2.1.2.9 Systematic Internalisers

94. Although not technically a separate investment service or activity, systematic internalisers perform a function which needs to be discussed separately. Systematic internalisers are defined in MiFID II as: “an investment firm which, on an organised, frequent systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system”.1 The ‘Markets in Financial Instruments Regulation’2 (MiFIR) further elaborates on this definition in its recitals: “systematic internalisers should be defined as investment firms which, on an organised, frequent systematic and substantial basis, deal on own account by executing client orders outside a trading venue”.3 A systematic internaliser, or SI, is thus an investment firm that uses its own balance sheet to execute client orders but is explicitly not an MTF or OTF operator .4 The “SI is the contractual counterparty for the client”.5 Where operators of an MTF or OTF use their platform through which multiple third parties interact and ultimately concluded their transactions without the operator of an OTF6 or MTF being a counterparty to the transaction (unless it is an OTF dealing on own account), an SI is always the counterparty to its clients. An SI will therefore usually have a licence to perform the investment services of execution of orders and possibly the transmission of orders, but it will also have the licence to perform the investment activity of dealing on own account. The risks associated with these investment services and activities, described above, also apply to a systematic internaliser and it is fair to say that with an SI such risk are cumulative.

95. Title III of MIFIR also requires SI’s to comply with further organisational requirements, such as the obligation to make public the SI’s quotes for certain products,7 execution of orders,8 access to quotes9 and post-trade disclosure.10 These requirements of MiFIR on SI’s require the SI to have in place a sufficient operational control environment to perform all these functions and requirements without errors. These MiFIR requirements will therefore enhance the operational risk of the SI, as any errors in executing these MiFIR requirements will lead to a supervisory response by the supervisory authority responsible for supervising the provisions of MiFIR, but, simultaneously, such risks are also transmitted to increased clients’ expectations.

96. An SI is therefore exposed to similar risks as investment firms performing the same investment services and activities, but the SI is also exposed to an increased operational risk through the additional MiFIR requirements it is subject to and potentially aggregated liability risk towards clients.