New notification requirement pursuant to section 79 sentence 1 of the WpHG

With the entry into force of the new rules, investment firms which are active as systematic internalisers are also required to follow special rules on pre-trade transparency in addition to the MiFIR rules on post-trade transparency that apply to all investment firms.

In addition, a new provision has been incorporated into the WpHG according to which all investment services enterprises which act as systematic internalisers are obliged to notify BaFin of this without delay (section 79 sentence 1 of the WpHG). BaFin must then forward this information to the European Securities and Markets Authority (ESMA), which is preparing a list of all systematic internalisers active in the European Union.

Who is subject to the notification requirement?

Pursuant to the new provision of section 79 sentence 1 of the WpHG, all investment services enterprises which act as systematic internalisers are subject to the notification requirement. This prerequisite is fulfilled if they perform the investment service of systematic internalisation.

Systematic internalisation is defined in section 2 (8) no. 2 (b) of the amended WpHG as frequently organised and systematic dealing on own account on a substantial basis outside an organised market or multilateral or organised trading facility when client orders are executed outside a regulated market or a multilateral or organised trading facility without operating a multilateral trading system.

More detailed provisions on the definition of frequent systematic trading or trading on a substantial basis can be found in section 2 (8) sentence 3 and sentence 4 of the WpHG. Here it is stated that whether frequent systematic trading is deemed conducted is determined by the number of transactions executed outside a trading venue (OTC trading) with a financial instrument for the execution of client orders performed by the investment services enterprise on own account. Whether substantial trading is deemed conducted is determined on the basis of either the share of the OTC trading in the investment services enterprise's total trading volume in a particular financial instrument or the ratio of the investment services enterprise's OTC trading to the total trading volume in a particular financial instrument in the European Union; more detailed provisions can be found in Articles 12 to 17 of Commission Delegated Regulation (EU) 2017/565.

Pursuant to section 2 (8) sentence 5 of the WpHG, the prerequisites for systematic internalisation are not fulfilled until both the upper limit for frequent systematic trading as well as the upper limit for trading on a substantial basis are exceeded (exceeding of thresholds) or until an enterprise submits itself voluntarily to the rules which apply to systematic internalisation (declaration of voluntary submission or "opt-in") and has applied for authorisation to conduct systematic internalisation from BaFin (referred to as the Bundesanstalt (Supervisory Authority) in the law).

Whereas at present investment services enterprises can only be considered systematic internalisers owing to an exceeding of thresholds from September 2018 at the earliest, a voluntary opt-in is possible as of 3 January 2018.

How can the notification be made?

BaFin has prepared a standard form which those investment services enterprises concerned can use to satisfy the notification requirement in relation to BaFin. The form can be completed electronically and must be signed by a person authorised to represent the enterprise. It must then be scanned and sent by e-mail to BaFin (secondarymarkets@bafin.de).

What circumstances must BaFin be notified of?

According to the provision of section 2 (8) sentence 5 of the WpHG, there are basically two notification types, each of which can be used in order to report two possible sets of circumstances and which are shown on page 1 of the standard form for the SI notification:

• SI-1 notification: Notification of the commencement of systematic internalisation activity on the basis of a voluntary submission to the rules which apply to systematic internalisation (opt-in);
  corresponding to that
  
  
• SI-2 notification: Notification of the cessation of systematic internalisation activity on the basis of a withdrawal from voluntary submission to the rules which apply to systematic internalisation (opt-out);
  as well as
  
  
• SI-3 notification: Notification of the commencement of systematic internalisation activity owing to the applicable thresholds for a financial instrument being exceeded (exceeding of thresholds);
  corresponding to that
  
  
• SI-4 notification: Notification of the cessation of systematic internalisation activity owing to the applicable thresholds for all relevant financial instruments being fallen short of (falling short of thresholds).

Investment services enterprises must always submit a notification to BaFin if they voluntary submit themselves to the rules which apply to systematic internalisation (SI-1 notification) of if they withdraw such a declaration of voluntary submission (SI-2 notification). It must be clear at all times in which asset classes the enterprises are conducting systematic internalisation, including, where applicable, by exceeding (SI-3 notification) or falling below (SI-4 notification) the thresholds which apply to a particular financial instrument.

