MiFID II, ESMA and the Consolidated Tape

Published on 30 May 2018

Dr Kay Swinburne MEP, the vice-chair for the European Parliament’s Economic and Monetary Affairs Committee, doubts a commercial provider will deliver a single tape of bond trading data which has been mandated by MiFID II.

She outlines her concerns and expectations in May’s Trader TV, and explains the need for a tape in democratising the market and improving transparency.

Dan Barnes Welcome to Trader TV Fixed Income – your insight into the trading climate for professional bond investors. I’m Dan Barnes. In May’s show, we’ll be talking with Dr. Kay Swinburne, MEP, vice-chair for the Committee on Economic and Monetary Affairs in the European Parliament, about the need for a consolidated tape of trading data, the value it could provide for investors in Europe, and the problems that its absence creates. Market data is provided by MTS. Kay, welcome to Trader TV.

Kay Swinburne Thank you. Good to be here.

Dan Barnes We’d like to talk today about the consolidated tape and the concept was introduced to the consolidated tape provider under MiFID II. This is the legislation that came in on the 3rd of January 2018, and it’s creating a level playing field of pricing data for the fixed income markets, regardless of whether you are institutional investors or retail investors. In terms of the value that a consolidated tape might provide to the end investors, the pension funds and the insurance funds, what does it actually do for asset managers?

Kay Swinburne Well, for us as as parliamentarians, we always saw that the data costs in Europe were hugely expensive compared to the US. And so the typical data feed in the US at the time was some 50 dollars. In the EU, the equivalent was 500 orders of magnitude different. And so we actually thought in most of the buy-side, particularly the smaller ones, would never be able to justify getting that data and purchasing all of the data feeds, that they would require for their entire portfolio. So we needed a method of democratizing that data. And the way of doing it, of course, is the consolidated tape. We didn’t want to take away the ability for data providers and collators to make money, so that instantly available data that people are prepared to pay handsomely for. We felt unbundling was the way forward, but not forcing them to do it for nothing. But actually over a period of time when that sort of first advantage goes away within milliseconds or seconds, by the time you get to 15 minutes, the value of that data to the APAs is actually less.

Dan Barnes So what’s an APA?

Kay Swinburne So this is an entity that has an approved publication arrangement. So we felt that actually everybody should have access to that point, including the retail investor who is more sophisticated and wanted to go and actually look at that data for themselves. They should be able to go and look at it and make decisions for themselves. So whether it’s buy-side in terms of the asset managers looking after other people’s money, or indeed whether it was the retail investor themselves, we always thought that they should have access to that data.

Dan Barnes You mentioned that there’s a US model for this already. There’s a system called TRACE, which is based in the US and run by FINRA, one of the self-regulatory organizations there. Why haven’t we just copied the model they’ve used?

Kay Swinburne TRACE, of course, started with just 20 names within it, in terms of its pre-trade, transparency requirements and the way that the reporting was done. We always envisaged in Europe that because we were starting so much later than TRACE, that we probably were going to look at a larger number of names and instruments than the 20 that TRACE started with. So we couldn’t copy it directly, because we didn’t actually know how many instruments were going to be involved. We now have the number of instruments in the 100s rather than in the 10s, so it’s a different system. But actually we are at the stage where we have relatively standardized data inputs and data reporting coming out. But I see no reason at all why we will see a market-led solution to actually achieving a single, consolidated tape, because there are so many vested interests and data is so profitable for so many institutions, that I’m not sure there is actually a commercial interest in anybody providing that consolidated tape.

Dan Barnes That’s very interesting, because in the European Securities Markets Authority, it was proposed to them, they might run the tape in a similar way that FINRA does. And I understand they’ve pushed back against that. Do you know why that would be?

