Explanatory Memorandum to COM(2021)727 - Amending regulation 600/2014 on enhancing market data transparency, removing obstacles, optimising trading obligations and prohibiting payments for forwarding client orders - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2021)727 - Amending regulation 600/2014 on enhancing market data transparency, removing obstacles, optimising trading obligations and ... |
|---|---|
| source | COM(2021)727  |
| date | 25-11-2021 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
This initiative is one of a series of measures that implement the Capital Markets Union (CMU). It aims to empower investors, in particular smaller and retail investors, 1 by enabling them to access market data necessary to invest in shares or bonds more easily and by making EU market infrastructures more robust. This will also help increase market liquidity, making in turn easier for companies to get funding from capital markets. In order to deliver on its objective of fostering a true and efficient single market for trading, the Commission has identified three priority areas for the review: improving transparency and availability of market data, improving the level-playing field between execution venues and ensuring that EU market infrastructures can remain competitive at international level. This initiative is accompanied by a proposal to amend Directive 2014/65/EU on markets in financial instruments (MiFID) and is included in the Commission’s 2020 Work Programme.
In its Communication on ‘The European economic and financial system: fostering openness, strength and resilience’ of 19 January 2021, 2 the European Commission confirmed its intention to propose to improve, simplify and further harmonise capital markets’ transparency, as part of the review of the MiFID II and MiFIR framework (MiFID/R). In the wider context of the efforts aimed at strengthening the international role of the euro, the Commission announced that such a reform would include the design and implementation of a consolidated tape, in particular for corporate bond issuances with an aim of increasing the liquidity of secondary trading 3 in euro-denominated debt instruments.
On the establishment of a consolidated tape, in the 2020 CMU Action Plan 4 the Commission announced that it would put forward a legislative proposal by the end of 2021 to create a centralised database meant to provide, for equity and equity-like financial instruments, a comprehensive view on market data, namely on prices and volume of securities traded throughout the Union across a multitude of trading venues. This centralised database, also referred to as the ‘consolidated tape’ 5 would have the objective to “improve overall price transparency across trading venues”.
• Problems that this proposal intends to tackle
This proposal intends to tackle liquidity and trade execution risk. The former corresponds to the risk that there is not enough depth of market (i.e. buyers and sellers willing to trade), the latter corresponds to the inability to execute at a given price limit or in a given time period. Both result from a lack of correct and timely information on prices and available trading volumes for traded securities, as well as the risk that insufficient transparency affects the share trading landscape and the competitiveness of the EU as a financial hub.
As pointed out in the Market Structure Partners (MSP) study on the creation of an EU consolidated tape 6 , liquidity risk is a consequence of the need to navigate the fragmented execution markets in the Union in order to identify buying and selling interests to execute a transaction in its entirety. Absent a comprehensive picture of all available liquidity pools, certain investors might not be in a position to execute all transactions, or they might only execute transactions in part or at a less attractive price. The economic cost of imperfect market transparency can be measured both in terms of “implementation shortfall” (i.e. trades are executed at prices that do not reflect the best available sales offer or purchase bid) and in terms of missed trading and investment opportunities. These costs go against the objectives of the CMU, which is to provide well-functioning, liquid and integrated capital markets.
The impact of market fragmentation, especially across national lines, is particularly acute for smaller asset managers and smaller banks. These market participants do not have the same possibilities to access information on market data across multiple venues as sophisticated market participants, such as large “sell-side” investment banks or electronic market makers have. Lack of market information leads to the risk of ill-considered investment decisions that could be avoided if a complete picture of the market would have been available.
In equities markets, asset managers interviewed as part of the MSP study estimate that the annual cost of not having a complete and accurate view of market data (defined as “slippage”) is between 0 to 1.0 basis points of their annual traded value. Some interviewees rated the annual costs even higher at above 5.0 basis points. Respondents to the MSP study make different estimates on the cost of having an imperfect view of the market. The larger the firm and the more extensive the resources available to compile and clean the data, the lower the estimate might be. By applying these estimates to the annual traded value of European equities, the total cost of not having an accurate view of the equities markets can be as high as EUR 10.6 billion annually whereas almost a third of the respondents indicate that the cost is between 0.5 and 1 billion euro annually 7 .
In bond markets, asset managers estimate the cost in basis points to their annual trading strategies resulting from a lack of consolidated and accurate market data view in the range of 0 to 5 basis points 8 .
Liquidity and trade execution risks are also prevalent in markets for derivatives that are not traded on venues (also called ‘over-the-counter’ trades or ‘OTC’). OTC derivatives markets are dealer markets, where major international banks offer bespoke contracts to their clients, e.g., for taking a position to protect against future price movements (hedging). There is very little post-trade transparency in OTC markets. The 2020 ESMA annual statistical report 9 shows that OTC derivatives still account for 85% of the notional value of derivatives traded in the Union (with the remaining 15% being traded on exchange). Because there is currently no consolidated public view of prices for OTC derivatives, the high percentage of OTC trading contributes to opacity in the pricing of these derivatives and, in consequence, to information asymmetries that primarily hurt smaller market participants.
