5.III.1.4.2 Level 2 text: frequent and systematic basis

the pre-set limit for a ‘frequent and systematic basis’ to be defined as a number of transactions carried out by the investment firm outside an RM or MTF when dealing on own account. In ESMA’s view the ‘frequent and systematic’-threshold needed to be set at such a level that ‘any activity above that level could reasonable be assumed to be carried out on a regular and continuous basis’ (in other words, that the activity was not ad hoc or irregular).1

ESMA also proposed to make a distinction between liquid and illiquid instruments.

ESMA noted that the new SI regime only should have a limited impact on the transparency of illiquid instruments traded OTC. In this context, ESMA referred to the SI-obligation to make public firm quotes, only when there is a ‘liquid market’.2 In ESMA’s view, investment firms that would qualify as SIs for an illiquid instrument would be subject to limited requirements. Thus, when calibrating the thresholds for determining a frequent and systematic basis, ESMA took liquid instruments into greater consideration.3

ESMA initially proposed a threshold between 0.25 and 0.5 percent of the average

number of trades calculated for each financial instrument. This number was based on the current level of internalisation by existing SIs in shares admitted to trading on an RM. ESMA was of the preliminary opinion that the threshold was also appropriate for equity-like instruments (depositary receipts, ETFs, certificates and other similar financial instruments).4 Based on feedback from respondents, ESMA changed its view and recommended the threshold to be set at 0.4 percent.5