When European lawmakers first envisaged the new era of transparency in European markets, with information on the trades that take place on a daily basis freely available to the public, they didn’t imagine that information would be locked away behind a Bloomberg terminal. Or posted for blink-and-you’ll-miss-it time periods. Or simply presented as a static image. Yet, somehow, that’s how new European reporting platforms seem to have interpreted the guidance.
Under the revised Markets in Financial Instruments Directive and Regulation, known collectively as Mifid II, trading venues and reporting platforms, such as Approved Publication Arrangements (APAs), are meant to make information on the trades that are reported to them available in a digestible format, almost immediately after the trade is executed. Yet that’s not what many have done, choosing instead to stick, as lawmakers describe it, to the very narrow confines of Mifid’s exact wording.
“Many APAs used to publish post-trade data in a way that made this kind of data basically useless as the data was either only available in a data format that could not be used by third parties or only available during a very short time period of a couple of seconds,” says Markus Ferber, a German member of the European Parliament and the vice-chair of the powerful Committee on Economic and Monetary Affairs (Econ), which was substantially responsible for Mifid II. “Many of these practices applied by APAs when publishing post-trade data were at least against the spirit if not the letter of Mifid II.”
Now, European authorities are taking action. In an update to Mifid II through a Q&A, which is regarded under the European lawmaking process as a legitimate phase of rulemaking, the European Securities and Markets Authority (Esma) came down hard on these practices in late May.
Spelling out, in detail, exactly what it expected from APAs and other reporting platforms, Esma said that reports must be available for at least 24 hours; require no third-party platforms or tools to digest; must be machine-readable, so as to promote systematic analysis of data from platforms; and be available on substantially the same basis as commercially reported data.
Esma, which did not respond to requests for comment, was unusually scathing in its assessment of current practices. Listing them one by one, the regulator said that many of the ways in which APAs currently disseminate data do not “meet the requirement to make information available to the public free of charge.” That particular phrase occurs at least five times sequentially.
“I’ve not seen a European body, outside of some of the antitrust folks, be so explicit in their condemnation of current practices before,” says one Brussels-based lobbyist. “Granted, it’s the European Union, so they’re not going to come out and say they’re thoroughly pissed off, but they are definitively saying ‘you are not in compliance and we are taking notice of this,’ and if I were an APA doing some of this I’d be sweating bullets.”
As a technical body with limited oversight capabilities, Esma cannot directly enforce the provisions of Mifid II. That, instead, falls to the National Competent Authorities (NCAs)—domestic regulators charged with overseeing their local markets.
“I think this is additional information that firms will have to take into account when working out whether or not their current arrangements are compliant and whether they may need to make a change,” says Michael Thomas, a partner in the financial services practice at law firm Hogan Lovells. “But just because Esma has put out something clarifying their position, it doesn’t necessarily mean firms need to jump to it immediately.”
That should offer limited succor to firms, however, particularly those in the UK—people familiar with the Q&A say that the UK’s Financial Conduct Authority (FCA), for instance, was heavily involved in the production of this update. Many of the major APAs are based in the UK and regulated by the agency. Most major APAs either did not respond to a request for comment or declined to comment for this article, some citing national holidays as a reason for not doing so. Those who did speak with Waters say that regulators might want to be careful what they wish for.
Before that, however, it’s worth noting that this is not the first time that transparency requirements under Mifid II have been derailed.
The problems with trade reporting began almost as soon as Mifid II went live, on January 3 of this year. In truth, there had been issues building up well ahead of that—multiple market participants told Waters that firms had run their final builds on software by December 20, 2017, confident that they would be ready to return on January 2 after the holiday break, ready to go, only to find that APA providers had issued emergency fixes over that period.
Then, on day one, Approved Reporting Mechanisms (ARMs) operated by NCAs went down. The Hellenic Capital Markets Commission, for instance, suffered an outage for several hours on January 3, as did the FCA’s own platform, built by French technology firm Sopra Steria. The problems were reportedly so severe that APAs were ordered to stop sending reports to the regulator until the system was restored.
Other problems continued with APAs. Waters reported in January that Tradeweb’s APA, for instance, suffered a glitch relating to mapping issues with identifiers, which meant banks were unable to submit their transaction reports. Tradeweb confirmed that an issue did take place, but that it was fixed almost immediately.
But problems seemed to continue across the board, often requiring institutions themselves to implement patches to fix issues that were caused by hotfixes and other updates. An internal memo at one bank, written one week after Mifid II went live and seen by Waters, illustrates the depth of the problems some institutions continued to have, in many cases being forced to route orders only through systematic internalizers (SIs).
“We are currently mitigating these issues as best we can by encouraging the front office to only use SIs so that the reporting obligation does not fall on the bank. However, this is not a practical long-term solution,” said one such memo. “We have been able to use the [multilateral trading facility] for deal execution; however, the lack of ability to test before go-live meant that it hasn’t been without incident.”
Other information suggests that banks were unable to submit full reports to some APAs for at least a week after January 3, and many suggested lodging written complaints so that they would have a record to show their regulators if and when questions began to be asked.
While teething issues with APA reporting were eventually ironed out, other problems with Mifid II’s transparency regime quickly reared their heads, this time from Paris, at Esma’s headquarters.