The absence of consolidated market data also prevents accurate portfolio valuations and reduces the accuracy of indices across all asset classes (European equity, bond and derivatives benchmarks are less reliable). Large cap stocks are favoured by most investors, as evidenced in the large number of investment indices that focus on the large cap universe of listed companies (e.g., DJ 100, S&P 500, STOXX 600). Informational inefficiency results in less indices that comprise smaller capitalisation companies and, in consequence, less index-driven funds channelling capital to smaller cap issuers (e.g., by virtue of exchange-traded funds that track a small or midcap index).
Imbalance in the share trading landscape: another driver behind the proposed reform is the need to ensure that the share trading on lit (term used for pre-trade transparent) venues in the EU is approximately in line with ratios observed in other international financial centres. Stock exchanges argue that the decline of their market share in stock trading is detrimental to the development of the Union’s capital markets as only exchanges and multilateral trading facilities (MTFs) offer full transparency on bids and offers (pre trade data) and on completed transactions (post trade data) and contribute to price formation. Banks and investments firms on the other hand claim that lit platforms have maintained and even increased market share in the EU. The importance of maintaining a balance between traditional stock exchanges, alternative trading platforms, investment banks and other players that provide trading systems is well acknowledged. The review will therefore include amendments aiming to maintain this balance.
Competitiveness of EU financial markets: certain provisions of the current regulatory framework have created legal uncertainty for market participants. The open access provisions for exchange traded derivatives have been suspended multiple times by the co-legislators for a variety of reasons. The Commission deems it necessary to remove these provisions in order to foster competition, innovation and development of exchange-traded derivatives in the EU on one side and building further clearing capability in the EU. It will also reflect the long-standing international trend of vertical integration between trading and clearing for these types of derivatives. The rationale underpinning this trend is that innovation in exchange-traded derivatives is not served by the “open access” obligation, as this rule removes incentives to launch new exchange-traded derivatives contracts if competitors do not have to make the upfront investment. Likewise, exchanges would no longer be obliged to accept that non-affiliated clearing-houses ensure their post-trade operations. This proposal would also refine the perimeter of the share trading obligation (STO) to clearly limit it to EU ISINs. In addition, the proposal would introduce a possibility to suspend the derivatives trading obligation (DTO) for certain investment firms that would be subject to overlapping obligations when interacting with non-EU counterparties on non-EU platforms.
• Consistency with existing policy provisions in the policy area
The initiative builds upon and improves the existing rules that govern participation in the capital markets of the European Union. In 2007, MiFID I 10 introduced competition in the market for equity trading. Later iterations of MIFID extended competition to trading in non-equity asset classes, such as bonds and derivatives. The consequence is that, when a broker or investor wants to execute an order to buy or sell an asset, they can choose from different venues, such as regulated markets (RMs), multilateral trading facilities (MTFs), dark pools 11 , and systematic internalisers (SIs).
Since MiFID I entered into application, the combined amount of multilateral venues and SIs across all asset classes in the EEA increased by 344, to a total of 476. 12 Every trading venue is publishing separate market data reports. Soon after MiFID I was implemented, the issue of market data fragmentation and market data monopolies 13 came to the fore, primarily in equity markets.
MiFIR, 14 in application since 3 January 2018, recognises the benefits of transparency and market data consolidation for the investment community.
To maintain a well-balanced trading landscape, the transparency rules that govern trading on exchanges as well as on the alternative platforms or through systematic internalisers (investment banks and market makers) would benefit from certain adjustments. The use of certain exemptions from the transparency rules (so-called “waivers”) are seen as being responsible for the relatively low percentage of share trades that are executed on price transparent venues. The current regulation already contains rules to curb the use of the most commonly used transparency waivers. Rules like the “double volume cap” intend to put an upper limit (cap) on the amount of shares that market participants can trade under a transparency waiver. Such provisions, apart from being resource-intensive to administer on the part of the regulators, have proven to be rigid and collectively introduce unnecessary complexity in the operation of equity markets. The review therefore plans to streamline the complex interplay between transparency waivers and the double volume cap.
Furthermore, as regards data consolidation, MiFIR already comprises the concept of a ‘consolidated tape provider’ (‘CTP’). 15 The idea behind a CTP is that exchanges and alternative trading venues would send real-time data streams to an accredited CTP. This CTP would make available to the public the exact same information, at so-called reasonable cost, using identical data tags and formats.
The current rules on the CT rely on private actors (competing consolidators) consolidating market data from various execution venues. Based on the MiFIR provisions, there can be multiple competing CTPs, but it is also possible to have one single CTP in case multiple providers do not step up. To date, this has not happened for a variety of reasons.
