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What are systematic internalisers?

In simplistic terms, every investment firm (IF) that uses its own capital to perform high volumes of OTC transactions is obliged under MIFID1 (in relation to shares) and MIFID2 (in relation to a wide range of instruments) to register as a Systematic Internaliser (SI), and is subject to pre-trade transparency requirements (i.e., publish firm quotes).




The longer version... 

The concept of systematic internalisation was initially introduced by MIFID1 (effective in 2007), by stating that a SI is an "investment firm which, on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF" (Art. 4, n. 1, 7).

MIFID2 kept this definition basically unchanged, by stating that a SI is an "investment firm which, on an organized, 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" (Art. 4, n. 1, 20).

However, while in MIFID1 the systematic internalisers definition applied only to shares, in MIFID2 it also applies to share-like instruments (such as ETFs, depository receipts and certificates) and non-equity instruments (such as bonds and derivatives).

Additionally, MIFID2 is much more precise on the criteria under which an IF has to become an SI – since, under MIFID1, the high subjectiveness of the criteria allowed many IFs to avoid it (under MIFID1, there were only 14 IFs registered as SIs). Indeed, MIFID2 now states that:
  • "The frequent and systematic basis shall be measured by the number of OTC trades in the financial instrument carried out by the investment firm on own account when executing client orders.
  • The substantial basis shall be measured either by:
    • The size of the OTC trading carried out by the investment firm in relation to the total trading of the investment firm in a specific financial instrument; or
    • The size of the OTC trading carried out by the investment firm in relation to the total trading in the Union in a specific financial instrument.
  • The definition of a systematic internaliser shall apply only where the pre-set limits for a frequent and systematic basis and for a substantial basis are both crossed or where an investment firm chooses to opt-in under the systematic internaliser regime";
SIs are subject to pre-trade transparency requirements - i.e, they have to publish firm quotes. While under MIFID1 such requirements only apply to equities, under MIFID2/MIFIR they also apply to equity-like instruments and non-equity instruments.


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