LONDON European Union regulators took steps on Wednesday to try to stop banks exploiting a loophole in revised rules for share trading in the EU that come into force in January next year.
The European Securities and Markets Authority (ESMA) said banks must apply for a trading platform licence if they are executing stock orders in house for several customers at once.
The watchdog suspects banks of trying to circumvent rules by saying they are dealing bilaterally with a client, when in fact they are executing share orders on a multilateral basis - an activity that would need a trading platform licence.
The watchdog wrote to the European Commission in February outlining its concerns that banks were circumventing the revised EU securities rules, known as MiFID II.
ESMA said in its guidance on so-called systemic internalisers or trading off an exchange (SIs), ESMA said SI activity which is "functionally similar to a trading venue would need to seek authorisation".
This would apply to arrangements between a bank and client that go beyond a "bilateral interaction", or become a regular rather than ad hoc activity, ESMA said in a statement.
"Several market participants have made ESMA aware of their observations that 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 said in its letter to Brussels.
The EU has been cracking down on off-exchange and anonymous trading by toughening up transparency rules in order for regulators to spot the build up of risks more easily.
ESMA said it will not prevent SIs from hedging the positions arising from the execution of client orders as long as it does not bring together multiple third party buying and selling interests.
(Reporting by Huw Jones. Editing by Jane Merriman)