The proposed reform of MiFIR addresses the reasons why no CTP has come forward. It amends the CT provisions in MiFIR to facilitate the emergence of one CTP for each asset class (shares, ETFs, bonds and derivatives).
• Consistency with other Union policies
The European Union’s financial services policy encourages transparency and competition. These policy goals extend to core market data. As part of the Capital Markets Union (CMU) action plan, the Union aims to create an integrated view of EU trading markets. A consolidated tape will provide consolidated data on prices and volume of traded securities in the EU, thereby improving overall price transparency across trading venues. It will also give investors access to considerably improved market information at a pan-European level.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The MiFID/R framework is the rulebook governing participation in European capital markets. It consists of a Directive 2014/65/EU (MiFID II) and a Regulation (EU) No 600/2014 (MiFIR). The legal basis for the adoption of MiFIR is Article 114 of the Treaty on the Functioning of the European Union (TFEU). The proposal aims at enhancing market data quality and market data consolidation through amendments to existing rules on market data in MiFIR. Therefore, the proposed reform should also fall under the same legal basis.
In particular, Article 114 TFEU confers the European Parliament and the Council with the competence to adopt measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have, as their object, the establishment and functioning of the internal market. Article 114 TFEU allows the EU to take measures not only to eliminate current obstacles to the exercise of the fundamental freedoms, but also to prevent, if they are sufficiently concretely foreseeable, the emergence of such obstacles, including those that make it difficult for economic operators, including investors, to take full advantage of the benefits of the internal market. Thus, Article 114 TFEU is the appropriate legal basis to address obstacles in data consolidation that result from (1) fragmented market data sources; (2) unclear market data reporting standards and (3) complex market data licensing schemes. These are the main drivers that prevent a consolidated view of trading liquidity across the Union.
More specifically, the continued lack of a centralised database showing market data for securities traded on EU trading venues would prevent EU investors, other than the very sophisticated ones, from having a consolidated view of where to find the best investment opportunities. This would perpetuate the current information asymmetries preventing investors from fully benefiting from the single market. Therefore, the use of Article 114 TFEU appears as the most appropriate legal basis to tackle these problems comprehensively and uniformly and to avoid market fragmentation.
• Subsidiarity (for non-exclusive competence)
According to Article 5.3 of the TFEU on the principle of subsidiarity, action on EU level should be taken only when the objectives cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved at Union level.
Trading markets for various financial instruments classes are spread across the Union. Consolidating market data published by these trading venues requires a rulebook that applies across the Union. Action taken by individual Member States would not effectively address the need for consolidation of market data across the Union. Member States could attempt to harmonise market data reporting standards and licensing conditions for a market data consolidator by means of national laws. National initiatives cannot address problems stemming from market data fragmentation across the Union.
Different Member States might adopt different standards or opt for different licensing schemes applicable to a market data consolidator. Some Member States might not take any action at all. As market data consolidation has to work across the entire Union, it is both more effective and efficient to address reporting standards and data licensing conditions, necessary for the production of a consolidated view of all trading markets at Union level. Standardisation of data reports and licensing conditions would apply only to reporting to the provider of a consolidated market data tape. For example, market data licenses that do not pertain to the production of a consolidated tape would not be subject to the proposed rules.
• Proportionality
The proposed harmonisation of market data standards and licensing conditions for the supply of market data to consolidated tape providers do not go beyond what is necessary to achieve the stated aims. A patchwork of national rules on any of the measures contained in this proposal would not achieve the stated aims of market data consolidation in order to make this information accessible to a wider group of market participants. Addressing the problems of market data quality and the complexities around market data licensing requires the proposed harmonisation of market data reports and the mandatory use of these reporting standards to supply market data to the provider of a consolidated tape.
• Choice of the instrument
An amendment to the MiFIR Regulation is the most appropriate legal instrument to solve issues arising from the lack of a consolidated view of the core market data across the EU markets as it allows amending certain provision in MiFIR as well as adding new specific requirements. The use of a Regulation, which is directly applicable without requiring national legislation, will restrict the possibility of divergent measures being taken by competent authorities at national level, and will ensure a consistent approach and greater legal certainty throughout the EU (e.g. for the mandatory contribution of core market data from exchanges of different Member States).
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The first stakeholder consultation undertaken by the Commission after the entry into application of the MiFID/R rules in January 2018 was carried out between February and May 2020 (see below). It revealed that most investors do not have a complete view of prices and available volumes (ie liquidity) when deciding to invest in the Union’s capital markets.
The consultation revealed that the exchange-specific (proprietary) market data products that have emerged under MiFID I and MiFID/R do not create a consolidated view of all trading markets. Liquidity available in alternative markets (MTFs/OTFs) and via investment banks that trade financial instruments against their inventory (systematic internalisers –SIs) are not represented on these proprietary data streams. This creates significant information impediments, as volumes on these alternative platform can constitute up to 50% of trading volume on any given trading day.
