Industry left adrift amid SI delegated act proposal

Systematic internaliser regime could be redefined to close potential loophole, although industry experts question whether this will be enough.

Regulatory experts have agreed a proposed last-minute delegated act to redefine the systematic internaliser (SI) regime under MiFID II has left the industry adrift.

The European Commission’s move to shut down a potential loophole whereby banks could network SIs to operate like broker-crossing networks has instead raised further questions about the regime.

Rob Boardman, European CEO of equities broker ITG, told The TRADE Brussels is attempting to ensure SIs provide new liquidity to the market.

“This is all well and good, but the problem is that there is no difference between a principal and a riskless principal transaction.

“The trouble is that the rules currently leave a number of grey areas when it comes to trade-by-trade hedging. But if a firm operates as an SI and sends out a principal price, it needs to know categorically that it can hedge,” he said.

It remains unclear as to whether a redefinition of the SI regime would see sell-side participants align with the regulator’s intentions.

Although as banks try to continue dark trading in a different guise, the more the European Commission appears to be ‘tightening the noose’.

Rebecca Healey, EMEA head of strategy and market structure at Liquidnet, questioned the buy-side’s role in the SI regime following the Commission’s proposal.

“How comfortable will the buy-side be in accessing SIs given the growing concern over reputational risk?

“This matters, as true principal activity has a valuable role to play in liquidity formation. In the research survey we conducted in August last year, 33% of the buy-side had planned to access SIs,” she told The TRADE.

Following ESMA’s decision to delay the regime late last year, Fidessa’s head of EU regulation change programme, Anne Plested, explained the regime would see unintended consequences once implemented.

“The way ESMA looks at this is often somewhat removed from the practicalities of real life. Whilst it has clarified some aspects of the SI regime, it has created new unknowns in the process," she said.

Earlier this week, the Commission said the proposal was published “in light of alleged nascent industry initiatives building on the ambiguity” around the SI 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.