Kay Swinburne The primary legislation foresaw that a market-led solution would emerge, not just for fixed income, but for all asset classes and in particular the more mature equity markets, where a consolidated tape had been talked about and was an aspiration in MiFID I. And so it was envisaged that with new incentives, with new data being collected, that the market would be incentivized to actually come up with a new consolidated tape. I’ve always argued that the market incentives were the exact opposite, and that we would have to revisit this over time. So in the primary legislation, in the actual text, it does say that if a market solution is not delivered within a 2-3 year time period, then we would have to look at what measures would be necessary, including whether or not a public utility model might be the most appropriate solution to this. FINRA obviously have delivered what is effectively a public utility model, and have one entity who will actually collect this data on behalf of everybody, on the equity side to make it free at source, and on TRACE, obviously TRACE itself as an entity, does that for the fixed income markets. So FINRA, we don’t have the equivalent of in Europe. And so it’s a question of whether or not the market-led solution can emerge or will emerge. I personally think it won’t and therefore the public utility model is more likely to be either ESMA itself having this, or what we discussed at length was whether or not they gave a mandate for someone to tender for this work for a set period of time, potentially a 5 or 7 year window, where they would actually tender for the work and would be paid to deliver that.

Dan Barnes FINRA originally was a US sell-side that is a dealer-led organization. There are some trade bodies like that, trade associations. Do you think one of them would be appropriate to step in and manage this?

Kay Swinburne That’s a possibility, but I think given that most of those trade associations are based here in London and given the current political climate with Brexit, I think the idea that it would be a trade association for the whole of Europe is unlikely. And so I think there is a lot of cynicism about the influence of London on those trade bodies as the global financial center, and therefore most of my colleagues in continental Europe would be a little suspicious if it was one of the trade bodies. I think they’d be more comfortable if it were a tendered process where an entity was actually tasked with the role of forming that fixed income platform.

Dan Barnes That makes sense, of course. There have been some discussion as well of having multiple consolidated tape providers, but consolidated vs multiple doesn’t seem to go together.

Kay Swinburne I think the issue for us was always about competition in the data space. So allowing multiple APAs, allowing those entities to report in a standardized way was actually a competitive issue, that we didn’t see that as needed to be consolidated into one. So for me, it’s about how do we now actually go forwards? Is there merit for all of the APAs to effectively come together and say, you know, ‘we make our money between 0-15 minutes. Post 15 mins, we will donate that data to a single, central consolidated app of some kind.’ There has got to be a very simple technology that will take this data and actually allow it to come into one form, to come back out again, free at point-of-source to others.

Dan Barnes If you were to outline the most optimistic scenario then for development of a consolidated tape over the next five year period, what do you expect to see?

Kay Swinburne If we talk about a pre-Brexit scenario, we talk about MiFID as it was originally envisaged and MiFID II for the fixed income space. For me it was always a case of waiting and seeing whether the market delivered. And as I say, I personally was very cynical as to whether or not that was going to happen. There is an inbuilt mechanism 2-3 years into the implementation phase, to actually make an assessment on whether it’s going to be delivered. If it’s not, then there are further measures foreseen in the legislation. I think we would have been at that stage within three years of implementing MiFID. So, I think we would have been there by 2021, had it been a pre-Brexit scenario. My only issue now is, of course, that so much of the fixed income trading is done through London, so much of it is done through London-based asset managers and through London-based firms generally, that I am concerned that the will to actually put those further legislative actions in place has probably diminished. And therefore it was always the UK that wanted transparency. It was always the UK that felt that the asset management industry needed more tools to actually conduct their business. And it was never really my continental colleagues who were pushing it. So I think we may end up finding that the MiFID II legislative agenda probably stalls in this regard, whereas actually it may be that the UK decides to go down that route, and that the UK itself will actually decide to take the initiative.

Dan Barnes Potentially then two tapes; one for Europe and the UK?

Kay Swinburne Potentially, yes. I’ve always believed that the transparency of markets is the thing that gives confidence to investors. And therefore the market that goes furthest in terms of transparency for me has a competitive advantage. So I would be encouraging the UK to be as transparent as possible going forwards. And indeed, I’d be encouraging those buy-side to be pushing for it, because it’s in their interest and their investors’ interest, that they have the best data set possible at the least expense to the asset manager to deliver it.

Dan Barnes Kay Swinburne, thank you very much.

Kay Swinburne Pleasure.

Dan Barnes I’d like to thank Dr. Kay Swinburne, MEP for her insights today, MTS for our government bond data, and of course for you for watching. To catch our monthly reports on the market or to subscribe to our newsletter, go to TraderTV.NET.