Securities brokers and broker-dealers are responsible for providing best execution, which means achieving the most advantageous transaction in terms of price and the lowest total explicit and implicit costs 16 to investors. Best execution means that brokers have to show their customers the prices at which they bought and sold compared with prices and volumes available on different exchanges and alternative trading venues at the time the trade was executed. The absence of a consolidated view of all trading markets is a problem when a financial instrument is made available for trading not just on a single listing venue, but across several competing venues. An investor has, and should continue to have, the choice between competing venues, but currently has to rely on market data that only cover individual venues. As a result, investors have insufficient access to consolidated and comparable market data and cannot compare whether they would have obtained better execution conditions on an alternative platform. This prevents them from holding their securities brokers and broker-dealers accountable on whether they achieved the best execution for any given trading order.
The consultation has also revealed significant issues around the cost to procure market data from multiple data sources. The cost of obtaining the market data from contributors (connecting and obtaining a license) currently accounts for roughly two-thirds of the overall cost of assembling market data. Because of this, data vendors, who make this data available to users, tend to narrow the selection of sources from which they collect and offer data. As a result, investors lack a comprehensive view of liquidity across all trading markets and most investors are unable to afford the cost of obtaining a more comprehensive view.
Between the end of 2019 and 2021 ESMA performed in-depth analyses of the MiFID/R framework, primarily focussing on the topics addressed in the review clauses in Article 90 MiFID and Article 52 MiFIR, and published review reports containing recommendations for changes in the legal framework 17 . These review reports built on extensive public consultations and contained detail recommendations relating to market structure topics, in particular the current transparency regime.
In particular, in its ‘MiFID II/MiFIR Review Report No. 1’ 18 , ESMA found that fragmentation of market data sources increases dependency on multiple, venue-specific, proprietary data streams which only cover a partial view of available trading liquidity. Verifying whether all market data sources provide access to their market data in a fair, equitable and timely manner is made difficult by the complexity of how proprietary market data is licensed and how compliance with usage restrictions is administered. The fact that trading data from individual venues is unique and non-substitutable has allowed data licensing agreements to become increasingly detailed and onerous. Firms receiving market data therefore face significant complexity in managing ongoing variation in their licensing agreements, incurring operation costs and risks; they also often bear the cost of complex audits of their licenses, imposed by data providers through ex-post fees.
In light of the heterogeneous market data pricing policies across the single market, it is difficult for a consolidator of market data to access proprietary market data streams on fair, equitable and timely conditions. In its report on the consolidated tape, ESMA took the view that the current MiFID II rules do not oblige trading venues and APAs to submit market data to a consolidated tape on fair and reasonable terms. Therefore, ESMA suggests that trading venues and APAs should be required to provide data to the consolidated tape either by (i) requesting trading venues and APAs to provide data to the consolidated tape, or, (ii) setting forth criteria to determine the price (and usage terms and conditions) for contributions to the consolidated tape.
According to ESMA, MiFID/R did not deliver on its objective to create more clarity on licensing and pricing of proprietary market data. Prices for market data, in particular for data for which there is high demand, such as non-display data, have increased since 2017. One trade association estimates that the total costs of data for a hypothetical small principal trading firm with access to various venues have increased by 27%, from EUR 917.000 in 2016 to EUR 1,16 million in 2019 19 . ESMA furthermore recommends that a consolidated tape should share its revenue with the contributing entities and should deliver the tape as close to real time as technically possible.
In the MiFID II/MiFIR Review Report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares, ESMA has reviewed the MiFIR transparency regime for equity instruments and made proposals for targeted amendments. It also includes recommendations on other key transparency provisions, in particular the trading obligation for shares and the transparency provisions applicable to systematic internalisers in equity instruments.
In its www.esma.europa.eu/press-news/consultations">Report on MiFIR Review Report on transparency for non-equity 20 , ESMA concluded that the current regime was too complicated and not always effective in ensuring transparency for market participants and made several proposals to improve it:
·deleting the specific waiver and deferral for respectively orders and transactions above the “size-specific to the instrument” threshold;
·streamlining the deferral regime with both a simplified system based on volume masking and full publication after two weeks as well as removing the supplementary deferral options left to National Competent Authorities (NCAs) under the current MiFIR text;
·transforming the possibility granted to NCAs to temporarily suspend MiFIR transparency provisions into a mechanism coordinated at EU-level;
·including the possibility to suspend at short notice the application of the derivative trading obligation similarly to the mechanism available in EMIR; and
·complementing the criteria used to grant equivalence to third-country trading venues for the purpose of the derivative trading obligation with conditions relating to transparency and non-discriminatory access.
·Who is affected by the low-performing transparency framework?
