Systematic Internalisers

Part

MAR Market Conduct

Chapter

Systematic Internalisers

Printed on: 17/06/2024

Rulebook at: 14/12/2007

MAR 6

Systematic Internalisers

MAR 6.1

Application

01/11/2007

MAR 6.1.1

Except as regards the reporting requirement in MAR 6.4.1 R, this chapter applies to:

(1) a MiFID investment firm which is a systematic internaliser in shares when dealing in sizes up to standard market size; or

(2) a third country investment firm which is a systematic internaliser in shares when dealing in the United Kingdom in sizes up to standard market size.

01/11/2007

MAR 6.1.2

The systematic internaliser reporting requirement in MAR 6.4.1 R applies to an investment firm which is authorised by the FSA .

01/11/2007

MAR 6.1.3

In this chapter, provisions marked "EU" apply to a third country investment firm which is a systematic internaliser as if they were rules.

01/11/2007

MAR 6.2

Purpose

01/11/2007

MAR 6.2.1

The purpose of this chapter is to implement Article 27 of MiFID, which deals with the requirements on systematic internalisers for pre-trade transparency in shares, the execution of orders on behalf of clients and standards and conditions for trading. It also provides a rule requiring investment firms to notify the FSA when they become, or cease to be, a systematic internaliser, and which gives effect to Article 21(4) of the MiFID Regulation. The chapter sets out for reference other provisions of the MiFID Regulation relevant to the articles being implemented.

01/11/2007

MAR 6.3

Criteria for determining whether an investment firm is a systematic internaliser

01/11/2007

MAR 6.3.1

Where an investment firm deals on own account by executing client orders outside a regulated market or an MTF, it shall be treated as a systematic internaliser if it meets the following criteria indicating that it performs that activity on an organised, frequent and systematic basis:

(a)

the activity has a material commercial role for the firm and is carried on in accordance with non-discretionary rules and procedures;

(b)

the activity is carried on by personnel, or by means of an automated technical system, assigned to that purpose, irrespective of whether those personnel or that system are used exclusively for that purpose;

(c)

the activity is available to clients on a regular or continuous basis.

An investment firm will cease to be a systematic internaliser in one or more shares if it ceases to carry on the activity specified in paragraph 1 in respect of those shares, provided that it has announced in advance that it intends to cease that activity using the same publication channels for that announcement as it uses to publish its quotes or, where that is not possible, using a channel which is equally accessible to its clients and other market participants.

The activity of dealing on own account by executing client orders shall not be treated as performed on an organised, frequent and systematic basis where the following conditions apply:

(a)

the activity is performed on an ad-hoc and irregular bilateral basis with wholesale counterparties as part of business relationships which are themselves characterised by dealings above standard market size;

(b)

the transactions are carried out outside the systems habitually used by the firm concerned for any business that it carries out in the capacity of a systematic internaliser.

[Note: Article 21(1) to (3) of the MiFID Regulation]

01/11/2007

MAR 6.3.2

An activity should be considered as having a material commercial role for an investment firm if the activity is a significant source of revenue, or a significant source of cost. An assessment of significance for these purposes should, in every case, take into account the extent to which the activity is conducted or organised separately, the monetary value of the activity, and its comparative significance by reference both to the overall business of the firm and to its overall activity in the market for the share concerned in which the firm operates. It should be possible to consider an activity to be a significant source of revenue for a firm even if only one or two of the factors mentioned is relevant in a particular case.

[Note: Recital 15 to the MiFID Regulation]

01/11/2007

MAR 6.4

Systematic internaliser reporting requirement

01/11/2007

MAR 6.4.1

An investment firm, which is authorised by the FSA , must promptly notify the FSA in writing of its status as asystematic internaliser in respect of shares admitted to trading on a regulated market:

(1) when it gains that status; or

(2) if it ceases to have that status.

[Note: Article 21(4) of the MiFID Regulation]

01/11/2007

MAR 6.4.2

The notification under MAR 6.4.1 R can be addressed to the firm's usual supervisory contact at the FSA .

01/11/2007

MAR 6.5

Obligations on systematic internalisers in shares to make public firm quotes

01/11/2007

MAR 6.5.1

A systematic internaliser in shares when dealing in sizes up to standard market size must publish a firm quote in relation to any share admitted to trading on a regulated market for which it is:

(1) a systematic internaliser in that share; and

(2) there is a liquid market for that share.

