ESMA has urged the European Commission to adopt delegated acts to close a loophole in the systematic internaliser (SI) regime under MiFID II.

Chair at ESMA, Steven Maijoor, explained in a letter to the Commission it is concerned market participants could use the SI regime to ‘circumvent’ MiFID II obligations.

“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,” Maijoor said.

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.

Maijoor added ESMA is concerned that despite this approach being focused on trading shares, it could gain traction and be extended to other instruments.

“We are very concerned about this potential loophole… We encourage the European Commission, if it shares the concerns described above, to look into this matter to determine whether it should use any of its regulatory tools, like the power to adopt delegated acts further specifying the definitions,” Maijoor said.

In the meantime, ESMA will closely monitor this issue and could in the future clarify the scope of SIs permitted activities and the characteristics of multilateral systems via a Q&A.

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