ESMA_QA_1498
Status: ✅ Answer Published
Link to ESMA Q&A tool: https://www.esma.europa.eu/publications-data/questions-answers/1498
Regulatory Context
Regulation : MIF2
Level 1 Regulation: Markets in Financial Instruments Directive II (MiFID II) Directive 2014/65/EU- Secondary Markets
Level 2 Regulation: No information available
Level 3 Regulation: No information available
Topic: Multilateral and bilateral systems
Subject Matter: Multilateral and bilateral systems - Systematic internalisers - “risk-facing activity”
Question
Submission Date: 01 April 2019
How does the concept of “risk-facing activity” apply to an EU branch of a third-country firm that operates as an SI in the EU?
ESMA Answer
Answer Date: 01-04-2019
[ESMA 70-872942901-38 MiFID II MiFIR market structures Q&A, Q&A 5.31] As clarified in Q&As above, ESMA is of the view that based on the SI definition provided in Article 4(1)(20) of MiFID II, the trading activity of a SI is characterised by risk-facing transactions that impact the Profit and Loss of the SI. ESMA considers that the SI should carry out a degree of risk on an independent basis. Accordingly, ESMA is of the view that an EU branch of a third-country firm, in order to comply with the SI regime, should at least meet the following criteria:
Risk management
The EU branch should not transfer the risk resulting from its SI activity through a de facto riskless back-to-back booking for hedging purposes whenever a transaction is executed with a client. Any transactions undertaken in an SI capacity should impact the Profit and Loss of the branch.
Quote provision
The EU branch should have control over the provision of quotes. This would require the EU branch to have the ability to define its own pricing model through dedicated parameters, set its quotes, define its pricing model update and withdraw its quotes on an independent basis. The EU branch should also have traders located in the EU assigned to the SI activity and providing quotes to EU clients.
Specific commercial policy
The EU branch should have documentation signed with its clients and a dedicated commercial policy with respect to its SI activity including a definition of the objective, non-discriminatory criteria governing access to its quotes.
Reporting
The EU branch should have a dedicated MIC code for the purpose of the relevant reporting obligations (including those covered by Article 14(5) of RTS 22 and the Guidelines on transaction reporting section 5.14.4 and 5.17.3) to be done in its SI capacity.
This document was automatically extracted from the ESMA EMIR Q&A database.