In the world of financial technology, M&A is simply a way of life. In May 2016, Nex Group was born after Icap sold its broking business to Tullett Prebon. Five months later, Nex (still using the Icap moniker) bought Abide Financial to bolster its suite of regulatory reporting services. Just over two years later, on Nov. 2, 2018, CME Group closed its acquisition of Nex.

But a year after closing the Nex deal, the CME couldn’t find any takers for the regulatory reporting businesses—Abide Financial and Nex Regulatory Reporting—that came along with Nex, or its European and Australian trade repositories (TRs). As a result, CME Group said it would wind down these units.

Sources tell WatersTechnology that CME approached multiple firms in the regulatory reporting space between July and December 2019 looking for a buyer for the whole package, or pieces from the combined entity.

The requirements associated with being a trade repository are fairly draconian and the ongoing regulatory change is another thing.

Executive at a competing firm

There are several possible reasons why the CME came up dry when it hit the M&A market, but multiple sources pointed to the difficult regulatory environment that TRs with regulatory reporting arms face, especially in Europe.

In late 2017, Abide Financial obtained its license to operate as a trade repository, but that brought with it strict measures when it came to data management concerns, which it did not face as a non-TR vendor, says an executive at a competing service provider.

“I think what has probably dawned on a number of firms that have stepped out of the reporting space is the requirements associated with being a trade repository are fairly draconian and the ongoing regulatory change is another thing,” the executive says. “It is not the case that you just set up a trade repository and you are good to go—you have to think about the continually changing legislation.”

In Europe alone, financial institutions are bracing for a refit of the European Market Infrastructure Regulation (Emir), and the incoming Securities Financing Transactions Regulation (SFTR) is set to go live with the first phase of its rollout on July 13. Additionally, TRs also need to consider the implications of a no-deal Brexit for January 2021, in terms of managing data and splitting the reporting.

When combined into a global strategy, firms need to be agile so as to not rip and replace with each new requirement or change, says Val Wotton, head of product development, strategy, repository, and derivatives services at the Depository Trust and Clearing Corp. (DTCC).

“Trade repositories must invest heavily in infrastructure,” he says. “The European Securities and Markets Authority (Esma) has very clear requirements around the kind of infrastructure and technology that are mandatory for a trade repository, so the overall expense of setting up, running, and complying with the ongoing regulatory change agenda for a trade repository is quite significant.”

Brian Lynch, global head of regulatory reporting services at Bloomberg, agrees, adding that he thinks there will be further consolidation—either through acquisition or through companies unwinding their business—meaning those assets will go to a smaller number of vendors.

“As firms evaluate the market, I think they should consider whether regulatory reporting is a core activity for the vendor, and not only something they thought looked like a good idea at the time but might later realize is not a trivial exercise and requires sustained commitment,” he says.

Downward Pressure

For about six months, the CME was unable to find a dance partner.

Several sources close to the discussions, including one former employee of CME, say the DTCC, UnaVista, Regis-TR, and Tradeweb were among the firms invited to acquire the Nex Regulatory Reporting and Abide Financial business lines, as well as the European and Australian TRs. Among those involved, Tradeweb was the most interested party that took part in discussions in December, says the former CME employee. Tradeweb declined to comment.

“It was a really badly kept industry secret from Chicago that they have been looking at an exit strategy for quite some time,” says an executive at a second competing service provider.

And the CME is not alone in this pullback.

A few weeks after the Chicago exchange operator made its announcement, WatersTechnology learned that Deutsche Börse would follow suit and plans to offload its regulatory reporting businesses—the Regulatory Reporting Hub, and its Approved Reporting Mechanism (ARM) and Approved Publication Arm (APA)—in the coming months.

“The Regulatory Reporting Hub will not be part of our core portfolio in the medium term, and we are currently evaluating different options,” says a Deutsche Börse spokesperson, adding that they could not confirm whether the German bourse will look to unwind the regulatory reporting business if a buyer doesn’t come forward in the near future.

While regulatory burdens are the leading cause for the consolidation, there are also significant cost pressures facing vendors in the space, and sources say Nex Abide has an aggressive pricing model.

