European Commission finally shuts down SI loophole

Potential loophole within the systematic internaliser regime under MiFID II has been source of controversy for months.

After months of controversy surrounding the systematic internaliser (SI) regime under MiFID II, the European Commission has made its move to shut down a potential loophole.

An amendment to the rules means banks operating as SIs will not be able to recreate broker-crossing networks through matching client orders as an exchange operator would.

“An investment firm shall not be considered to be dealing on own account…  where that investment firm participates in matching arrangements entered into with entities outside its own group,” the amendment said.  

“With the objective or consequence of carrying out de facto riskless back-to-back transactions in a financial instrument outside a trading venue.”

Banks were first warned against networking SIs at an event hosted by The TRADE earlier this year. Kay Swinburne MEP told delegates market players were “seeking ways around the rules, seemingly using grey areas to avoid giving investors the best price”.

“Politicians do not see this as a loophole, but the financial industry seeking a new way to line its pockets at the expense of investors,” she added.

Following several exchanges between the European Commission and the European Securities and Markets Authority, the amendment published this week has finally ended possibility for banks to network.

Several major institutions - including JP Morgan and Morgan Stanley - have signed up to operate as SIs ahead of the January 2018 MiFID II deadline, with the number expected to increase significantly.

A surge in the number of SIs is expected to cause further market fragmentation, with expert predictions estimating up to 100 SIs could be in operation by January.

“We believe clients will find it difficult to interact with [all SIs] without sophisticated aggregation technologies,” Rob Boardman, CEO of ITG Europe told The TRADE.

An SI is considered an investment firm that deals on its own account by executing client orders outside of a regulated market, multilateral trading facility or organised trading facility.

The amendment to the SI regime will apply from 3 January next year. 

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