How Will Future Regulatory Changes to the SI Regime Impact Liquidity Sourcing Strategies for the Buy-Side?

Concept

The operational architecture of European market structure is undergoing a foundational rewrite. For the buy-side, the impending changes to the Systematic Internaliser (SI) regime are a recalibration of the very system through which principal liquidity is accessed and understood. This is a shift away from a rules-based, quantitative framework toward a principles-based, voluntary system.

The core function of the SI, an investment firm trading on its own account by executing client orders outside a regulated market, has been a known quantity, a predictable node in the network. It provided a degree of certainty; specific volume thresholds mandated SI status, creating a clear, if imperfect, map of major liquidity providers.

That map is now being redrawn. The 2025 reforms, driven by both the UK’s Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA), dismantle the mandatory, volume-based qualification model. In its place, a voluntary framework emerges. Investment firms will now choose to opt into the SI regime based on their own strategic and commercial calculus.

This transition moves the SI designation from a passive consequence of trading volume to an active declaration of intent by a market participant. The implications for buy-side liquidity sourcing strategies are immediate and structural. The old system of identifying counterparties based on a simple regulatory flag is becoming obsolete.

A buy-side firm’s ability to source liquidity effectively will now depend on a much deeper, more dynamic understanding of their counterparties’ strategic choices.

The New Architectural Principles

The regulatory overhaul is built on several key modifications that redefine the roles and responsibilities within off-venue trading. Understanding these principles is the first step in redesigning any institutional liquidity sourcing strategy. The changes create a new logic for market interactions, one that demands a more sophisticated analytical layer from the buy-side.

From Mandatory to Voluntary Status

The most significant change is the removal of the quantitative tests that previously forced a firm to become an SI. Both the UK and EU are moving to a qualitative, opt-in system. A dealer’s decision to become an SI will now be a signal of its commitment to providing principal liquidity in specific asset classes.

This introduces a new layer of strategic analysis for the buy-side. A counterparty’s choice to opt in, or to abstain, becomes a critical data point in assessing their role and reliability as a liquidity source.

Decoupling Reporting from SI Status

Historically, SI status was intrinsically linked to post-trade reporting obligations. The new architecture severs this connection, introducing new entity types responsible for trade publication. This change is designed to simplify the reporting process and place the obligation more logically.

• Designated Reporter (DR) in the UK The FCA is implementing a Designated Reporter regime where firms must register at an entity level to take on reporting responsibilities across all asset classes.
• Designated Publishing Entity (DPE) in the EU Similarly, ESMA is introducing the Designated Publishing Entity, which allows a firm to be responsible for making a transaction public without needing to be an SI.

This separation means that a buy-side firm can no longer assume their SI counterparty will handle the trade report. The responsibility for publication is now determined by which party in the transaction is a DR or DPE, a completely new axis of counterparty classification.

Modified Transparency Requirements

The reforms also recalibrate pre-trade transparency obligations, particularly for non-equity instruments. Both the UK and EU are removing the requirement for SIs to publish pre-trade quotes in fixed income and derivatives markets. While pre-trade transparency for equities remains, this change fundamentally alters the landscape for other asset classes. Buy-side firms sourcing liquidity in bonds or swaps will have less public data to inform their initial routing decisions and will rely more heavily on direct relationships and sophisticated RFQ protocols.

Strategy

The transition of the Systematic Internaliser regime from a rigid, quantitative framework to a flexible, voluntary system compels a fundamental strategic reassessment for every buy-side institution. The previous model, while imperfect, provided a clear, if static, overlay for identifying major liquidity sources. The new architecture demands a dynamic, intelligence-led approach to liquidity sourcing. The core strategic challenge is to build a new internal framework that can interpret the new signals the market will provide and translate them into a tangible execution advantage.

How Will Counterparty Relationships Evolve?

The shift to a voluntary SI model elevates the importance of counterparty analysis from a compliance function to a core strategic activity. A dealer’s decision to opt into the SI regime is now a powerful piece of commercial intelligence. It signals a strategic commitment to providing principal liquidity and taking on risk in specific asset classes. Conversely, a dealer’s decision to abstain, while perhaps registering as a Designated Reporter (DR) or Designated Publishing Entity (DPE) for reporting purposes, also provides valuable information about its business model.

Buy-side firms must develop a new taxonomy for classifying their counterparties, one that goes beyond the simple SI flag. This new classification system must account for the distinct and separate registrations for SI and DR/DPE status. A dealer might be an SI for equities but not for bonds, or it might be a DPE for all asset classes while opting out of the SI regime entirely.

Each configuration implies a different level of service, risk appetite, and operational capability. The strategic response is to build and maintain a multi-dimensional map of the sell-side landscape, one that informs not just routing decisions but the entire relationship.

The value of the ‘SINT’ flag as a universal proxy for liquidity is diminishing, requiring buy-side firms to develop more sophisticated, data-driven methods for liquidity discovery.

A New Framework for Liquidity Discovery

The changes necessitate a move away from static routing rules toward a more adaptive system of liquidity discovery. The diminishing utility of the ‘SINT’ flag, as noted by industry bodies like ICMA, means that simple, flag-based routing logic within an Order Management System (OMS) is no longer sufficient. A truly effective strategy requires the integration of multiple data sources to build a coherent, real-time picture of available liquidity.

The table below contrasts the old operational environment with the new one, highlighting the key strategic adjustments required from the buy-side.

