categories of clients and the distinctions between these clients.  This information should be available to competent authorities to enable them to comply with obligations.

Key questions

  • What is the definition of ‘firm’ price? What should be included in the value, i.e., will it include spreads or just the raw price?
  • For non-equities, when streaming on a continuous basis would ‘non-firm’ prices be provided?

In illiquid markets disclose quotes to clients on request


Investment firms must make public firm quotes for financial instruments traded on a trading venue for which they are systematic internalisers and there is a liquid market.  If a liquid market doesn’t exist, SIs only have to disclose quotes to their clients upon request.

Key questions

  • Do the obligations mean that pre-trade transparency would only be required if the client asked for a quote on the same instrument of the same size and if it was on the same day?
  • Do quotes have to be disclosed for illiquid instruments to all clients of a similar tier?
  • Do firms have to disclose a ‘firm’ quote on request to clients, in the case of illiquid markets?

Prove compliant to the regime


The understanding is that SI compliance with their obligations should be checked and information should be made available to competent authorities.

Key questions

  • How will firms prove to regulators that are compliant to the SI regime? What data will have to be recorded?
  • How will firms explain why certain instruments are not being monitored?


Across all seven key capabilities, there are more than ten times the number of issues than the ones this article highlights above, this constitutes to over 60 pages of guidance providing clarity on the 45 key implementation considerations and the 300+ MiFID II paragraph references on the topic of Systematic Internalisers alone. This should put into perspective the vast amount of information and unanswered questions out there. MiFID II implementation is a complicated process but our guidance notes, along with the frequent meetings, provide answers and insight into the best ways to manage this complex regulation.

Furthermore, this guidance note provides the different perspectives of operations, technology, legal and compliance, all of which are required to understand the impacts and risks that come of new financial regulations.

At JWG, we track these impacts constantly and keep our platforms such as RegTechFS and our MiFID II LinkedIn group updated regularly.  So, if you have a view on systematic internalisers or any other MiFID II/R topics, come and join our group and keep on top of recent developments.

Stay tuned for part two of this article, where we will highlight the key issues and questions surrounding the topic of research.

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