EC drafting proposal for derivatives consolidated tape

The European Commission will draft in the next few months a proposal for a consolidated tape in Europe covering “certain strategic asset classes in the derivatives world”—as well as equities, bonds, and exchange-traded funds (ETFs)—with a beta version ready for testing in 2023.

Tilman Lueder, head of the securities markets unit at the EC, told a conference on June 23: “We’re still of the opinion that this can be provided by private initiative. We have had many conversations with very motivated actors who are ready to do this and who have the technological capacity. All they’re basically waiting for is some tweaks to the legislative framework so that they can get going.”

Lueder, who was speaking at the Fix European trading conference, noted that the European Union, with its 27 national exchanges, as well as dozens of alternative trading venues, represents a comparable market structure to the US, lacking only in one important respect: a consolidated stream of core market data.

The tape would comprise core market data fields including the transaction, its timestamp, an instrument identifier, and the trading protocol that was used.

Asked how the tape would balance transparency with the need to protect the willingness of market-makers to provide liquidity in over-the-counter markets, Lueder said it would need to be accompanied by a “slightly modified deferral regime”.

Some modifications to pre-trade transparency thresholds and post-trade publication deferrals in bonds would be likely, for example. And for strategic asset classes in the derivatives space, the proposal would probably need to be accompanied by a “recalibration of post-trade transparency rules”.

Lueder said moving ahead with a tape would also provide the best possible incentive to fix OTC derivatives data standards. Citing problems with using International Securities Identification Numbers (Isins) to identify various OTC derivatives, he said the tape initiative could provide “political impetus to look at how you get around this problem with the Isins, that they don’t actually allow you to identify the instrument because they don’t differentiate according to maturities.”

Following approval of the EC’s impact assessment, in the third quarter of this year, it will present its proposal on how to create the framework for a consolidated tape to the European Parliament and the European Council.

We’re still of the opinion that this can be provided by private initiative

Tilman Lueder, EC

Previous attempts to foster the commercial development of a tape had foundered, Lueder said, because “certain key ingredients” were not in the legislation to give private sector actors an initiative to proceed with it as a commercial proposition. For instance, lawmakers had focused too much on regulating the tape provider rather than the data contributors. The cost of market data is seen as a potential stumbling block to a commercially viable consolidated tape.

For derivatives, the European Securities and Markets Authority (Esma) has proposed that dealers trading large amounts of a derivative outside of a venue publish details of all transactions in swaps belonging to the same sub-asset class. Non-banks have welcomed the move, with buy-side firms believing it could assist in the creation of a consolidated tape in derivatives that would allow them to monitor whether they are being offered the best quotes.

Lueder said the tape will increase “data quality and democracy” in markets such as OTC derivatives.

Within equities, Lueder would not be drawn on whether the tape would offer pre-trade or post-trade data, saying this level of detail would be left for private enterprises to decide. The purpose of the regulatory framework will be to improve data quality by harmonizing data reporting, and harmonizing mandatory contributions: “Private enterprise can then decide what they wish to offer.”

The framework will define data standards and reporting templates for OTC derivatives, for example, and there will be a supervisory role for Esma to police those standards. But at the primary legislation level, delivery schedules will not be mandated and left instead to private enterprise to decide.

However, there will be “tight surveillance of the different market data contributors”, to monitor the quality and the timeliness of their contributions to the tape. Mandatory contributions and mandatory harmonized input standards should mean “garbage” is not recorded to the tape that then requires data normalization, Lueder said.

France takes over the presidency of the Council on January 1, 2022, and Lueder is confident “there will be a huge impetus to get this negotiated within six months so that around July of next year, we will have a political compromise between the two co-legislators, the Parliament and the Council, on how to change the Markets in Financial Instruments Regulation framework so that a data consolidated tape can happen across the asset classes that I mentioned.”

That would lead to the proposal being put on the statute books in the autumn of 2022, with “tangible results” seen the following year. The mandate of the current Commission runs until December 2024.

Lueder said the EC believes the tape will facilitate transparency and encourage more retail participation in markets. It favors a solution that gives “a fast and reliable delivery” but has not come to a conclusion yet on whether the data should conform to an ISO standard or a regulatory technical standard.

Editing by Philip Alexander