Adapting Execution Protocols

The strategic adjustments must flow directly into the execution protocols used by the trading desk. The Request for Quote (RFQ) process, a cornerstone of off-book liquidity sourcing, must become more intelligent. An RFQ system should be able to dynamically construct a list of appropriate counterparties based on the new, multi-dimensional classification system.

For example, when sourcing liquidity for a large block of non-equity instruments, where pre-trade transparency is being removed, the buy-side’s execution system must be able to:

• Identify potential counterparties not just by their historic willingness to quote, but by their current regulatory posture (SI opt-in, DPE registration).
• Understand the reporting implications of trading with each potential counterparty before the trade is executed.
• Incorporate performance analytics, such as historical fill rates and TCA data, into the counterparty selection process to a greater degree than before.

This represents a fusion of regulatory data, market data, and internal performance data into a single, cohesive execution strategy. The goal is to replace the certainty lost from the old regime with a new, more powerful form of certainty derived from superior internal data analysis and system architecture.

Execution

Executing a successful transition to the new SI regime requires a granular, systematic approach. The strategic principles must be translated into concrete operational protocols, system configurations, and data architectures. This is where the theoretical understanding of the regulatory shift is forged into a durable, high-performance execution framework. The objective is to engineer a system that not only complies with the new rules but also extracts a competitive advantage from their complexity.

The Operational Playbook for Buy-Side Desks

A structured, phased implementation is essential to managing the transition. The following steps provide a procedural guide for buy-side trading desks to re-architect their liquidity sourcing and execution workflows.

1. Counterparty Intelligence Gathering This is the foundational step. Trading desks must move beyond legacy classifications. This involves a systematic outreach program to all trading counterparties to confirm their intended status under the new regime. The key questions to ask are:
   • Will you be opting into the SI regime post-December 2025 (UK) / September 2025 (EU)?
   • If so, for which specific asset classes?
   • Will you be registering as a Designated Reporter (UK) or a Designated Publishing Entity (EU)?
   • What is your readiness timeline for these changes?
2. Constructing the Dealer Capability Matrix The intelligence gathered must be centralized into a dynamic, internal database. This Dealer Capability Matrix becomes the new source of truth for the trading desk, replacing the decommissioned SI Registry. It should be a living document, updated as counterparties adjust their strategies.
3. Reconfiguring OMS and EMS Architecture With the new data architecture in place, the system logic must be rewritten. Hard-coded rules that preference the ‘SINT’ flag must be replaced with a more sophisticated rules engine that queries the internal Dealer Capability Matrix. The routing logic for an RFQ, for instance, should be able to filter counterparties based on a combination of their SI status, DR/DPE registration, and the specific asset class of the order.
4. Updating Transaction Cost Analysis (TCA) Models TCA models must be recalibrated to reflect the new market structure. The benchmarks used to measure execution quality for off-venue trades need to be re-evaluated. For example, TCA reports should be able to differentiate between trades executed with an opt-in SI versus a non-SI DPE, as the liquidity dynamics and information leakage profiles may differ. This allows for a more precise measurement of the true cost and quality of execution.

Quantitative Modeling and Data Analysis

The Dealer Capability Matrix is the core analytical tool in the new execution framework. The table below provides a hypothetical example of what such a matrix might look like. It integrates regulatory status with performance metrics to provide a holistic view of each counterparty.

A portfolio manager or trader can use this matrix to make highly informed decisions. For a large EU corporate bond trade, Dealer Alpha and Dealer Beta are the primary candidates. Although Dealer Alpha is an SI and Beta is not, both are DPEs, meaning the reporting workflow is clear.

The trader can then weigh Alpha’s higher fill rate and better TCA performance against any qualitative factors. This data-driven approach replaces guesswork with a quantifiable, evidence-based selection process.

What Is the New System Integration Architecture?

The execution framework is only as robust as its underlying technology. Several key integrations are required to support this new, dynamic approach to liquidity sourcing.

• API Integration with Regulators Systems must be built to programmatically ingest data from the FCA and ESMA. These regulators will maintain the definitive lists of registered DRs and DPEs. An automated API connection ensures that the internal Dealer Capability Matrix is always up-to-date, eliminating the risk of making decisions based on stale information.
• Flexible OMS/EMS Database The database underpinning the OMS/EMS must be flexible enough to accommodate the new, multi-dimensional nature of counterparty data. Rigid, legacy systems with hard-coded fields for SI status will need to be upgraded to a more modern architecture that can handle multiple, evolving regulatory designations per counterparty.
• Enhanced FIX Protocol Usage While the core FIX protocol may not change, the way it is used will. Firms may need to utilize custom tags or specific fields within their FIX messages to pass information about the DPE/DR status of a counterparty between the OMS, EMS, and downstream allocation and settlement systems. This ensures that the reporting determination made at the point of trade is carried through the entire post-trade lifecycle.

Ultimately, the execution of these changes is about building a more intelligent and adaptive trading infrastructure. It is a move from a system that relies on public, static labels to one that thrives on private, dynamic intelligence. The firms that successfully execute this transition will possess a significant operational and strategic advantage in the European markets of the future.

Reflection

The regulatory evolution of the Systematic Internaliser regime provides a moment for profound institutional introspection. The core question for every buy-side firm extends beyond mere compliance with the new statutes. The true challenge is to assess whether your internal operational architecture is designed as a reactive system, built to absorb external changes, or as a proactive intelligence engine, engineered to translate market structure shifts into a persistent strategic advantage.

The data, protocols, and systems you build today will define your capacity to navigate the more complex and nuanced liquidity landscape of tomorrow. Is your framework built for yesterday’s certainty or tomorrow’s opportunity?