Investment services enterprises do not, in the context of their notification, have to indicate to BaFin the individual financial instruments for which they are conducting (or no longer conducting) systematic internalisation. Instead, they only have to indicate the asset classes to which these financial instruments are to be allocated. This information can be furnished by way of corresponding check boxes, which the standard form includes for the respective notification types.

The provision of this information is necessary because the register of all systematic internalisers active in the European Union to be drawn up by the European Securities and Markets Authority (ESMA) will also list all asset classes in which an investment firm conducts systematic internalisation. This register will be kept up to date amongst other things by the forwarding of information on systematic internalisers active in Germany which BaFin has at its disposal.

Independently of this, BaFin assumes that each investment services enterprise active as a systematic internaliser possesses a complete list of those financial instruments for which it conducts systematic internalisation. It should be pointed out in this regard that BaFin can request the submission of this list at any time within the scope of the supervisory duties assigned to it by law.

What other details must be submitted to BaFin?

For the clear allocation of a notification to an investment services enterprise, BaFin requires other details, which are listed on page 2 of the standard form. These include, in particular, a valid legal entity identifier (LEI) as well as a market identifier code (MIC).

Examples of how to complete the form

For investment services enterprises which intend to voluntarily submit themselves as of 3 January 2018 to the rules which apply to systematic internalisation (opt-in), the SI-1 notification of the standard form can be used. In this case, the two corresponding boxes on page 1 must be ticked as well as pages 2 and 3 completed. On page 3, the corresponding check boxes must be ticked and also those asset classes ticked to which the financial instruments for which the systematic internalisation is conducted are attributable. If the systematic internalisation is to be conducted subsequently in another financial instrument pursuant to this notification type, no further notification has to be submitted to BaFin provided this financial instrument is attributable to an asset class which BaFin has already been notified of. If a systematic internaliser wishes in this context to then also become active in another asset class, it can notify BaFin of this by ticking the box next to the corresponding asset class on page 3.

If an investment services enterprise decides in the period following the submission of an SI-1 notification to no longer act as a systematic internaliser on the basis of a voluntary submission to the rules which apply to systematic internalisation (opt-out), the SI-2 notification must be ticked on page 1 of the standard form. In addition, pages 2 and 4 must also be completed. If the declaration of voluntary submission to the rules which apply to systematic internalisation is then withdrawn on page 4 and the prerequisites for systematic internalisation are therefore no longer fulfilled as a whole, i.e. if systematic internalisation is no longer conducted in a relevant financial instrument of an asset class (owing to an exceeding of thresholds, for example), the box next to the text notifying BaFin that systematic internalisation activity has ceased must also be ticked. In addition, all asset classes can be named here in which systematic internalisation is no longer being conducted as a whole after a previous opt-in. Insofar as the intention is merely to no longer conduct systematic internalisation in individual financial instruments, BaFin must only be notified of this within the scope of the SI-2 notification in cases where the systematic internalisation is no longer being conducted in a further financial instrument of the respective asset class.

If an investment services enterprise is deemed to be a systematic internaliser for the first time not owing to an opt-in but rather owing to an exceeding of thresholds, an SI-3 notification must be made. In this case, the corresponding boxes must be ticked on page 1 of the standard form as well as pages 2 and 5 completed. On page 5, for a first-time notification both check boxes must be ticked and the relevant asset classes indicated. Here, enterprises may also name asset classes which they had not informed BaFin of previously within the context of an opt-in (i.e. through an SI-1 notification) because the relevant thresholds in a financial instrument attributable to these asset classes were only exceeded afterwards.

Should an investment services enterprise, after previously making an SI-3 notification, no longer exceed the applicable thresholds in any relevant financial instrument in the most recent applicable calculation period, which would mean that the prerequisites for systematic internalisation are no longer fulfilled, BaFin can be notified of this by way of an SI-4 notification contained in the standard form. The corresponding boxes must then be ticked on page 1 of the form as well as pages 2 and 6 completed. On page 6, BaFin can in addition be notified of all asset classes in which systematic internalisation is no longer conducted as a whole owing to the relevant thresholds for all financial instruments attributable to them being fallen short of, i.e. in those asset classes in which an investment services enterprise perhaps no longer wishes to act as a systematic internaliser on the basis of a previous SI-1 notification.

After the respective submitted notification is signed at the end of pages 3, 4, 5 or 6, the form must be scanned and sent by e-mail to secondarymarkets@bafin.de.