PJ Di Giammarino, CEO of the JWG Group examines the goals of the European Consolidated Tape and suggests what needs to be done by banks and regulators to reach a consensus.
The notion of having a “system of record for the market,” is central to the regulatory reform efforts. Is MiFID back where it started? Where are we in this saga and why should both the buy-side and sell-side care? The recent MiFID review was initially going to entail only a few minor technical revisions to the active directive; no one was particularly worried about it. In one of 2010’s biggest surprises, the review snowballed, expanding the scope and depth of change dramatically. In its current form, the MiFID review represents a massive shift in the way financial markets operate in Europe far exceeding the original implementation, as evidenced by its expansion into commodity price controls. In many ways, this ‘review’ has the industry right back to where we were in 2005 – attempting to figure out what transparency means to ‘business as usual’. So what is different this time?
Perhaps the big differences are that 1) the stakes are far higher; 2) Europe is no longer alone, and 3) there is real resource to get it right and, therefore, add value to the industry. Across the world, supervisors are worried about the completeness of their view of the financial markets, as well as establishing a level playing field for market participants. New data requests are the order of the day, originating from every part of the value chain and generated by the hedge fund directive (AIFMD), OTC derivative reporting to trade repositories, short selling transparency and the SEC’s Large Trader Reporting System. Meanwhile, regulators are also calling for more transparency back to the market, shedding light into dark pools by forcing real-time (or close to realtime) post-trade data and introducing new post-trade transparency regimes for entire asset classes, such as bonds and derivatives.
Why does the creation of a European Consolidated Tape – a discussion that was successfully batted away by the industry in 2004 – now matter? What is the real driver for it? Clearly, buy-side firms feel it is difficult to acquire a complete view at a reasonable cost and would welcome the initiative. The public can see the point. If market participants cannot reasonably afford sufficient pre and post-trade data for their needs, they are unfairly disadvantaged.
Though many larger firms are happy with the ‘status quo’, this is a particular problem in Europe, where an ever-more fragmented market means that a full set of equity market data costs approximately €450, as opposed to €50 in the US, according to consultation responses. By lowering these costs, regulators say investor protection will be enhanced and price discovery will be facilitated more easily. The real question, however, comes down to whether the tape will be of value to market practitioners, and the answer, as ever, depends on ‘the how.’ The discussion in the European Commission is not on whether a consolidated tape is necessary, but how it should work and who should run it. The bottom line is that, if the tape is done correctly, it will have huge knock-on benefits to the cost/income ratio and be used to build products nd services that can bring value to market participants and regulators.
Smart vendors are seizing the consolidated tape as a commercial weapon. If one company can grab sufficient market share for the tape, the value-added data and services that could be offered would be both attractive and lucrative. Therefore, the industry ought to officially open the discussion to vendors early to start helping with the requirements, operating model and commercial terms. The industry has so far failed to define the detailed ‘rulebook’ and standards required to be able to create such a system of record; hence, the well-known arguments about the quality of the data amongst the many players involved.
So can the industry define ‘what good looks like’ and fix the system? We think the answer is “yes” – but we need the banks to focus on the issues in the centre and commit to solving them. A few meetings instigated by CESR last summer were able to produce the type of quality standards effort from industry practitioners that has been missing in the five years of MiFID’s history. If the industry wants to create, publish and maintain a way to consolidate the trading across Europe, it can. And, for a variety of reasons, it should.
Of course, we cannot fall into the trap of assuming what works for apples will work for pears. The unintended consequences of getting this wrong could be huge; market liquidity is not something to alter without understanding the potential impact thoroughly. Regardless of the scope, timing, operational date or any other considerations the EC has on the table, the consolidated tape will become a reality in one form or another. Rulebooks, standards and quality measures will be written by the regulators, whether we like it or not. The information will be usable by the market and the supervisors, not only to fulfil their remit of market protection, but to challenge trading practices, adjust capital and liquidity buffers and seek out and identify systemic risk.
Whilst we still do not know the shape and governance of the entity that will be responsible for consolidating the information, we can be sure that Europe will not be alone in the pursuit of this objective. The US Office of Financial Research (OFR) has the remit and the budget to amass a great deal of reference and market information, and has already started its detailed policy consultations. The EU and Asia do not have a similar mandate, as yet, but do have the same political drive.
In summary, we are at a tipping point for real collaboration. As we at JWG explore new regulatory frontiers (e.g., systemic risk), we continue to see opportunity to clarify what data, and in what format, are required to meet aggressive G20 targets. Discussions on standards, protocols and data quality measures now matter more than they ever have before and on a global scale. The stakes are high, and industry members regardless of their specific focus, must understand what the ECT entails and get involved in defining the new ‘business as usual.’
FPL Submits a Proposal to CESR
Following requests to comment on a range of regulatory consultations, in the summer of 2010 FPL formed the European Regulatory Subcommittee. FPL is a neutral industry body and the development of this group enabled the organisation to ensure that responses are reflective of membership interests. In November 2010, following consultation with this group, FPL submitted a proposal to CESR, which aimed to address a number of issues relating to the development of a European Consolidated Tape. The submission proposed the creation of an industry led solution for the establishment of a Consolidated Tape Delivery Authority (CTDA) to oversee the delivery and governance of the European Consolidated Tape.
To view the proposal submitted please visit: www.fixprotocol.org/regulations. FPL welcomes participation in the FPL European Regulatory Subcommittee and if your firm is a member of FPL and you would be interested in finding out more, please contact the FPL Program Office by emailing fpl@fixprotocol.org.
European Consolidated Tape: the Tipping Point for Real Collaboration?
