ESMA has just released a draft revision to the Delegated Regulation 2017/565 which deals with Systematic Internalisers (SI). The revision underlines that when a firm operates an SI it is not allowed to match trades in a de facto riskless back-to-back way. The proposed new Article reads:
(1) the following Article 16a is inserted:
Participation in matching arrangements
An investment firm shall not be considered to be dealing on own account for the purposes of Article 4(1)(20) of Directive 2014/65/EU where that investment firm participates in matching arrangements with the objective or consequence of carrying out de facto riskless back-to-back transactions in a financial instrument outside a trading venue".
(2) in Article 91, the second paragraph is replaced by the following:
“It shall apply from 3 January 2018.”.
The model where liquidity is sourced and passed off as own liquidity is looking increasingly precarious. The OTC principal-only model may find itself being pushed towards a hybrid model where there is also explicit commission based pricing.