On December 13, 2017, an amending Delegated Regulation was published in the Official Journal of the European Union which closes a loophole in the Markets in Financial Instruments Directive provisions relating to systematic internalisers. In February this year, the European Securities and Markets Authority highlighted the possibility that investment firms operating broker-crossing networks might try to circumvent the MiFID II requirements by setting up networks of connected SIs which would allow SIs to cross third party buying and selling interests via matched principal trading or other types of back-to-back transactions.
An SI is defined under MiFID II as an "investment firm which, on an organized, frequent systematic and substantial basis, deals on own account when executing client orders outside a trading venue without operating a multilateral system." The Delegated Regulation on the organizational requirements and operating conditions for investment firms provides further criteria to be met for an investment firm to be considered an SI. The amending Regulation amends this Delegated Regulation to provide that a SI may not participate in matching arrangements with entities outside of its own group with the objective or consequence of carrying out de facto riskless back-to-back transactions in a financial instrument outside a trading venue.
The amending Regulation entered into force on December 13, 2017 and will apply from January 3, 2018. The amending Delegated Regulation is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R2294&from=EN , the original Delegated Regulation is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0565&from=DA and ESMA's February letter to the European Commission is available at: http://finreg.shearman.com/european-securities-and-markets-authority-concern.
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