European Systematic Internalizer Post-2024 Review: A Legal Fiction or Functional Reality for Enabling Corporate Bond Markets Liquidity?

This paper examines the extent to which the European Systematic Internalizer (SI) regime facilitates liquidity in inherently illiquid corporate bond markets and whether policy improvements are needed. It argues that removing pre-trade requirements for non-equity SIs in 2024 aligns with market realities and is therefore proportional. Nonetheless, the reform is insufficient to encourage SIbased liquidity provision. SI can support liquidity by offering investors a reliable option, but the prevailing regime needs strengthening. The consolidated tape programme supporting post-trade data, currently underway, should be accessible and market-friendly, as it will be the only formal source of liquidity visibility for the SI-bond market. Standards for ‘best execution’ and client order handling require a more SI-specific context. Furthermore, SIs could be reliable market makers because they can facilitate order flows and internalize trading. Technical regulations, such as request-for-quote (RFQ) mechanisms and route-order rules, are necessary to encourage SI operations. Due to the shift to a voluntary framework of SI, authorities need to introduce effective deterrence and strengthen monitoring to ensure the application of the regime is legally certain.