Morgan Stanley has become the latest bank to register as a systematic internaliser (SI) ahead of MiFID II, according to the regulator’s market identifier code database.
Denmark’s Spar Nord Bank has also registered as an SI and both banks join the likes Credit Suisse, Goldman Sachs, UBS, Citigroup and Societe Generale already registered with the European Securities and Market Authority (ESMA).
The number of registered SIs is expected to soar post-MiFID. Speaking to The TRADE last month, Rob Boardman, CEO at ITG Europe, explained the removal of broker-crossing networks means there are likely to be fewer choices for banks to interact directly with investors away from exchange and MTFs.
“It doesn’t take a genius to figure out there are therefore likely going to be far more SIs than there have been previously, because there are fewer choices now,” he said.
Introduced under MiFID in 2007, an SI is an investment firm that deals on its own account by executing client orders outside of a regulated market, multilateral trading facility (MTF) or organised trading facility (OTF).
The regime has come under scrutiny in recent months following warnings from regulatory authorities prohibiting the use of the requirements as a method of networking.
Kay Swinburne MEP explained at The TRADE’s MiFID II pop-up event earlier this year she was made aware of banks plotting to network SIs together.
“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,” she said.
ESMA urged the European Commission to adopt delegated acts to close the loophole in the SI regime under MiFID II.
Chair at ESMA, Steven Maijoor, explained in a letter to the Commission: “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.”
ESMA has since clarified the rules around the use of SIs under MiFID II and formally stated SIs operating similar to a trading venue must seek authorisation.
Banks will need authorisation if an SI has an arrangement with clients which go beyond a bilateral interaction or on a regular basis, if it doesn’t undertake risk-facing activity, or if third-party buying and selling interests are executed OTC.