European Commission in late bid to close SI loophole

A delegated act has been proposed which would redefine the systematic internaliser regime to close networking loophole.

The European Commission has proposed a last-minute delegated act to redefine the systematic internaliser (SI) regime under MiFID II.

It will be adopted to close a potential loophole which could see banks operate in the same manner as broker crossing networks by setting up networks of SIs.

The Commission said the proposal was published “in light of alleged nascent industry initiatives building on the ambiguity” around the regime.

“It is necessary to further specify the definition of systematic internaliser to address those market developments and circumscribe the risk of circumvention of MiFID II,” the proposal added.

Earlier this year, the Commission said it would enter into a dialogue with the European Securities and Markets Authority (ESMA) to understand the potential loopholes through SIs.

Commissioner, Valdis Dombrovskis, explained in a letter to ESMA 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.

Chair at ESMA, Steven Maijoor, had suggested the Commission adopt delegated acts to further specify the definition of SIs and close the potential loophole.

Banks were warned earlier this year at The TRADE’s MiFID II pop-up event that European authorities were aware of plans to network SIs and to consider the ‘spirit’ of the regulation.

“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,” Kay Swinburne MEP told delegates.

“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… Networks of SIs are against the spirit of the MiFID II framework and this is the message delivered by all policy groups.”