April 25, 2016

Final MiFID II Rules on SI Thresholds

Finally, the EU Commission has published the delegated regulation on organizational requirements, including thresholds for systematic internalisation (SI), inter alia.

If your point of reference is ESMA’s technical advice back from December 2014, you will see some unwanted surprises. However, if you had a chance to look at the leaked version late in 2015, you may feel some relief now.

Firstly, you may be unhappy to see that, after SI threshold calculation has been performed, there is no 2-month grace period until you have to meet the SI obligations, but that you are rather prompted for a cold start. A cold start which extends from the internalised derivative to all derivatives of that class (with no definition of the “class” provided), and which also extends from the internalised bond to all bonds of that class which are issued by the same company or the company’s group. The latter definition is actually an improvement compared to the draft leaked late in 2015, which didn’t contain the limitation to the company/group.

You may also find it unfavorable that the first SI threshold calculation is to be performed in January 2018, as opposed to April 2018, which you may have been led to believe before. Unless of course you presume that any obligation to collect data for the SI threshold calculation can come to life only when MiFID II / MiFIR enters into force, which would move the first calculation into July 2018 (with reference period Jan-Jun 2018).

When analyzing changes to the aspired SI regime, one should not be shy of a glance at the forthcoming RTS 2.  With the EU Commission’s proposal for a relaxed liquidity assessment for bonds in the first years, the market will see more illiquid bonds (lowering pre-trade transparency obligations) but also more internalised bonds (increasing the quality-of-execution reporting efforts). The proposed SSTI phase-in approach at least is unconditionally good news.

Overall, legislative bodies seem to tighten their grip with regard to long term measures, but to make temporary concessions in order to let the market participants zero in on the new requirements. Let’s see what the final RTS package and level 3 guidance will hold for you.

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