[Note: Subparagraphs 1 and 2 of Article 27(1) of MiFID]

01/11/2007

MAR 6.5.2

Where there is no liquid market for a share, the systematic internaliser must disclose quotes to its clients on request.
[Note: Subparagraph 1 of Article 27(1) of MiFID]

01/11/2007

MAR 6.5.3

A systematic internaliser may:

(1) update a quote at any time; and

(2) under exceptional market conditions, withdraw a quote.

[Note: Subparagraph 1 of Article 27(3) of MiFID]

01/11/2007

MAR 6.6

Size and content of quotes

01/11/2007

MAR 6.6.1

(1) A systematic internaliser may decide the size or sizes at which it will quote.

(2) The quote can be up to standard market size for the class of shares to which the share belongs.

[Note: Subparagraph 3 of Article 27(1) of MiFID]

01/11/2007

MAR 6.6.2

Each quote must include:

(1) a firm bid price; or

(2) a firm offer price;

in respect of each size for which the systematic internaliser quotes.
[Note: Subparagraph 3 of Article 27(1) of MiFID]

01/11/2007

MAR 6.6.3

A systematic internaliser is not obliged to publish firm quotes in relation to transactions above standard market size.[Note: Recital 51 to MiFID]

01/11/2007

MAR 6.7

Prices reflecting prevailing market conditions

01/11/2007

MAR 6.7.1

A firm bid or offer price in respect of a particular share must reflect the prevailing market conditions for that share.
[Note: Subparagraph 3 of Article 27(1) of MiFID]

01/11/2007

MAR 6.7.2

A systematic internaliser shall, for each liquid share for which it is a systematic internaliser, maintain the following:

(a)

a quote or quotes which are close in price to comparable quotes for the same share in other trading venues; and

(b)

a record of its quoted prices, which it shall retain for a period of 12 months or such longer period as it considers appropriate.

The obligation laid down in point (b) is without prejudice to the obligation of the investment firm under Article 25(2) [implemented at SUP 17.4.6 G] of [the MiFID] Directive 2004/39/EC to keep at the disposal of the competent authority for at least 5 years the relevant data relating to all transactions it has carried out.[Note: Article 24 of the MiFID Regulation]

01/11/2007

MAR 6.8

Liquid market for shares, share class, standard market size and relevant market

01/11/2007

MAR 6.8.1

A systematic internaliser will need to refer to the provisions in MAR 6.8.3 EU, MAR 6.8.4 EU, MAR 6.8.5 EU, MAR 6.8.6 EU and MAR 6.8.7 EU and the material the FSA publishes in relation to those provisions to determine:

(1) whether there is a liquid market for a share;

(2) the class to which a share should be allocated;

(3) the standard market size for each class of shares; and

(4) the relevant market for a share.

[Note: Article 27(1), (2) and (7) of MiFID]

01/11/2007

MAR 6.8.2

The FSA will publish on its website the material referred to in MAR 6.8.1 G as regards liquid market for shares, share class, standard market size and the relevant market for a share.

01/11/2007

MAR 6.8.3

Shares not traded daily should not be considered as having a liquid market for the purposes of [the MiFID] Directive 2004/39/EC. However, if, for exceptional reasons, trading in a share is suspended for reasons related to the preservation of an orderly market or force majeure and therefore a share is not traded during some trading days, this should not mean that the share cannot be considered to have a liquid market.

[Note: Recital 16 to the MiFID Regulation]

01/11/2007

MAR 6.8.4

The most relevant market in terms of liquidity for a financial instrument which is admitted to trading on a regulated market, hereinafter "the most relevant market", shall be determined in accordance with paragraphs 2 to 8.

In the case of a share or other transferable security covered by Article 4(1)(18)(a) of [the MiFID] Directive 2004/39/EC or of a unit in a collective investment undertaking, the most relevant market shall be the Member State where the share or the unit was first admitted to trading on a regulated market. ...

Where a financial instrument covered by paragraphs 2 ... was first admitted to trading on more than one regulated market simultaneously, and all those regulated markets share the same home Member State, that Member State shall be the most relevant market.

Where the regulated markets concerned do not share the same home Member State, the most relevant market in terms of liquidity for that instrument shall be the market where the turnover of that instrument is highest.