Market participants are expected to adhere to highly complex transparency rules, including as regards the application of waivers, deferrals and the double volume cap. This results in costly administration costs that affect the overall competitiveness of EU platforms and places an undue burden on EU market participants. Streamlining the transparency rules would benefit the entire investment community by increasing the availability of trading data and decrease execution costs. It would also result in more price discovery in the Union.
Data vendors already offer proprietary consolidated version of data from multiple sources. However, no data vendor has been able to provide a complete picture of EU trading in any asset class. Moreover, as data vendors interpret the data fields and choose the venues they incorporate, they differ not only in terms of market coverage, but also on the level of detail provided, data tags and will provide different results for the same securities.
The cost of producing and normalising bad quality data has led to additional expense and asset and portfolio managers complain that data providers are charging high fees for their data feeds. 21 As a result it is very costly for all investors and their intermediaries to manage their liquidity and trade execution risk throughout the trading day. Investors are also unable to hold their brokers accountable for whether they achieved best execution for their trades, as verification of the best price currently requires a subscription to a proprietary market data product produced by a data vendor or the proprietary data feed that each stock exchange offers for its venue.
• Stakeholder consultations
On 28 June 2019, the Commission organised a workshop intended to engage with stakeholders about the creation of an EU consolidated tape, bringing together around 80 market participants to debate the merits and technical characteristics of an EU CTP, as well as the obstacles to its creation. The participants were experts in trading or market data from the buy-side, data vendors, trading venues, and on the regulatory side, ESMA and several NCAs. Generally, participants of all types agreed that such a tool could be useful, even if there were different views as to the optimal characteristics of a tape.
On 17 February 2020, DG FISMA published a public consultation on MiFID/R review intended to gather evidence from stakeholders, and more generally from EU citizens, on the overall functioning of the regime after two years of application. Stakeholders had until 18 May 2020 to express their views via the online EU Survey portal. 458 stakeholders replied to the open consultation on several topics including the functioning of the transparency framework, the consolidated tape, the share and derivative trading obligations, with responses coming from sell side, buy side, trading venues, data providers, end users as well as regulators.
Beyond the above, the Commission has been actively studying the issues at hand, mandating an extensive study for assessing and defining it ex-ante, with the final goal of supporting an informed decision-making process.
Finally, the Commission staff has had many bilateral contacts with a broad spectrum of stakeholders, notably companies that specialise in the aggregation of market data, further refining its analysis and policy approach.
• Collection and use of expertise
The proposal builds on the expertise of EU competent authorities that supervise trading venues as well as on the expertise of market operators. In addition, the Commission monitors closely developments in other jurisdictions (notably U.S. and Canada) that have already developed their consolidated tapes in the past, and the possible changes that these jurisdictions are contemplating for their respective tapes. The Commission considered the various alternatives and has taken a view on whether these alternatives could be applied to the EU situation.
• Impact assessment
The Regulatory Scrutiny Board reviewed the impact assessment that focussed on the development of a framework for consolidation of market data. 22 Other topics included in the proposal were already covered in-depth in the various ESMA reports on the functioning of the MiFIR framework which explains why they were not the focus of the impact assessment.
Contents
Option 1– Self-aggregation. Self-aggregators of market data are defined as market participants that collect and consolidate market data for their internal use. Electronic market makers (high-frequency trading firms) or big investment banks have the capacity to become self-aggregators. Self-aggregators will collect market data from trading markets and consolidate this data directly at their own premises (decentralised consolidation). Upon registration with ESMA as “self-aggregators”, market participants would be allowed to collect all core (harmonised) market data and consolidate the information solely for their internal use (harmonisation of reporting standards diminishes the cost of data consolidation). Self-aggregators would not publish a consolidated tape. In order to avoid complex, individual market data licensing arrangements with often hundreds of execution platforms or their APAs that act as data contributors, all market data sources would have to make standardised core market data available to self-aggregators (mandatory contributions).
Option 2 – competing consolidators. The competing consolidator model also takes a decentralised approach to core market data consolidation. Upon registration with ESMA, competing consolidators would be allowed to collect harmonised market data from the individual data sources (trading venues, APAs) and then consolidate these market data at the data centre where its subscribers are located (thus avoiding consolidation at a central hub). A decentralised model for data consolidation aims to address geographical dispersion and latency by showing each market data subscriber its local reality. As a result, each subscriber will be able to observe the best price available from its geographical location. The decentralised model aims to neutralise a common criticism made with respect to a consolidated tape: The fact that “best execution” is a local reality, true at one moment, for one specific location where the executing broker is located.
Option 3 – exchange operated consolidators. The exchange-operated consolidator operates a centralised "hub and spoke model”. With this approach, each stock exchange would become the exclusive data consolidator with respect to shares or other instruments listed on its exchange. The result would be that listing exchanges become the consolidators (the “hub”) for all market data that involve their listings (the “reportable securities”). In practice, Option 3 would lead, e.g., to a separate tape for each European listed exchange (examples are Euronext, Deutsche Börse, NASDAQ OMX, BME, Vienna stock exchange, Warsaw stock exchange).
