Article 4(1)(20) of MiFID II sets out the definition of systematic internaliser. This definition is further expanded in Articles 12 to 16 of Delegated Regulation (EU) 2017/565 which supplements MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms.
In June 2017 the European Commission (Commission) held a four week consultation on a draft Delegated Regulation that would amend Delegated Regulation (EU) 2017/565. The consultation was in response to “alleged nascent industry initiatives building on the ambiguity around the notion of ‘trading on own account when executing client orders’ which define the activity of systematic internalisers”. During the consultation the Commission also noted that concerns were raised about prudential risk management achieved by means of intra-group transactions.
The Commission has now published a final draft of the Delegated Regulation that amends Delegated Regulation (EU) 2017/565. Recital 2 of the Delegated Regulation states that:
“…technological and market developments therefore make it necessary to specify that a systematic internaliser is not allowed to engage, on a regular basis, in the internal or external matching of trades via matched principal trading or other types of de facto riskless back-to-back transactions in a given financial instrument outside a trading venue.”
Recital 3 of the Delegated Regulation adds that:
“Insofar as centralised risk management within a group usually involves the transfer of risk accumulated by an investment firm as a result of transactions with third parties to an entity within the same group which has no ability to provide quotes, other information on trading interests or to reject or amend such transactions, those transfers should still be considered as dealing on own account where carried out for the sole purposes of centralising the risk management of the group.”
The Delegated Regulation inserts into Delegated Regulation (EU) 2017/565 a new Article 16a (Participation in matching arrangements) which states:
“An investment firm shall not be considered to be dealing on own account for the purposes of Article 4(1)(20) of Directive 2014/65/EU where that investment firm participates in matching arrangements entered into with entities outside its own group with the objective or consequence of carrying out de facto riskless back-to-back transactions in a financial instrument outside a trading venue.”
The Delegated Regulation was adopted by the Commission on 28 August 2017. If neither the Council of the EU nor the European Parliament objects to the Delegated Regulation it will be published in the Official Journal of the EU (OJ). It will enter into force on the day after its publication in the OJ. It will apply from 3 January 2018.