5.III.1.3 Rule-based provisions to distinguish SIs from RMs/MTFs

The distinction between SIs and RMs/MTFs has the potential to become blurry. To ensure appropriate classifications, MiFID II introduces rule-based provisions for the SI-definition. First of all, MiFID II makes explicit that the definition of an SI includes so-called single-dealer platforms (SDPs). Single-dealer platforms are platforms on which all transactions are performed with a single investment firm, in so far that the investment firm always acts on behalf of the client on one side of the transaction and on its own account on the other.1 Contrarily, so-called multi-dealer platforms (MDPs), that is – multiple investment firms trading against their own account for the same financial instrument, should not be considered a SI.2

Second, MiFID II states that an SI is not allowed to bring together third party buying and selling interests in functionally the same way as an RM or MTF. This means that an SI cannot consist of an internal matching system that executes client orders on a multilateral basis, an activity that requires authorisation as an MTF (see section V below).3MiFID II notes that an internal matching system in this context is a system for matching client orders that results in the investment firm undertaking matched principal transactions on a regular and not occasional basis.4 Matched principal trading (also ‘back to back trading’) refers to the situation where the facilitator (here the SI) interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risk.5

Both sides of the trade are executed simultaneously and the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction.6MiFID II specifies that an SI is not allowed to engage, on a regular basis, in the internal or external matching of trades via matched principal trading or other types of de facto riskless back-to-back transaction in a given financial instrument outside an RM or MTF.7 The rationale behind the MiFID II provision is to delineate between bilateral own account trading and executing client orders versus multilateral trading foreseen by MiFID II.8

Third, ESMA has provided formally non-binding guidance to ensure further delineation between SIs and RMs/MTFs. ESMA states that a system that provides quote streaming and order execution for multiple SIs is a multilateral system. In this situation, the system is required to become authorised as an RM or MTF (or OTF).9 The ESMA guidance is a reaction to the situation where so-called Approved Publication Arrangements (APAs) proposed to set up arrangements, on top of their APA services, providing a suite of quote streaming and order execution to SIs and their clients. Clients could send multiple messages to multiple SIs participating in the service provided by the APA.10 The APA service blurred the distinction between bilateral SIs and multilateral RMs/MTFs. To remedy the situation, ESMA notes that any system providing such services needs to authorise as an MTF.