For the purposes of determining the most relevant market where the turnover of the instrument is highest, each competent authority that has authorised one of the regulated markets concerned shall calculate the turnover for that instrument in its respective market for the previous calendar year, provided that the instrument was admitted to trading at the beginning of that year.

Where the turnover for the relevant financial instrument cannot be calculated by reason of insufficient or non-existent data and the issuer has its registered office in a Member State, the most relevant market shall be the market of the Member State where the registered office of the issuer is situated.

However, where the issuer does not have its registered office in a Member State, the most relevant market for that instrument shall be the market where the turnover of the relevant instrument class is the highest. For the purposes of determining that market, each competent authority that has authorised one of the regulated markets concerned shall calculate the turnover of the instruments of the same class in its respective market for the preceding calendar year.

The relevant classes of financial instrument are the following:

(a)

shares; ...

[Note: Article 9(1),(2) and (8) of the MiFID Regulation]

01/11/2007

MAR 6.8.5

A share admitted to trading on a regulated market shall be considered to have a liquid market if the share is traded daily, with a free float of less than EUR 500 million, and one of the following conditions is satisfied:

(a)

the average daily number of transactions in the share is not less than 500;

(b)

the average daily turnover for the share is not less that EUR 2 million.

However, a Member State may, in respect of shares for which it is the most relevant market, specify by notice that both those conditions are to apply. That notice shall be made public.

A Member State may specify the minimum number of liquid shares for that Member State. The minimum number shall be no greater than five. The specification shall be made public.

Where, pursuant to paragraph 1, a Member State would be the most relevant market for fewer liquid shares than the minimum number specified in accordance with paragraph 2, the competent authority for that Member State may designate one or more additional liquid shares, provided that the total number of shares which are considered in consequence to be liquid shares for which that Member State is the most relevant market does not exceed the minimum number specified by that Member State.

The competent authority shall designate the additional liquid shares successively in decreasing order of average daily turnover from among the shares for which it is the relevant competent authority that are admitted to trading on a regulated market and are traded daily.

For the purposes of the first subparagraph of paragraph 1, the calculation of the free float of a share shall exclude holdings exceeding 5% of the total voting rights of the issuer, unless such a holding is held by a collective investment undertaking or a pension fund.

Voting rights shall be calculated on the basis of all the shares to which voting rights are attached, even if the exercise of such a right is suspended.

A share shall not be considered to have a liquid market for the purposes of Article 27 of [the MiFID] Directive 2004/39/EC until six weeks after its first admission to trading on a regulated market, if the estimate of the total market capitalisation for that share at the start of the first day's trading after that admission, provided in accordance with Article 33(3) [of the MiFID Regulation], is less than EUR 500 million.

Each competent authority shall ensure the maintenance and publication of a list of all liquid shares for which it is the relevant competent authority.

It shall ensure the list is current by reviewing it at least annually.

The list shall be made available to the Committee of European Securities Regulators. It shall be considered as published when it is published by the Committee of European Securities Regulators in accordance with Article 34(5) [of the MiFID Regulation].

[Note: Article 22 of the MiFID Regulation]

01/11/2007

MAR 6.8.6

In order to determine the standard market size for liquid shares, those shares shall be grouped into classes in terms of the average value of orders executed in accordance with Table 3 in Annex II [of the MiFID Regulation].

[Note: Article 23 of the MiFID Regulation]

01/11/2007

MAR 6.8.7

Table 3: Standard market sizes

Class in terms of average value of transactions (AVT)

AVT< €10 000

€10 000 <AVT< €20 000

€20 000 <AVT< €30 000

€30 000 <AVT< €40 000

€40 000 <AVT< €50 000

€50 000 <AVT< €70 000

€70 000 <AVT< €90 000

Etc

Standard market size

€7 500

€15 000

€25 000

€35 000

€45 000

€60 000

€80 000

Etc

[Note: Table 3 of Annex II of the MiFID Regulation]

01/11/2007

MAR 6.8.8

The FSA will publish on its website a link to the calculations and estimates for shares admitted to trading on a regulated market, made by the FSA under the provisions in Articles 33 and 34 of the MiFID Regulation.

01/11/2007

MAR 6.9

Publication of quotes

01/11/2007

MAR 6.9.1

Where a publication obligation arises under MAR 6.5.1 R, a systematic internaliser must make its quotes public:

(1) on a regular and continuous basis during normal trading hours; and

(2) in a manner which is easily accessible to other market participants on a reasonable commercial basis.

