The European Commission is to enter into a dialogue with the European Securities and Markets Authority (ESMA) to figure out where potential loopholes through the systematic internaliser (SI) regime could be founded.
European Commissioner, Valdis Dombrovskis, acknowledged concerns via a letter to ESMA over the potential for banks to use the SI regime under MiFID as a loophole.
He explained the concerns were first raised by exchange operators who became aware of attempts to create electronic communication networks linking investment firms operating under the SI status.
“While the network would potentially not infringe the letter of MIFID II as it stands, such interconnected networks would not reflect the spirit of the MiFID II reforms,” Dombrovskis wrote.
Banks were recently warned against using the SI regime as a loophole by MEP Kay Swinburne at The TRADE’s MiFID II pop-up event in London last month.
“It’s disappointing with less than a year to go, to be told how some market players are seeking ways around the rules, seemingly using grey areas to avoid giving investors the best price,” Swinburne told delegates.
Chair at ESMA, Steven Maijoor, wrote to the European Commission in February urging the loophole be shut down.
He said: “Certain investment firms, that currently operate broker-crossing networks, might be seeking to circumvent the MiFID II requirements by setting up networks of interconnected SIs and other liquidity providers.”
Such an arrangement would allow SIs to cross third-party buying and selling interests via matched principle trading or other types of back-to-back transactions.
Dombrovskis concluded once the Commission has spoken with ESMA on the matter, it would “then engage with the relevant authorities on how to address the establishment of such broker crossing networks within the MiFID II rules.”