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MiFID II Update - Systematic Internaliser, investment research and commodity derivative

MiFID II Update

The amended Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR) is currently one of the most far-reaching sets of regulation that financial services firms across Europe are facing. - By Shamsi Khan and Paul Lewis.

Julie Patterson

Wealth & Asset Management, EMA FS Risk & Regulatory Insight Centre

KPMG in the UK


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Despite the many pages of “Level 2” rules, one of the key difficulties firms have had in preparing for the implementation deadline of 3 January 2018 is the need for answers to a series of practical operational questions. This article discusses the headline points from a selection of the key topics. Updates on other topics, including HFT/Algo, Best Execution and Transaction Reporting, will be covered in subsequent articles.

Since autumn 2016, a raft of papers on MiFID II/MiFIR have been released by the ESAs and National Competent Authorities (NCAs). Each paper aims to bring clarity to certain of the requirements and to provide firms with practical information to assist implementation efforts across a broad range of technical areas.

This article focusses on some of the headline points from papers issued in the last couple of months. Updates on other topics, including HFT/Algo, Best Execution and Transaction Reporting, will be covered in subsequent articles.

Systematic Internaliser

Perhaps one of the most contentious areas for firms has been the Systematic Internaliser (“SI”) regime - in particular, the calculations that firms are required to undertake in order to assess whether they fall under the definition of an SI. ESMA’s updated transparency Q&A states that SI calculations will be performed only when six months of data is available to ESMA (at latest by 1 August 2018). Firms will have six months from this date to comply with the relevant requirements.

Meanwhile, ESMA has written to the Commission about the potential establishment of networks of SIs by investment firms to circumvent certain MIFID II obligations; in particular, the requirements for investment firms operating internal matching systems and executing client orders on a multilateral basis to be authorised as trading venues, and the trading obligation for shares.


Inducements – and particularly the payment for investment research – has been a difficult topic for buy-side and sell-side firms alike, with the rules drafted without being prescriptive on what constitutes an inducement. Different regulator viewpoints have been presented in Consultation Papers from ESMA and the NCAs on what may be deemed an inducement as opposed to a “minor non-monetary benefit” (MNMB). Regulators have not provided an exhaustive list of MNMBs, but examples include communications between trading desks seeking market information, ‘issuer sponsored’ third party coverage to be distributed and received by an investment firm (provided that it is distributed broadly or made public) and Corporate Access services.

With regard to the use of Research Payment Accounts (RPAs), ESMA clarified in its December Q&A on Investor Protection that a budget can be set for a group of client portfolios, provided that those portfolios share sufficiently similar investment objectives and research needs, and the firm still identifies a specific research charge for individual clients to fund the RPA. The Q&A also clarifies that money held in an RPA is not classified as client assets until such time as it is rebated into the client’s account. Firms should ring-fence this money, and should try to align as much as possible the timing of research funds being received from clients and expenditure on research from providers. The substantial changes to the rules around charging for research are likely to drive a significant shift in commercial equilibrium, with sell-side firms facing market over-capacity and a pricing expectations gap with the buy-side.

Commodity Derivatives

On 1 December 2016, the European Commission adopted the adopted the long-awaited final draft of Regulatory Technical Standards RTS 20 (PDF 259 KB) and RTS 21. RTS 20 governs the provisions under which persons dealing in commodity derivatives, emissions allowances and derivatives may be exempt from the provisions of MiFID II/MiFIR. The “Ancillary Activities Exemption” is critical to many corporates and commodity traders which use commodity derivatives in their commercial activities, but which do not provide other investment services to clients, and want to avoid becoming an authorised investment firm.

RTS 21 governs the provisions under which NCAs must define limits in the positions in commodity derivatives that can be held by persons (i.e. firms) and groups, and how the exposures of those persons and groups should be measured and aggregated. The general objective is to enable regulators to foster orderly markets, prevent market abuse and excessive price volatility in financial and commodity markets.

Next Steps for Firms

With the MiFID II/MiFIR implementation deadline less than a year away, firms must work through the difficult and contentious areas, despite not having full clarity in some areas of the rules.

Firms need to make assumptions when provisionally conducting SI calculations, in order to determine whether they are ready for the MiFID II SI requirements and to determine how much uplift is required to fulfil the pre-trade transparency disclosure requirements.

Firms need to conduct a full scoping exercise to determine the types of inducements that may be in place.

Lastly, where commodity firms are currently operating under a MiFID I exemption, they need to estimate their eligibility for the “Ancillary Activities Exemption”. Where firms identify they may no longer be covered by the exemption, urgent action will be required to remain exempt or to apply for regulated status under MiFID II. Those commodity firms already classed as MiFID Investment Firms will have to comply with more stringent rules.

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