On February 14, the European Securities and Markets Authority (ESMA) published a letter (Letter), dated February 1, to the European Commission (EC) in relation to the systematic internalizer (SI) regime under the revised Markets in Financial Instruments Directive (MiFID II) and the associated Markets in Financial Instruments Regulation (MiFIR).

In the letter, ESMA highlights its concerns regarding the potential establishment of networks of SIs to circumvent certain MiFID II obligations. ESMA states that such arrangements would allow SIs to cross third-party buying and selling interests via matched principal trading, or other types of back-to-back transactions. In addition, those arrangements would be supported by liquidity provision agreements between members of the networks. These arrangements would be in violation of the MiFID II and MiFIR objectives, bringing the majority of trading activity onto MiFID-authorized trading venues and away from so-called “dark pools.”

ESMA states that it will continue to monitor the situation and may clarify the scope of SIs’ permitted activities in question and answer publications. It also asks the EC to consider the issues presented and whether or not it should use its regulatory tools to close any potential loopholes.