On April 5, the European Securities and Markets Authority (ESMA) announced that it had published four new questions and answers (Q&A) providing guidance on implementation of the revised Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR).

The new Q&As are included in updated versions of the following MiFID II Q&As:

  • market structures topics (available here)—updated in relation to direct electronic access and algorithmic trading, multilateral and bilateral systems, organized trading facilities and systematic internalizers (SI), and riskless transactions.
  • commodity derivatives topics (available here)—updated in relation to position limits.
  • transparency topics (available here)—updated in relation to transparency generally and equity transparency.
  • market data topics (available here)—updated in relation to reporting on the seniority of a bond, inflation indexed bonds and transaction reporting.

ESMA’s Q&As clarify that the key characteristic of an SI’s activity is to provide liquidity bilaterally to clients by trading at risk. However, SIs, which are functionally similar to a trading venue, would need to seek authorization. This would be the case for SIs meeting the following criteria:

  • where arrangements between the SI and a client go beyond a bilateral interaction, and where the SI does not undertake risk facing activity;
  • where the arrangements in place are used on a regular basis and qualify as a system or facility (as opposed to ad-hoc transactions); and
  • where transactions arising from bringing together multiple third-party buying and selling interests are executed OTC, outside the rules of a trading venue.

ESMA highlights that the above does not prevent SIs from hedging the positions arising from the execution of client orders, as long as it does not lead to the SI executing non-risk-facing transactions and bringing together multiple third-party buying and selling interests. This is intended to cover the issue highlighted by ESMA in its letter to the European Commission on February 1 (further information in relation to this can be found in the Corporate & Financial Weekly Digest edition of February 17.)