Bank of New York Mellon and Barclays have opted in as systematic internalisers for non-equity instruments under MiFID II, becoming the latest dealers to do so.
More are expected to register voluntarily in the coming week as banks ramp up efforts to ease the reporting burden on clients ahead of January 3 implementation.
The SI designation of liquidity provider allows banks to execute bilateral trades outside of a regulated market in instruments that fall into scope to be traded on a trading venue (TOTV). While the SI regime does not officially take effect until September 2018, when trading data will be available to determine in-scope products, voluntary registration shifts the reporting onus onto SI banks, alleviating uncertainty for clients.
BNY Mellon has registered its London and Luxembourg branches with the relevant national competent authorities for SI status in foreign exchange products. That largely covers swaps, forwards and non-deliverable forwards as spot FX escaped the MiFID II gaze.
Barclays has chosen to be an SI for all products that fall within the TOTV regime across FX, rates, credit and equities. It follows Deutsche Bank and JP Morgan, which registered as SIs for fixed income instruments in recent weeks.
By opting in as SIs, banks hope to avoid possible liquidity disruption as the rules take effect.
“The biggest driver in becoming an SI is to assist clients. Come January 3, with all the other MiFID II-related requirements they have to comply with, they want to avoid further uncertainty or confusion in trying to get a deal done,” said James Taylor, head of eFX sales at BNY Mellon.
“After consulting with many of our clients, we decided to opt in for the start of MiFID II and the market as a whole seems to be moving this way.”
Under the new rules, most asset classes deem the seller to be responsible for reporting in bilateral trades that do not include an SI. In FX, however, it is more complex as each counterparty is effectively buying one currency and selling another.
ESMA guidelines deem that “the counterparty receiving the currency which is first when sorted alphabetically on the far leg, is identified to be the buyer”.
As more banks opt in, demand for greater transparency around registrations is growing. ESMA recently confirmed that it would publish fortnightly SI registers across products. IHS Markit has partnered with ISDA to create a database that enables counterparties to establish which banks have SI status across individual products.
Technology firm Vela also plans an SI data hub for connection to multiple liquidity price feeds for single consolidated best bid/offer views to aid best execution.
Bankers are optimistic that greater transparency around SI activities will help to smooth trading activity in the early days of the new regime, subject to clients having obtained legal entity identifiers.
“There’s going to be a learning experience,” said Taylor. “There has been a lot of noise around ‘no LEI, no trade’ but we’re pretty sure that aside from a handful of clients that trade infrequently, our core franchise have LEIs in place and will be able to trade from the start.”