Option 4 – single, independent consolidator for each asset class. The single consolidator would operate a centralised "hub and spoke model” for each asset class (shares, ETFs, bonds and derivatives). With this approach, the exclusive data consolidators would collect data for specific stocks from geographically separated venues, consolidate the data in one centralised data centre, and then disseminate them from such a central location to subscribers that are in other locations. Compared to a decentralised operating model, a centralised model would therefore be slightly less accurate in terms of the timeliness of the pre-trade quotes provided on the consolidated tape but it would guarantee more data integration and operate a more efficient revenue participation scheme.
Option 5 – the concentration rule. All trading in listed shares is concentrated on the listing exchange (for non-equities on the existing primary centre of liquidity), there is no need for consolidation of core market data with an exclusive or non-exclusive securities market data consolidator. This option would not involve the creation of a consolidated tape. This option would rather aim to consolidate the flow of market data (indirectly) by concentrating trading in certain asset classes on designated execution platforms.
The preferred options for market data consolidation:
Option 1.2 (competing consolidators) and 1.4 (a single, independent consolidator) constitute the two preferred options. In terms of achieving optimal market data quality and timely delivery, the decentralised consolidation model in Option 1.2 enjoys a slight advantage over the centralised consolidation (Option 1.4). On the other hand, the competitive tender in Option 1.4 provides ESMA with more discretion to award the consolidator role to an entirely new market entrant. This would allow selection of a consolidator that is entirely independent of both market data contributors and market data companies and that operate a more efficient revenue participation scheme.
Option 1.2, on the other hand, would most likely present an opportunity for incumbent market data companies to leverage their expertise in data aggregation into the new market of consolidated data. While this allows for ease of entry and potentially lower set-up and operating cost, it entails the risk that many of the emerging consolidators will be part of established financial groups and therefore not free of potential conflicts of interest.
With respect to ensuring fair remuneration of market data contributors, the impact assessment considered three options:
Option 2.1 – Mandatory contributions with “minimum revenue targets” incumbent on market data consolidators. All market data sources would have to make standardised core market data available to market data aggregators (mandatory contribution). In order to create additional revenue for allocation to market data contributors, there would be “minimum revenue targets” that form part of the selection process for a single consolidator (Option 1.4) or part of the registration process for competing consolidators (Option 1.2). The minimum revenue targets would be established and regularly reviewed by an independent operating committee. The revenue targets would take into account various uses that subscribers make of the consolidated tape and take into account relevant parameters such as commercial redistribution, price referencing, indexing, syndication, sales of market data to media outlets. The revenue targets with respect to professional users could be set at levels sufficient to largely subsidize the cost of granting retail access for minimal or no cost.
Option 2.2 – Mandatory contributions with statutory subscription fees. Option 2.2 would comprise statutory minimum subscription fees for consolidated market data feeds. Making mandatory contributions contingent on a “revenue participation model” aims to create a commonality of interest between market data contributors and market data consolidators. By setting fee floors for the use of core market data, market data contributors participate in the commercial success of consolidated market data streams and share the risk of success of the consolidated market data product with market data consolidators. The subscription fees would be designed and regularly reviewed by an independent operating committee.
Option 2.3 – Mandatory contributions with compensation by means of a “reference price usage fee”. Option 2.3 envisages to ensure compensation for market data contributors by means of a usage fee for all execution venues that do not contribute to price formation in the equity markets (“dark trading”). Technically “dark trading” is defined as a form of trading that is not pre-trade transparent – no quotes are published and trades are executed at the reference price set at the primary market execution platforms that match trades using a reference price “imported” from the listing exchange. Users of the reference price waiver would need to “buy” the reference price by means of a monthly “ad valorem” fee, to be paid (for rebating back to the listing exchange) to the operator of the consolidated tape.
In the end, the preferred option for market data remuneration is Option 2.1 as the least intrusive on the consolidator’s business model, while ensuring a revenue stream in line with that that can be generated with either Options 2.2 or 2.3. When compared to the complexity of setting individual subscription fees centrally, Option 2.1 allows for more commercial freedom in establishing and revising subscription fees.
Overall policy choice on consolidation and fair remuneration
In terms of achieving optimal combination ensuring high market data quality and timely delivery, the competitive tender process on Option 1.4 is the most appropriate method to ensure competition for the new market of establishing the essential infrastructure necessary for market data consolidation. On the other hand, many of the positive features of Option 1.2 can be maintained by, possibly at a later stage, creating a new “downstream” market for market data publication and data advanced analytics, a market that is open to competition. Revenue participation for market data contributors is best ensured with Option 2.1 (revenue participation model).
