How Does the MiFIR Review Change SI Quoting Obligations for Non-Equity Instruments?

Concept

The Recalibration of Pre-Trade Transparency

The Markets in Financial Instruments Regulation (MiFIR) review represents a fundamental recalibration of the transparency architecture for non-equity instruments, particularly concerning the obligations of Systematic Internalisers (SIs). An SI is an investment firm which, on an organised, frequent, systematic, and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF, or an OTF. Under the previous iteration of the framework, these entities were integral to the pre-trade price discovery mechanism in certain non-equity markets, such as bonds and derivatives.

They were bound by specific obligations to provide quotes to their clients, a mandate designed to infuse a degree of transparency into markets that are predominantly over-the-counter (OTC) and less centralised than their equity counterparts. The core function of this mandate was to furnish clients with a reliable view of prevailing prices, thereby enabling them to make more informed execution decisions.

The original logic was rooted in the principle that firms internalising significant order flow should contribute to public price formation. This translated into a requirement for SIs in bonds, structured finance products, and derivatives to publish firm quotes when certain conditions were met. These obligations, detailed under Article 18 of MiFIR, stipulated that an SI must provide quotes to any client that requested one, subject to commercial policies, and that these quotes must be firm up to a certain size.

The objective was to create a more level playing field, where access to pricing information was democratised, reducing the informational asymmetry that often characterises OTC markets. This system, however, produced significant operational overheads for firms, requiring constant monitoring, data management, and public dissemination of pricing information that, in many illiquid markets, was argued to be of limited value and potentially detrimental to the SI’s ability to manage risk.

The MiFIR review fundamentally shifts the SI quoting paradigm for non-equity instruments from a mandatory obligation to a voluntary, commercially driven activity.

A Departure from Prescriptive Quoting

The recent MiFIR review, which culminated in changes that took effect on March 28, 2024, marks a significant departure from this prescriptive approach. The central amendment is the complete removal of the mandatory pre-trade transparency requirement for SIs dealing in non-equity instruments. This means that firms classified as SIs for bonds or derivatives are no longer legally compelled to publish firm or indicative quotes for their clients. The legislative recalibration stems from a recognition that the anticipated benefits of the original quoting regime did not fully materialise.

Regulators and market participants observed that for many non-equity instruments, particularly those that are illiquid or bespoke, the forced provision of public quotes had a limited impact on price formation while imposing substantial compliance costs. The nature of these markets, often driven by request-for-quote (RFQ) systems and bilateral negotiation, proved resistant to a one-size-fits-all transparency model designed with equity markets in mind.

This policy evolution reflects a deeper understanding of non-equity market microstructure. Instead of mandating pre-trade transparency at the individual firm level, the revised framework places greater emphasis on post-trade transparency and centralising data through the future development of Consolidated Tapes (CTs). The removal of the quoting obligation acknowledges that in many non-equity contexts, liquidity is sourced and priced bilaterally, and forcing the exposure of pre-trade interest can be counterproductive, potentially increasing risks for liquidity providers without a commensurate benefit to the wider market. The change effectively returns the decision of whether to provide quotes, and in what manner, to the commercial discretion of the investment firm, allowing for a more flexible and, arguably, more appropriate application of transparency principles tailored to the specific characteristics of the asset class being traded.

Strategy

Navigating the New Discretionary Landscape

The elimination of mandatory SI quoting for non-equity instruments introduces a new strategic calculus for investment firms. The decision to provide public quotes is no longer a matter of regulatory compliance but a distinct commercial choice. This shift compels firms to re-evaluate their client engagement models and their role in the market ecosystem. For many, the immediate strategic response may be to cease all public quoting activities to reduce operational costs and the complexities associated with maintaining the necessary infrastructure.

This path simplifies the operating model and removes the risk management challenges tied to displaying firm prices for potentially illiquid instruments. A firm choosing this route would likely pivot to a purely bilateral trading model, engaging clients primarily through RFQ protocols or direct voice trading, where liquidity provision is tailored to specific inquiries.

Conversely, some firms may identify a competitive advantage in continuing to provide voluntary quotes. In a market where pre-trade price information becomes scarcer, a firm that reliably offers transparent, high-quality quotes could become a preferred counterparty for clients seeking price discovery. This strategy positions the firm as a market leader and a central hub of liquidity, potentially attracting greater order flow. The execution of such a strategy requires a sophisticated understanding of which instruments and client segments would value this transparency most.

It involves a targeted approach, perhaps providing quotes only for more liquid benchmark bonds or derivatives where the firm has a strong pricing capability and can manage the associated risk effectively. This path transforms a former regulatory burden into a tool for market differentiation and client acquisition.

The Rise of the Designated Publishing Entity

A pivotal innovation within the MiFIR review is the creation of the “Designated Publishing Entity” (DPE) status. This new classification offers a strategic alternative for firms that wish to make transactions public without taking on the full suite of responsibilities and the regulatory identity of a Systematic Internaliser. A DPE is an investment firm that, on behalf of other firms that do not have the infrastructure, agrees to be responsible for making a transaction public through an Approved Publication Arrangement (APA). This mechanism decouples the act of trade reporting from the internalising activity itself, providing a more modular and efficient market structure.

For an investment firm, pursuing DPE status is a significant strategic decision. It allows the firm to offer a valuable service to smaller counterparties who may lack the connectivity or scale to manage their own post-trade reporting efficiently. By becoming a DPE for specific asset classes, a firm can centralise its reporting infrastructure and potentially monetise it, creating a new revenue stream. This is particularly relevant in fragmented OTC markets where numerous smaller firms may struggle with the technical and compliance burdens of MiFIR’s reporting requirements.