[Note: Subparagraphs 1 and 2 of Article 27(3) of MiFID]

01/11/2007

MAR 6.9.2

A regulated market, MTF or systematic internaliser shall be considered to publish pre-trade information on a continuous basis during normal trading hours if that information is published as soon as it becomes available during the normal trading hours of the regulated market, MTF or systematic internaliser concerned, and remains available until it is updated.

Pre-trade information, and post-trade information relating to transactions taking place within normal trading hours, shall be made available as close to real time as possible. Post-trade information relating to such transactions shall be made available in any case within three minutes of the relevant transaction.

Information relating to a portfolio trade shall be made available with respect to each constituent transaction as close to real time as possible, having regard to the need to allocate prices to particular shares. Each constituent transaction shall be assessed separately for the purposes of determining whether deferred publication in respect of the transaction is available under Article 28 [of the MiFID Regulation].

[Note: Article 29(1) to (3) of the MiFID Regulation]

01/11/2007

MAR 6.9.3

Information which is required to be made available as close to real time as possible should be made available as close to instantaneously as technically possible, assuming a reasonable level of efficiency and of expenditure on systems on the part of the person concerned. The information should only be published close to the three minute maximum limit in exceptional cases where the systems available do not allow for a publication in a shorter period of time.

[Note: Recital 18 to the MiFID Regulation]

01/11/2007

MAR 6.9.4

For the purposes of Articles 27, 28, 29, 30, 44 and 45 of [the MiFID] Directive 2004/39/EC and of this Regulation, pre- and post-trade information shall be considered to have been made public or available to the public if it is made available generally through one of the following to investors located in the Community:

(a)

the facilities of a regulated market or an MTF;

(b)

the facilities of a third party;

(c)

proprietary arrangements.

[Note: Article 30 of the MiFID Regulation]

01/11/2007

MAR 6.9.5

Any arrangement to make information public, adopted for the purposes of Articles 30 and 31 [of the MiFID Regulation] shall satisfy the following conditions:

(a)

it must include all reasonable steps necessary to ensure that the information to be published is reliable, monitored continuously for errors, and corrected as soon as errors are detected;

(b)

it must facilitate the consolidation of the data with similar data from other sources;

(c)

it must make the information available to the public on a non-discriminatory commercial basis at a reasonable cost.

[Note: Article 32 of the MiFID Regulation]

01/11/2007

MAR 6.9.6

For the purposes of ensuring that published information is reliable, monitored continuously for errors, and corrected as soon as errors are detected (see MAR 6.9.5 EU(a)), and in respect of arrangements facilitating the consolidation of data as required in MAR 6.9.5 EU(b), the guidance in MAR 5.8.3 G and MAR 5.8.4 G applies equally to firms falling within this chapter, and should be read as if references to provisions and types of firm in MAR 5 were references to the corresponding provisions and types of firm in this chapter.

01/11/2007

MAR 6.10

Execution price of retail client orders

01/11/2007

MAR 6.10.1

A systematic internaliser must, while complying with the obligation to execute orders on terms most favourable to the client set out in COBS 12.2, execute an order up to standard market size received from a retail client in relation to shares for which it is a systematic internaliser:

(1) at the price quoted at the time of the reception of the order; or

(2) if the order does not match the quotation size or sizes, in compliance with the execution price rules in MAR 6.12.1 R or MAR 6.12.2 R.

[Note: Subparagraphs 3 and 6 of Article 27(3) of MiFID]

01/11/2007

MAR 6.11

Execution price of professional client orders

01/11/2007

MAR 6.11.1

A systematic internaliser may execute an order up to standard market size received from a professional client in relation to shares for which it is a systematic internaliser:

(1) at the price quoted at the time of the reception of the order; or

(2) at a better price for the professional client where:

(a) this price falls within a published range close to market conditions; and

(b) the order is of a size bigger than the size customarily undertaken by a retail investor; or

(3) at a different price which benefits the professional client where:

(a) execution in several securities is part of one transaction; or

(b) the order is subject to conditions other than the current market price.

[Note: Subparagraphs 4 and 5 of Article 27(3) of MiFID]

01/11/2007

MAR 6.11.2

For the purposes of the fourth subparagraph of Article 27(3) of [the MiFID] Directive 2004/39/EC, an order shall be regarded as being of a size bigger than the size customarily undertaken by a retail investor if it exceeds EUR 7 500.