Ronen Kertis, CEO of Cappitech, a vendor in the regulatory reporting space, says that it simply made sense to divert business to CME because the price was right and there weren’t any problems with the service offering. 

“CME had a combination of high-quality service and the most competitive pricing scheme for EMIR in the market, and as a result many vendors like us who aggregate multiple clients tended to use the CME as a trade repository.”

We lost a couple of big clients [to CME] who were primarily driven by pricing … and—surprise, surprise—they’re in a situation now whereby their balance sheet doesn’t allow the business to continue.

Rival executive

But the former CME employee says the strategy proved costly, in the long run. The Abide TR, they say, offered the best deal on the market for data aggregators or for regtech vendors that offered delegated reporting services on behalf of investment firms. Additionally, the vendor offered bespoke offerings to attract large clients, including providing data standardization services and building customized solutions for various platform integrations.

“In our case,” says an executive at a third competing service provider, “we lost a couple of big clients who were primarily driven by pricing and [CME] basically implemented pricing that would be attractive to take big customers from some of their competitors and—surprise, surprise—they’re in a situation now whereby their balance sheet doesn’t allow the business to continue.”

An executive at a fourth competing service provider says the Abide business “attracted a number of reporting firms based on low fees, which then resulted in both [the Nex Abide Regulatory Reporting Hub] being unprofitable and the [Abide] trade repository not being able to carry those costs.”

A consensus among all sources spoken to for this article is that regulatory reporting is a difficult business to thrive in if you are a heavily regulated entity. Under Emir, all pricing for TR services must be made publicly available and approved by Esma in Europe, or the Financial Conduct Authority (FCA) in the UK.

Therefore, competing with non-regulated firms that have more commercial freedom is becoming an increasing challenge among TR businesses, and here’s where pressure from fintechs comes into play.

“What’s really hurting the regulated industry now is that non-regulated space,” says the fourth executive. “It’s a bit of a conundrum because those firms are ‘fintechy’—they have good ideas and good technology, they drive innovation, and they provide a good service to the industry—but they’re kind of undercutting the regulated firms that are bound and shackled by the regulators to provide this standardized, and somewhat expensive and non-flexible service.”

CME declined to comment further when asked about potential buyers, its pricing structure, and Abide not being fully integrated into the CME tech stack.

Rock, Meet Hard Place

Sources say the CME—and Deutsche Börse, and likely additional companies—found itself in a difficult position: The incumbents are competing on price as there isn’t clear differentiation when it comes to the underlying technology; regulatory requirements are burdensome; and there is new pressure from fintech startups, which don’t have the same regulatory constraints as a TR.

So the question then becomes whether it is worth the investment to both deeply integrate CME’s regulatory reporting technology stack with Nex’s, and integrate its two European TRs, Nex Abide TR and CME’s European TR. The answer was, evidently, no.

“You look at it and ask, ‘Does the cost of investment justify the return?’ And the answer is, ‘No, it does not.’ It is not as if it is a single integration project, because they never properly integrated Abide and CME. So, you are buying two different trade repositories with two different technology stacks,” says the second executive.

Finally, there was also a misstep, and this, too, is not unique to CME.

Data is a goldmine, but for regulated firms like TRs, there are significant limitations as to what they can do with their clients’ reporting data. TRs are tightly regulated by Article 9 of Emir, under which they must inform the client or regulator of any changes to their contracts, says the source at the first service provider, including the use of reporting data.

While largely unregulated vendors have much more commercial freedom to operate, TR businesses are regulated by Esma and cannot use or manipulate client data without the client’s permission. Therefore, TRs cannot offer data management services from that entity without the relevant authorization, says the fourth executive.

Some financial services firms entered the trade repository business because they believed it was a treasure trove of data, but quickly realized its limitations.

“Where firms got into reporting in the first place—whether it was to look at protecting their own trade flows, whether it was looking at protecting their data flows, whether it was more of a data opportunity—the reality probably unwound,” says the source at the first service provider, “and I think that’s where firms have looked at the overall viability of the business model itself.”