Earlier this year, MarketAxess concluded the onboarding and migration of Deutsche Börse’s regulatory reporting businesses—Regulatory Reporting Hub (RRH), its approved reporting mechanism (Arm), and approved publication arrangement (APA)—to its post-trade services suite.

As part of the acquisition, MarketAxess has expanded into new markets across Europe, servicing nine new EU countries and regions, including Germany, France, and the Nordics. Over the last 18 months, the firm has built connections to each of the new areas’ national competent authorities (NCAs) and now covers a total of 24 NCAs, including the Swiss Financial Market Supervisory Authority (Finma), the UK’s Financial Conduct Authority (FCA), and the Gibraltar Financial Services Commission (GFSC).

Chris Smith, head of post-trade services at MarketAxess, tells WatersTechnology the firm has onboarded around 500 new clients.

Prior to the acquisition bid, Smith says there was one reference data challenge he didn’t foresee. Every regulated entity submitting reports to an NCA must have a valid legal entity identifier (LEI), a 20-character alpha-numeric code based on the ISO 17442 standard. The problem is that LEIs expire on an annual basis until you renew them, and without a valid one, any submission to the NCAs would be rejected. In this case, Deutsche Börse’s RRH LEI was set to expire at the end of the summer of 2021.

“We had a monumental effort to figure out a path to ensure that that didn’t happen,” Smith says. “During the first half of last year, we had to make sure that, come the expiry of the RRH LEI in September, we didn’t face any interruptions of service to customers who had not migrated at that point.”

I don’t see many firms coming into this space, and I don’t see many firms being able to make that much money in order to stay in this space

Chris Smith, MarketAxess

To mitigate any disruptions for clients that hadn’t moved over to the new system, MarketAxess built a pipe that would port the transaction-reported files from RRH into its systems directly, and then those would be submitted, using its own valid LEI to the NCA. In other words, the firm created a stopgap between RRH and the NCAs to ensure the reported data was submitted from an entity with a valid LEI—in this case, Trax BV, MarketAxess’s Netherlands-based reporting subsidiary.

Additionally, ahead of the migration process, MarketAxess had to build translation layers so that its systems could interpret the reports from Deutsche Börse’s clients and prevent any disruption of the service. This is because all APAs and reporting entities use their own reporting schemas and standards that clients have to use.

Added to that, under Mifid II, transaction-reporting data needs to be retained for more than five years. As such, MarketAxess also had to onboard all Deutsche Börse’s historical data going back to January 2018 onto its own datacenters. Smith says the firm additionally had to extend its security and data privacy tools to protect any personal client data in the transaction reporting.

To help in these efforts, over the last 18 months, Smith hired six new employees to join his now 20-person post-trade services team. “We did a lot of communications [outreach] with clients,” he adds. “We hired in Amsterdam and Germany, and being able to speak in the local language makes a big difference.”

Change in the air

In June 2020, WatersTechnology learned that the German exchange group was preparing to offload its reporting units and was scanning the market for suitable buyers.

“The Regulatory Reporting Hub will not be part of our core portfolio in the medium term, and we are currently evaluating different options,” a spokesperson for Deutsche Börse confirmed at the time. Four months on, in September 2020, MarketAxess secured the takeover of the businesses, including the entire log of Deutsche Börse’s client contracts and obligations.

With the migration completed at the end of Q1 2022, MarketAxess says it has a total book of over 1,000 regulatory reporting clients—reaching across the sell side, buy side, corporates, and regulated markets—servicing their reporting obligations under the Markets in Financial Instruments Directive and Regulation (Mifid II/Mifir). The list of services the combined businesses offer includes transaction and trade reporting, best execution, systematic internalizer services, and delegated reporting for the European Market Infrastructure Regulation (Emir) through its APA and Arm.

Smith says the acquisition of hundreds of new clients brings scale to the MarketAxess post-trade unit, which will help it to continue to invest in the business and sustain it going forward.

“Scale is so important in the provision of these services. You have to have scale in order to be able to make investments in technology and to support customers with the latest front-end, and the latest pieces of technology expected of you to deliver your services.”

The regulatory reporting space has seen significant shifts over the last three years due to the high costs of running reg businesses and the challenges of keeping up with the constant barrage of new rules. For example, CME Group decided to scale back its regulatory reporting activities in November 2020, and Bloomberg chose to increase its reporting fees in February 2021 to ease cost pressures and improve margins.

However, despite the amount of change to date, Smith says it’s inevitable that the market will continue to shrink—whether due to more firms being acquired or firms deciding to roll back their services.

“I don’t see many firms coming into this space,” he says, “and I don’t see many firms being able to make that much money in order to stay in this space.”