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Europe’s main markets watchdog has issued series of clarifications to upcoming trading rules in an effort to head off what it fears are “potential loopholes” in the regulations that would favour less transparent trading.

The Paris-based European Securities and Markets Authority on Wednesday issued guidance toughening requirements for institutions that usually traded instruments kept on their own books. That would encompass banks trading shares and fixed income for customers and some proprietary high-frequency traders.

Under the Mifid II rules from January they may have to register as ‘systematic internalisers’ (SIs) to conduct business. The arcane point has become a divisive for exchanges, banks and some high-frequency traders this year, with concerns that some brokers and rival high-speed traders could seek to circumvent the rules.

In February Esma wrote to policymakers in Brussels that some market participants could go against the spirit of the rules – which were designed to increase transparency European trading – by misusing the SI regime to move more trading away from regulated exchanges. Some policymakers had considered rewriting the rules but the short time frame has meant Esma trying to resolve the issue through documents on technical issues.

But on Wednesday, Esma made clear that any party looking to set up a private network that mimicked a trading venue in terms of the volume of transactions, or brought together many parties to transact regular business off-exchanges would need to be authorised by the regulator.

It also confirmed that institutions were barred from operating any system that would “bring together third party buying and selling interests in functionally the same way as a trading venue” – one of its key worries.

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