Strategically, the DPE role enables a firm to deepen its relationships with other market participants, positioning itself as an essential infrastructure provider. It also allows the firm to avoid the SI designation, which, even with the removal of quoting obligations, still carries a certain regulatory profile that some firms may prefer to avoid. The choice between operating as an SI with voluntary quoting, ceasing quoting altogether, or registering as a DPE will depend entirely on a firm’s business model, technological capabilities, and strategic ambitions within the evolving non-equity market landscape.

Firms must now decide whether to leverage voluntary quoting as a competitive tool or streamline operations by embracing a purely bilateral trading model.

Comparative Strategic Pathways Post-MiFIR Review

The revised regulatory framework presents distinct pathways for firms dealing in non-equity instruments. Each path carries its own set of operational considerations, client relationship implications, and competitive positioning. The following table outlines the primary strategic options available to a firm that frequently deals on its own account in non-equity products.

Execution

Operational Blueprint for Regulatory Adaptation

The transition away from mandatory quoting for non-equity SIs requires a precise and systematic execution plan. Firms affected by this change must undertake a multi-faceted project that spans legal, compliance, technology, and business functions. The immediate priority following the March 28, 2024 effective date is to formally assess and document the firm’s chosen strategic path. This decision must be ratified by senior management and communicated clearly across the organisation.

If the decision is to cease mandatory quoting, the firm must systematically disable the relevant functionalities within its trading systems. This involves not only halting the dissemination of quotes to external venues or data vendors but also updating internal monitoring systems that were designed to track compliance with the now-defunct obligations, such as quote uptime and spread parameters.

A critical component of the execution process is client communication. Firms must proactively inform their clients of the changes to their quoting behaviour. This communication should explain the firm’s new approach, whether it involves moving to a purely RFQ-based model or providing quotes on a discretionary basis. Clarity is essential to manage client expectations and ensure a smooth transition in trading protocols.

Internally, trading desks need to be retrained. Staff who operated under the previous regime must understand the new discretionary framework and the commercial principles that will now govern quoting. The operational playbook must include updated procedures for handling client requests, managing liquidity, and ensuring that any voluntary quotes provided are consistent with the firm’s commercial policy and risk management framework.

Deconstructing the Regulatory Shift

To fully operationalise the changes stemming from the MiFIR review, a granular understanding of the specific shifts in regulatory text is necessary. The core change resides in the amendment of Article 18 of MiFIR, which previously housed the mandate for SIs to provide quotes. The removal of this obligation is the central pillar of the reform. The following table provides a comparative analysis of the key obligations for non-equity SIs before and after the 2024 MiFIR review, offering a clear blueprint for compliance and technology teams to map the required changes.

The core execution task is the systematic decommissioning of mandatory quoting systems and the realignment of client engagement protocols to a discretionary framework.

Transition and Compliance Checklist

Executing the transition to the new MiFIR framework requires a structured approach. Firms must ensure they have addressed all relevant aspects of the regulatory change to remain compliant and to position their business effectively in the new landscape. The following checklist provides a high-level operational guide for investment firms navigating this transition.

1. Conduct a Strategic Assessment ▴ Formally decide and document the firm’s approach. Will the firm de-register as an SI (if possible), remain an SI with voluntary quoting, or seek DPE status for certain services? This decision should be based on a cost-benefit analysis of each pathway.
2. Update Compliance Policies and Procedures ▴ All internal compliance manuals, trading desk procedures, and monitoring protocols must be updated to reflect the removal of mandatory quoting obligations. References to the old Article 18 requirements should be expunged.
3. Implement Technology Changes ▴
   • For firms ceasing quoting ▴ Initiate a project to switch off automated quote feeds to external platforms. Ensure that all related monitoring and alerting systems are also decommissioned to avoid false positives.
   • For firms continuing with voluntary quoting ▴ Reconfigure systems to allow for discretionary quoting. This may involve developing new user interfaces or logic that allows traders to control which clients receive quotes and for which instruments.
4. Client Outreach Program ▴ Develop and execute a communication plan to inform all affected clients of the changes. The communication should be clear, concise, and explain the practical impact on how they interact with the firm for non-equity trades.
5. Staff Training ▴ Conduct training sessions for front-office, compliance, and operations staff. Ensure that all relevant personnel understand the new regulatory environment and the firm’s strategic response to it.
6. Review Post-Trade Reporting Systems ▴ Analyze the impact of the harmonised deferral regime on current reporting workflows. Update system logic to align with the new, standardised deferral periods and remove any dependencies on national discretions.
7. Evaluate Third-Party Services ▴ Assess whether leveraging a Designated Publishing Entity for post-trade reporting could be more efficient than maintaining in-house APA connectivity. This involves a due diligence process and potential integration work with the chosen DPE.

Reflection

Beyond Compliance a Systemic Realignment

The modification of Systematic Internaliser obligations within the MiFIR review is more than a simple reduction of regulatory burden. It represents a philosophical shift in the approach to transparency within Europe’s vast and varied non-equity markets. By removing the mandate for pre-trade quoting, regulators have acknowledged the unique microstructure of these OTC-dominant asset classes, where liquidity is often bespoke and relationship-driven. This change moves the locus of responsibility from a prescriptive, one-size-fits-all rule to the commercial and risk management acumen of the investment firm.

The knowledge gained through understanding this regulatory evolution is a component in a larger system of market intelligence. It prompts a deeper introspection into a firm’s own operational framework. How is your system designed to source liquidity? How does it manage information leakage in an environment with less public pre-trade data? The ultimate strategic potential lies not in simply adapting to the new rule, but in architecting a trading and client engagement model that leverages this new discretion to achieve a superior operational edge.