The Committee of European Securities Regulators (CESR), which is entrusted with harmonising securities regulation across Europe, has proposed to the European Commission (EC) the creation of a regulatory regime for broker crossing networks and a mandated consolidated tape of post-trade data.
The proposals were published in CESR's technical advice to the EC, the executive body of the European Union, which will guide the EC's review of MiFID, the results of which will be published in Q1 2011.
CESR has recommended that a new regime is introduced specifically to regulate investment firms that operate broker crossing systems (BCSs).
The proposed new regime would require: disclosure of networks by firms and publication of a comprehensive list of BCSs; increased transparency of trading activity provided through a generic BCS trade identifier published in post-trade information; identification of BCSs in transaction reports; and end-of-day publication of aggregate trade information for each BCS.
In its advice, the regulator noted “concerns expressed by some market participants and regulators about the speed of growth of BCSs and the potential impact of these OTC markets on price formation in the future”.
In addition to its transparency recommendations, CESR also suggested that a limit be imposed on the level of business that could be conducted on a BCS beyond which it would have to register as a multilateral trading facility, which carries it own transparency rules.
Concerns have been raised by stock exchanges over the lack of regulatory burden that non-exchange trading venues face, which exchanges say makes for an uncompetitive landscape.
CESR has also recommended that a consolidated tape of post-trade data be mandated. The fragmentation of liquidity and reporting across European trading venues post-MiFID has caused concern due to the effort and cost required to gather pricing data from across the market.
However CESR has not gone as far as some commercial data providers had feared. Instead of proposing to manage the project, it recommends that the tape be offered as a project to the industry, to be established and managed in accordance with features specified in CESR's advice paper.
These features include: gathering all trade data whether it occurred on a trading venue or OTC; dissemination of the data in real time and in as low latency a form as possible; data from the tape to be offered to users on a share-by-share basis; and availability at a “reasonable” cost determined by the class of user, for example an individual compared to an investment firm.
To facilitate the creation of a tape, all investment firms would be required to publish their trades through approved publication arrangements, which would create a standardised format, facilitating consolidation.
If the project failed to successfully build a tape as mandated, CESR proposes imposition of a tape managed on a not-for-profit basis.
Other recommendations to the EC include the improvement of data delivery speed. This would be achieved by ensuring that firms publish data “as close to instantaneously as technically possible” in addition to making the deadline for reporting transactions one minute. The deferred publication framework for large trades made close to the end of the day would also have its timescales tightened up, with almost all trades being published by the end of the trading day.
CESR said that standards should be embedded in post-trade data to make it more transparent. These could cover elements such as condition codes for trade types and instituting a process for correcting erroneous post trade-reports. Current reporting is non-standard and therefore difficult to collate and understand.
Separately, the regulator said large-in-scale thresholds for waivers to pre-trade transparency – which remove pre-transparency obligations on trades above a certain size – should be examined further, as a reaction to the decrease in average equity trade size across Europe.
CESR also recommended that depositary receipts, exchange-traded funds (baskets of securities traded as a single security) and certificates be regulated under the MiFID regime due to their similarity to equities.
CESR said MiFID's existing systematic internaliser regime should be reviewed with regard to clarifying categorisation of SIs and the level of activity seen on them. They will be required to maintain two-sided quotes, maintain an minimum quote size, and monthly trading data reports be published with the retention of exemption from identifying themselves in the trades.
Meetings were held between CESR and industry representatives prior to publishing three consultation papers on MiFID’s reform in April. The responses to these, along with a call for evidence that was requested on micro-structural market issues also in April, informed CESR's advice to the EC.
Following submission to the EC, CESR's recommendations will feed into the Commission's proposal in Q1 2011 which will then be examined by the European Parliament and the European Council for up to nine months prior to legislation finally being passed.