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With MiFID II’s stated aim to push OTC trading (where appropriate) onto regulated platforms European market structure is undergoing considerable upheaval. As the first round of Level 2 consultation has just finished it’s now time to define what OTC trading is appropriate and where it can be executed. While double volume caps somewhat restrict the use of transparency waivers, Systematic Internalisers (SIs) appear to be a possible home for some OTC trading. However, reading through the discussion paper and some of the responses, this is not so certain anymore.

For example, under the new SI regime, ESMA considers disclosing the SI’s identity in the post-trade information. It’s uncertain whether a broker, once categorised as an SI, can execute other OTC trades outside that regime. In addition, some market participants argue that riskless principal trades cannot be executed under an SI regime because this contradicts the bilateral nature of SIs.

Adding all that together, and assuming the worst, the attraction of becoming an SI could wane. With all of this uncertainty OTC trading is still seeking a suitable home under MiFID II. Without one markets might lose this liquidity permanently.