• Likely impacts of the preferred option
The positive impacts of eliminating the obstacles for market data consolidation would accrue to investors, the buy-side, in capital markets. The buy-side (i.e. investors in capital markets) would be the main beneficiaries of market data consolidation as a consolidated tape will ensure investors and their investment managers get a complete overview of the entire liquidity in any given financial instrument ultimately allowing them to take full advantage of the benefits of the single market.
By removing barriers to the creation of a consolidated tape, asset and portfolio managers will be incentivised to include in the portfolios they manage the most optimal (combination of) instruments available in the Union and not just the instrument available on the (few) venues whose market data they currently subscribe to. They would have the information allowing them to decide if they need to become member of (other) venues, when these venues provide the optimal products for their purpose. It will function as an important guide to the buy-side trader on assessing and making their trading decisions and setting up their algorithmic parameters.
The main investor (buy-side manager) benefit of a consolidated tape is the avoidance of liquidity risk and slippage. For equities, 56% of asset managers that participated in a survey conducted by MSP 23 identified slippage of between 0-0.5 basis points of the annual traded value as the main consequence of a lack of transparency with respect to liquidity in the market. Avoidance of this slippage would result in investor gains of up to EUR 1.06 billion.
For bonds, potential gains from a consolidated view of the markets would be even greater. This is because the estimated losses due to slippage by far exceed the above estimates for shares. 60% of bond asset managers interviewed for the MSP study estimated slippage costs of up to 5 basis points, 25% estimated slippage cost of up to 10 basis points, while 11% estimated slippage of up to 50 basis points. The absence of any reliable data for the traded value in bonds makes it impossible to quantify slippage in absolute terms.
Potential benefits are also foreseeable for regulated markets, as the tape will enhance the level of visibility of shares, especially those of SMEs, listed on such venues which will have a wider visibility than their own local markets and a consequential increase in liquidity. This increased visibility increases the attractiveness of investments and the possibilities of the shares being included in investment funds or investment portfolios. As a consequence of increased attractiveness of SME shares the consolidated tape could therefore also increase the effectiveness of raising capital for SMEs.
• Fundamental rights
The proposal respects the fundamental rights and observes the principles recognised by the Charter of Fundamental Rights of the European Union, in particular the principle establishing a high level of consumer protection for all EU citizens (Article 38). Without creating the condition for a consolidated tape to be created in the EU, retail clients would potentially remain without a tool to assess compliance with the best execution rule by their brokers and to allow them an increased range of investment opportunities, particularly in certain Member States where trading venues are smaller and offer fewer investment opportunities.
4. BUDGETARY IMPLICATIONS
The initiative does not have an impact on the EU budget. The consolidated tape will be provided by the private sector, under the supervision of ESMA. The other elements that the proposal tackles do not have an impact on the EU budget either.
5. OTHER ELEMENTS
Apart from the provisions on consolidation of market data and the operation of consolidated tape providers for the main MiFIR asset classes, shares, ETFs, bonds and derivatives, the proposal contains a series of accompanying measures that aim to strengthen the transparency and competitiveness of the Union’s capital markets.
• Implementation plans and monitoring, evaluation and reporting arrangements
The proposal contains a monitoring and evaluation of the development of an integrated EU market for consolidated market data. Monitoring will cover both the evolution of operating models for a consolidated tape used and the success in facilitating universal access to consolidated market data for the wider investor community. Particular focus of monitoring will be on the asset classes for which a consolidated tape has emerged; the timeliness and delivery quality of market data consolidation; the role of market data consolidation in reducing implementation shortfall per asset class; the number of subscribers to consolidated market data per asset class; the success of revenue allocation models for regulated markets for their contribution of market data in shares; the effect of market data consolidation on remedying information asymmetries between various capital market participants; and the effect on more democratic access to consolidated market data on investments in SMEs.
• Detailed explanation of the specific provisions of the proposal
Article 1(1) amends certain aspects of the matter and scope of the Regulation, in particular with regard to the obligation for multilateral systems to operate with a trading venue licence.
Article 1(2)(a) are moving provisions on the delineation between multilateral and bilateral systems from MiFID II to MiFIR in order to obtain a higher degree of harmonization which aims at increasing transparency as a consequence.
Article 1(2)(b)(c)(d) contains new definitions, in particular the ones that are essential for market data consolidation, such as the definition of core market data.
Article 1(3) proposes to institute a minimum threshold trade size for the reference price waiver (RPW) preventing any alternative trading venue (MTFs) from executing small trade sizes under the reference price waiver, in line with ESMA recommendations.
Article 1 i replaces the double volume cap with a single volume cap set at 7% of trades that are executed under the reference price waiver or the negotiated trade waiver.
Article 1(6) shortens and harmonises publication deferrals for non-equity post trade reports to the public. It also removes the discretion of national competent authorities to allow that post-trade reports for non-equities are deferred for four weeks, by replacing it with Union wide thresholds. Only with regard to sovereign debt the national competent authorities remain to have discretion.