Under the double volume cap regime, which is supposed to govern the amount of trading in listed names that can take place in the dark, Esma is obliged to publish a list of those stocks that breach caps on trading on a single venue, or a percentage of trading in that name’s entirety each month. Those that breach the caps are then limited to trading only on lit, or disclosed venues (with a number of exceptions).
However, Esma delayed the initial publication of volume-cap data for January soon before it was due. Once again taking an unusually combative stance, it blamed the quality of data received from exchanges and trading venues for this. The exchanges were—and according to some sources, still are—livid over Esma’s reasoning, and reacted accordingly.
Esma eventually began publishing the data from February onward, but the episode was yet another bump in the road to Mifid II’s painful birth, particularly as transparency had been repeatedly cited by lawmakers, regulators, and market participants as being at the core of the revised rules.
Despite this, the largest abrogation of the spirit of Mifid II, as Ferber says, appears to be the manner in which many APAs have gone about publishing the data they provide. Yet the APAs themselves say that, while they will comply with the new guidance from Esma, the new rules may end up having a detrimental effect on some corners of the market.
Those APA operators that did respond to queries from Waters on this topic acknowledge that there have been bad practices among some of their peers. The updated guidance from Esma, they say, will go some way toward fixing this.
“So on one extreme, there were people who were making it difficult to obtain, or making it difficult to use thereafter—by giving a screenshot, showing a photo of the data that couldn’t then be grabbed and used in spreadsheets or whatever—as data. It was just displaying the thing but not in a usable format,” says Mark Kelly, director of professional services at NEX Regulatory Reporting, which operates an APA. “All of those things have been hammered out and the guidance is stopping people from doing that.”
Others, such as Fredrik Ekström, vice president and head of Nordic fixed income at Nasdaq, say that deliberately making the data hard to access would be “counterproductive.” He says Nasdaq already makes its trade data downloadable in a CSV format, directly from a dedicated website, but that the enhanced guidance should also assist in standardizing approaches among operators.
“From a customer perspective, it is important to have access to transparency data on equal terms throughout Europe. This fact makes having the same interpretation among the different APA regarding how and what should be published even more important,” he says.
Likewise, a Bloomberg spokesperson said it already publishes its data in line with the updated rules, and that little if any technical lift would be required to change its approach. Others also say the new guidance is a welcome dose of prescription, but that communication on this issue should work both ways.
“Regulators have been prescriptive about certain things and have left other areas vague—if real market transparency is to be achieved, then a certain level of prescription is required,” says Virginie O’Shea, research director at analyst firm Aite Group. “Regulators also need to listen to the industry feedback on problems around certain data fields and items, and respond in an appropriate manner.”
However, APA operators have expressed concern over at least one part of the updated guidance, in that Esma said simply providing a searchable database that users could query by identifier, such as an Isin, was not in compliance with the rules. Rather, APA operators should provide access to the full data.
This could hinder certain market participants, NEX’s Kelly says, such as day traders and smaller shops that not only may just be interested in specific instruments but who also may not have the technical nous to take in, format and analyze such vast quantities of complex data.
“Some APAs have tried to make things simpler for them by making a website available with search criteria, because they are likely to be interested in the price of a specific instrument, so you can put an Isin in, you can get all of the prices for the last 24 hours in that instrument, then you can download it to CSV,” he says. “All of that is well within the reach of someone without specialist tools; the problem is, even people who have considered the different types of user and made these different platforms available, they are all being hit by this requirement that you can’t filter the data.”
Some of the guidance, he says, may therefore make it more difficult for members of the general public to access information on trades—ironically, the very people the provisions surrounding publication of data are designed to inform and protect.
Much of the problem, experts suggest, stems from a goal that has been long in the minds of European regulators but has thus far proven elusive—a consolidated tape for fixed income that would be a centralized, standardized means of printing trade data across the bloc’s markets.
People familiar with the regulatory agencies and Parliamentary committees who created Mifid II say that while this is true, the level of problems already seen with transparency and, as one European politician puts it, “deliberate unwillingness to engage with the process” on the parts of “some sections of the market,” shows that a consolidated tape will remain a pipe dream for some time.
“This needs to be a project that the whole industry works on, not just those who want to control the process and make some money off it,” the politician says. “But if the regulator is forced to turn around and say, ‘Stop publishing JPEGs of trade data, guys,’—and I don’t care how much you argue about what is and what isn’t in Mifid II, you know that’s not what we meant—you can see how we’re awhile off getting agreement on something so complex.”
While the APAs may have been temporarily cowed, however, one threat still remains—consolidation, but of a different kind. Publishing this data is not a revenue-generating model for businesses that, at the end of the day, answer to their shareholders first. If some are required to radically overhaul their systems, NEX’s Kelly suggests, there may well be a few less APAs in the market this time next year.
“Having to redo their architecture to meet all of these criteria could actually make the difference and hasten the consolidation of the APA space. It might be that this isn’t worth doing on a commercial basis anymore if people have to re-engineer their whole systems,” he says.
Despite this, regulators and politicians seem unfazed—indeed, the general sentiment from those spoken to by Waters for this article was that Esma is simply doing its job, and fixing bad blood in the market’s circulatory system.
“This will help bring actual market practices more in line with the intention of Mifid II,” says Econ’s Ferber. “With Mifid II we wanted to democratize access to post-trade data and I believe that the new Esma Q&As are a good step toward achieving that objective. Obviously, now national competent authorities have to make sure that those new Q&As are thoroughly enforced.”
With additional reporting by Josephine Gallagher and Hamad Ali
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