Pre-emptive compliance

MiFID II brings with it some significant changes to the Systematic Internaliser (SI) regime. Most importantly, ESMA will introduce quantitative thresholds that determine when a firm is obliged to obtain an SI licence. Given that these thresholds are based on average values across the previous quarter, it all looks pretty sensible and most likely to impact only the larger firms. But on closer inspection things are rather more complicated. Considering that the SI test applies for each instrument separately, and trading volumes can fluctuate massively, it’s likely that even a small brokerage firm will execute a few different stocks every quarter that force them into the SI regime. ESMA suggests that once thresholds are breached firms will have just one month to obtain an SI licence. Setting this up at short notice and explaining to clients that a few instruments will be executed within an SI, while all other internalised trades are executed in the old-fashioned way is hardly ideal.

Firms wanting to avoid a last minute SI application will have to move all their business onto MTFs, RMs or OTFs, or pre-emptively comply with a voluntarily opt-in to the SI regime.

For a more detailed explanation of ESMA’s SI test click here.

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