[Note: Article 26 of the MiFID Regulation]

01/11/2007

MAR 6.11.3

For the purposes of the fifth sub-paragraph of Article 27(3) of [the MiFID] Directive 2004/39/EC, execution in several securities shall be regarded as part of one transaction if that one transaction is a portfolio trade that involves 10 or more securities.
For the same purposes, an order subject to conditions other than the current market price means any order which is neither an order for the execution of a transaction in shares at the prevailing market price, nor a limit order.

[Note: Article 25(1) of the MiFID Regulation]

01/11/2007

MAR 6.12

Execution price of client orders not matching quotation sizes

01/11/2007

MAR 6.12.1

Where a systematic internaliser quotes:

(1) in only one quote in a share; or

(2) its highest quote is lower than the standard market size for the class of shares to which the share belongs;

and it receives a client order that is bigger than the quotation size, but lower than the standard market size, the order may be executed, but that part of the order which exceeds the quotation size must either be executed at the quoted price or, if it is a professional client order, as permitted under the execution price provisions in MAR 6.11.1 R.
[Note: Subparagraph 6 of Article 27(3) of MiFID]

01/11/2007

MAR 6.12.2

Where a systematic internaliser quotes in different sizes and it receives a client order between those sizes, the order may be executed:

(1) at one of the quoted prices in compliance with the client order handling rules set out in COBS 12.3, COBS 12.4.1R and COBS 12.4.5R; or

(2) if it is a professional client order, as permitted under the execution price provisions in MAR 6.11.1 R.

[Note: Subparagraph 6 of Article 27(3) of MiFID]

01/11/2007

MAR 6.13

Standards and conditions for trading

01/11/2007

MAR 6.13.1

A systematic internaliser must have clear standards which set out and govern the basis on which it will decide which investors are given access to its quotes. The standards must operate:

(1) in an objective, non-discriminatory way within the categories of retail and professional clients; and

(2) on the basis of its commercial policy, including considerations such as:

(a) investor credit status;

(b) counterparty risk; and

and a systematic internaliser may refuse to enter into or discontinue business relationships with investors on this policy basis.

[Note: Recital 50 and Article 27(5) of MiFID]

01/11/2007

MAR 6.13.2

Systematic internalisers might decide to give access to their quotes only to retail clients, only to professional clients, or to both. They should not be allowed to discriminate within those categories of clients.
[Note: Recital 50 to MiFID]

01/11/2007

MAR 6.14

Limiting risk of exposure to multiple transactions

01/11/2007

MAR 6.14.1

A systematic internaliser may limit the number of transactions from the same client that it undertakes to enter at the published quote, provided it does so in a non-discriminatory way within the categories of retail and professional clients.
[Note: Recital 50 and Article 27(6) of MiFID]

01/11/2007

MAR 6.14.2

A systematic internaliser may limit the total number of transactions from different clients at the same time that it undertakes to enter at the published quote, provided that it does so:

(1) in a non-discriminatory way within the categories of retail and professional clients;

(2) in accordance with the provisions of the client order handling rules set out in COBS 12.3, COBS 12.4.1 R and COBS 12.4.5 R; and

(3) that the number or volume of orders sought by clients considerably exceeds the norm.

[Note: Recital 50 and Article 27(6) of MiFID]

01/11/2007

MAR 6.14.3

For the purposes of Article 27(6) of [the MiFID] Directive 2004/39/EC, the number or volume of orders shall be regarded as considerably exceeding the norm if a systematic internaliser cannot execute those orders without exposing itself to undue risk.

In order to identify the number and volume of orders that it can execute without exposing itself to undue risk, a systematic internaliser shall maintain and implement as part of its risk management policy under Article 7 of Commission Directive 2006/73/EC [the MiFID implementing Directive] a non-discriminatory policy which takes into account the volume of the transactions, the capital that the firm has available to cover the risk for that type of trade, and the prevailing conditions in the market in which the firm is operating.

Where, in accordance with Article 27(6) of [the MiFID] Directive 2004/39/EC, an investment firm limits the number or volume of orders it undertakes to execute, it shall set out in writing, and make available to clients and potential clients, the arrangements designed to ensure that such a limitation does not result in the discriminatory treatment of clients.

[Note: Article 25(2) and (3) of the MiFID Regulation]

01/11/2007