Article 1(7) empowers ESMA to specify the content, format and terminology of the reasonable commercial basis concept, which has been interpreted very differently.
Articles 1(8) and (9) strengthen the public quoting obligations incumbent on a systematic internaliser (SI). This new provision increases a SIs pre-trade quotation obligation related to equities to cover quotes for trade sizes up to a minimum twice the standard market size. It also proposes to replicate the RPW floor to trades undertaken by an SI without pre-trade transparency. In line with the floor on the RPW, SIs will not be allowed to match small trades at midpoint.
Article 1(10) introduces the obligation for trading venues to contribute harmonised market data directly and exclusively to the entities appointed by ESMA as the CTP for each asset class (mandatory contributions). Article 1(10) also aligns the trade reporting formats and reporting obligations for SIs with those applicable to exchanges and alternative execution venues (MTFs/OTFs). This will be achieved by means of a delegated act that makes the current reporting format used by the exchanges (the Model Market Typology or ‘MMT’) mandatory for all SI market data reports. In addition, Article 1(10) extends the mandate of synchronisation of business clocks beyond trading venues and their members to systematic internalisers, APAs and CTPs (Article 22c).
Article 1(11) codifies the perimeter of the share trading obligation (STO). In line with ESMA’s proposals in its Final report on the transparency regime for equity instruments, following its approach in its statement, this article defines the perimeter of the STO as shares that are admitted to trading on an EEA regulated market, and establishes an EU “official list” of shares subject to the STO, avoiding current ambiguities in the perimeter of application of the STO.
Articles 1(12), (13) and (14) introduce some technical changes in relation to transaction reporting and reference data.
Article 1(15) introduces a selection procedure for the appointment of a consolidated tape provider for each asset class (shares, ETFs, bonds and derivatives).
Article 1(16) introduces a provision on the organisational requirements and quality of service standards that apply to all CTPs selected and appointed by ESMA (Article 27h). Requirements for the CTP include: (a) the collection of consolidated core market data; (b) the collection of licensing fees from subscribers; and (c) for shares a revenue participation scheme for regulated markets for their contribution of market data.
Article 1(17) introduces a new Article 27ha which contains a series of public reporting obligations incumbent on the CTPs. These reporting obligations concern service level requirements quality features, e.g., on speed of delivery, and reports on operational resilience.
Articles 1(18), (19) and (20) make adjustment to the derivatives trading obligations in line with recommendations made by ESMA. The trading obligation for counterparties to trade derivatives that are subject to the clearing obligation on trading venues is triggered when a class of derivatives is declared to be subject to the clearing obligation. In light of this close interconnection, the amendment aligns the derivatives trading obligation under MiFIR with the clearing obligation for derivatives under ‘EMIR Refit’ 24 , to ensure legal certainty between the two obligations, in particular with respect to the scope of the entities that are subject to the clearing and trading obligation and the possible suspension of such obligations. Article 1(20) introduces a new Article 32a containing a stand-alone suspension mechanism for the Commission to suspend the trading obligation for certain investment firms acting as market-makers with non-EEA counterparties when certain conditions are met. The mechanism can be activated at the request of the competent authority of a Member state and takes the form of an implementing act adopted by the Commission. The suspension needs to be accompanied by evidence that at least one of the conditions for suspension is met.
Articles 1(21), (22) and (23) remove the “open access” obligation for exchange-traded derivatives. Clearing infrastructures in the Union would no longer be obliged to clear derivatives trades that are not executed on their vertically integrated trading platform. Likewise, trading venues in the Union no longer need to accept that non-affiliated clearing infrastructure clear trades executed on their platform.
Articles 1(24) and 1(25) ensure that ESMA has sufficient supervisory powers for the consolidated tape providers.
Article 1(26) prohibits SIs from offering payment for (retail) order flow (PFOF). This proposal would end the controversial practice that certain high-frequency traders, organised as SIs on account of their large transaction volumes, pay retail brokers in exchange for the latter channelling their retail orders to the high-frequency trader for execution. The expectation is that, in the absence of PFOF, retail orders will be sent to a pre-trade transparent market (regulated market or MTF) for execution. Combined with the increased pre-trade quoting obligation for SI, these entities would have to “earn” the retail flow by publishing competitive pre-trade quotes. On the assumption that retail order flow accounts for anything between 7 to 10% of overall daily volumes and the expected increase in online brokerage, the prohibition of PFOF promises to increase execution quality for retail investors and increase pre-trade transparency of all execution platforms that execute retail orders.
Article 1(27) empowers the Commission to adopt delegating acts supplementing the Regulation.
Article 1(28)(a) tasks ESMA with the obligation to provide monitoring reporting.
Article 1(28)(b) and (29) delete a transitional measure and the empowerment for the Commission to adopt delegated acts based on the replaced CTP framework.
Article 2 provides that entry into force and application occur on the twentieth day following that of publication.