Delay to SI regime presents ‘new unknowns’ for industry

Regulatory experts look at the possible outcomes of ESMA’s recent Q&A on MiFID II’s systematic internaliser regime.

The European Securities and Markets Authority’s (ESMA) recent decision to delay assessments for becoming a systematic internaliser (SI) has created new unknowns for the industry, according to regulatory experts.

Fidessa’s head of EU regulation change programme, Anne Plested, explained the clarifications from ESMA have created further questions on the SI regime.

The potential for some firms to opt in to the regime in January 2018 as others choose not to could see an industry split over becoming an SI, possibly causing unintended consequences.

"The way ESMA looks at this is often somewhat removed from the practicalities of real life. Whilst it has clarified some aspects of the SI regime, it has created new unknowns in the process," Plested said.

Questions have also been raised about whether broker-crossing networks (BCN) will still be applicable considering the SI assessments have been delayed.

ITG’s European general counsel, JP Urrutia, believes BCN will “cease to exist as an option on the MiFID II implementation deadline of January 2018.”

“To the extent that a firm is looking to replace its BCN with an SI, firm’s can opt in to the SI regime from the MiFID II implementation deadline – meaning that the absence of permission to operate an BCN does not impact a firm’s ability to start using an SI well before the first assessment," he said.

ESMA stated in the Q&A that firms should carry out assessments by 1 September 2018 - although can opt in to the SI regime beforehand – following its publication of EU wide necessary data by 1 August 2018.

“At a high level there are two elements to this Q&A - when and how it is to be applied and the relevant transitional measures," Urrutia explained.

He added that part of the concern around the testing and assessment was the absence of those transitional measures and ESMA has clarified for one of the tests it can take place three months after the availability of the data.

Fidessa’s Plested agreed that it makes logical sense to wait until the data is available before carrying out the assessment.

“Before the Q&A was published last week, different market participants were trying to figure out how to understand if they met the threshold or not,” she told The TRADE.

"Lots of firms are still trying to make the decision and those on the border line of the threshold are trying to weigh up the cost benefits of becoming an SI."

However, Urrutia at ITG explained it is yet to be confirmed whether the rules have enough clarity to carry out these tests effectively.

“I’m not saying there isn’t, but as we have found before, once you actually get to grips with what is required, often more questions arise,” he said.