The current debate between ESMA, the European Commission and market participants on the establishment of networks of systematic internalisers (SIs) is unsurprising given the amount of regulatory change and the potential for market innovation. Last week ESMA expanded on what's behind its thinking on the topic in its most recent Q&A.
ESMA's objections to such networks are aimed squarely at back-to-back transaction agreements with other liquidity providers. They argue that they would make transactions riskless and therefore not in the spirit of the regulation which aims to ensure it's the SI that bears the risk. ESMA further stresses that matched principal transactions must be on an occasional and non-regular basis, otherwise they don't fit under the SI umbrella.
Naturally, some firms are particularly good at managing client relationships and regulatory complexity, while others are good at trading their own capital and providing quotes. Strategists would suggest that both firms should come together with one outsourcing its unique skill to the other to create the most competitive SI. But, with ESMA's standpoint supported by the legal texts, we'll have to wait and see whether such a division of labour will be allowed under MiFID II.