There’s a new and unlikely gold rush in European markets focused on being the primary home for trade data as new regulatory rules loom.
Banks, brokers and traders face a fundamental shift in the transparency of their fixed income, exchange traded funds and swaps deals from next January.
Brussels has mandated major improvements in the quality of transaction data for over-the-counter markets, in an effort to pull a notoriously opaque arena closer towards the public nature of equity trading.
This, say regulators, is all part of an effort to protect investors from both market failures and nefarious activity from traders.
Faced with the demands for greater transparency and only six months preparation time left, a number of established market infrastructure providers are stepping up their efforts.
Last year Nex Group bought Abide Financial, a lossmaking group to beef up its offering; TRADEcho, a partnership between the London Stock Exchange and Boat Services, signed up 259 financial institutions; Bloomberg teamed up with Bats Europe, and another big emerging one is being run by Tradeweb. It now has 11 banks signed up to its service, with BNP Paribas, Morgan Stanley and Société Générale joining Deutsche Bank, Goldman Sachs and JPMorgan, as well as signing up Thomson Reuters.
“There’s an element of land grab as people have got to sign up to a [reporting service] and you don’t want to be the only one using it,” says Simon Maisey, global head of business development at Tradeweb.
The rush also comes as the UK’s departure from the European Union remains the industry’s unanswerable question. Britain will incorporate EU rules into national law but it will be treated as an overseas country after Brexit. That may require building parallel reporting services, although few are able to make predictions. Many trading venues are considering building Mifid-compliant services in the EU and are likely to have to make a decision in coming months.
“We’re going to have to make a decision on Brexit before we have clarity on what Brexit will really mean,” says Mr Maisey.
In the interim, the new transparency rules, under the Mifid II legislation, do retain an element of flexibility that reflects the nature of OTC trading where large-scale swap and bond deals are often executed.
“It’s partly about producing a consolidated tape that allows people to see where something is trading but does it in a way that doesn’t expose that trade,” says Ben Macdonald, global head of enterprise products at Bloomberg.
While more liquid trades will be reported immediately; others have a delay; and some are exempted, thus helping protect investors and dealers from the situation of prices moving sharply against them should they transact a large position. It will be available for free 15 minutes after publication, allowing the collators to charge a small fee.
Under the new rules, institutional investors can no longer pass off responsibility for correctly publishing trades to an investment bank, although banks can help out.
Emphasising the crackdown, data must be collected by a regulated company, which will validate trades before making them public. Banks are nervous in part because many, including Merrill Lynch, Deutsche Bank and Barclays, have been fined millions of pounds for reporting failures in the past.
“Developing an effective and cost-efficient Mifid II implementation plan is a key regulatory priority this year,” says Nick Lovett, global markets chief controls officer at Credit Suisse as it signed up to the Tradeweb service.
While trade and transaction reporting sound similar, they have different characteristics. A trade report is a short intraday, real-time message that provides the market with an updated price; a transaction report is processed overnight and confidentially handed to the regulator, for market surveillance.
Furthermore trade reporting is restricted to instruments that are traded on EU trading venues and are freely published.
But other asset transaction reporting requirements include additional instruments; and the data required is huge. It goes up to 65 fields of information, including reference numbers, venues, counterparties, even passport or social security numbers from traders.
The biggest problem is the scope of the legislation, according to Christian Vogt, senior regulatory adviser at Fidessa, a UK trading technology group.
“If it has an underlying listed in the EU, then it is in scope for transaction reporting,” he says. “For example, if you trade a HSBC option anywhere in the world, from sitting in London, you have to tell the regulator.”
Another instance would involve an EU-based investor purchasing shares in Apple as the company has a secondary listing in Germany.
“That doesn’t mean that all US, for example, have to report to Europe, but it does mean that EU firms need to take a global view because the scope of these new rules can reach further than you might think,” he says
Whether it changes the nature of trading is another matter. Neill Penney, head of trading at Thomson Reuters, says similar standards in US derivatives markets “didn’t turn out to be as big a disruption as people thought. The big question is: is it accurate enough that you really want to put a trade on it? It is more likely to provide market colour.”
Nevertheless, he notes, that such levels of transparency had not been done in the fixed income market before.