European regulator admits need for mandated consolidated tape

The Committee of European Securities Regulators (CESR), the body responsible for supervisory convergence across Europe’s securities markets, has admitted that a mandated regulatory solution may be required to create a consolidated post-trade data source for cash equities.
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The Committee of European Securities Regulators (CESR), the body responsible for supervisory convergence across Europe’s securities markets, has admitted that a mandated regulatory solution may be required to create a consolidated post-trade data source for cash equities.

CESR’s acknowledgment of the failure to identify a market solution is included in a consultation paper on potential changes to Europe’s equity markets released today in which the regulator seeks comment on options for overhauling the MiFID directive. CESR has requested comment from stakeholders by 31 May and plans to send its findings to the European Commission before the end of July, in time for the commission’s final review of MiFID expected later in the year.

Consultations were also launched on investor protection and intermediaries, and transaction reporting.

The new consultation paper contains the strongest hint from CESR to date that a regulatory solution may be necessary to reform the European cash equities markets’ post-trade data regime.

“CESR recognises that significant barriers to the consolidation of post-trade data remain and that, without further regulatory intervention, market forces are unlikely to deliver an adequate and affordable pan-European consolidation of transparency information,” read a statement from CESR.

In an interview published in the Q4 2009 issue of The TRADE, CESR secretary general Carlo Comporti refused to be drawn on the need for regulatory intervention to create a consolidated tape. “MiFID leaves open the possibility that the public authorities might impose a consolidated tape. Are we at that point? I cannot tell you,” he said.

The first of CESR’s proposals for post-trade data would continue the existing commercially-driven approach to consolidation of data currently encouraged under MiFID, but introduce new standards to improve data quality and achieve greater consistency in trade reporting practices. It plans to do this by requiring investment firms to publish information through designated Approved Publication Arrangements (APAs), which would have to meet defined standards on post-trade data reporting. The other approach also entails the use of APAs, but would require all trades to be published via a single consolidated tape, offering market participants a single point of access.

As part of its suggestions to clean up post-trade data, CESR has also proposed a tightening up of the reporting delays currently available to market participants. At present, firms are permitted to delay trade reporting for up to three minutes in exceptional circumstances. However, CESR found that some investment firms use the three-minute delay routinely and has recommended that this be reduced to one minute. It has also advised abolishing the three-day delay option and shortening the intra-day delay option from 180 minutes to 120 minutes, both used to limit market impact for risk trades.

CESR’s consultation on equity markets also suggests a review of the current definition of systematic internalisers (SIs), a category used by some investment banks to operate internal crossing engines. In its paper, CESR says the current definition offers scope for firms and regulators to adopt different views as to whether a firm falls within guidelines. The new proposals include requirements for SIs to provide two-sided quotes, maintain a minimum quote size equivalent to 10% of the standard market size of any liquid share and to identify themselves in post-trade reports.

At the moment, SIs only need to quote one-sided an in a size of one share, meaning very little information on the size of business available in SIs is available. CESR has said that it supports the case for making SI information “more meaningful”. SIs are currently described under MiFID as “an investment firm, which, on an organised, frequent and systematic basis, deals on its own account by executing client orders outside a regulated market or an MTF”.

In addition, brokers that operate internal crossing engines as over-the-counter venues may have to re-register as multilateral trading facilities (MTFs) once their volumes reach a certain threshold. CESR says this proposal implies that MTF obligations, such as fair access and pre-trade transparency, should apply to broker crossing engines once they account for a certain market share. This hurdle would also include volume executed in conjunction with other counterparties. CESR reported that 1.4% of total trading in Europe is conducted in broker crossing engines that are not registered as SIs or MTFs.

The reference price and large-in-scale waivers used by non-displayed trading venues to forego pre-trade transparency requirements have also been put up for debate by CESR. The large-in-scale waiver allows the pre-trade transparency exemption if orders are above a certain size. The consultation paper proposes redefining large-in-scale because of declining average order sizes. According to CESR, the average trade size on the London Stock Exchange was €22,266 in 2006 compared with €11,608 in 2008 and €9,923 in 2009. “Many trading platforms contend that the gap between the average order size and the LIS thresholds (set in 2006) is too wide and that as a result market participants do not get adequate protection from market impact when submitting orders,” read the paper.

CESR has raised questions as to whether the reference price waiver, which allows pre-trade anonymity if quotes for non-displayed orders are pegged to a reliable reference market, should have a minimum size threshold. It refers to concerns from market participants that the reference price waiver is currently being used to execute small orders, which is against the intention of the waivers to provide protection against market impact.

In its consultation on investor protection and intermediaries, CESR said it will explore the feasibility of using common recording equipment to track orders received or transmitted by phone or electronic means in the European Economic Area as a means of improving legal certainty, consumer protection and market surveillance. The paper also proposes two approaches for ensuring that market participants have sufficient information to select between execution venues. CESR asks for market feedback on whether it should define key metrics to enable clients to compare execution quality across venues or take a stricter line by demanding that venues produce periodic reports on execution quality based on CESR-defined metrics. The paper also seeks to clarify MiFID’s definition of personal recommendation and proposes amendments to the directive’s tied agents regime.

The third consultation paper issued by CESR proposes amendments to transaction reporting under MiFID based on feedback to a call for evidence issued in November 2008 designed “to improve market supervision and ensure greater market integrity”. CESR’s key recommendation is an amendment to MiFID’s Implementing Regulation to permit the introduction of a third “trading capacity (riskless principal)” in transaction reports to differentiate principal transactions made on a bank or broker’s own account or on behalf of a client from other types of principal or agency trades. The paper also recommends the mandatory collection of client IDs by competent authorities and suggests an amendment to MiFID that would enable competent authorities to require the reporting of client IDs when orders are sent for execution.

“The proposals developed in these three consultation papers which form the first phase of CESR’s work to provide the Commission with technical advice, are focused on ensuring that market confidence is strengthened further,” said Eddy Wymeersch, chair of CESR and chair of the supervisory board of the Belgian Commission Bancaire, Financiere et des Assurances. “We are also seeking to make progress on convergence to ensure that market participants can effectively benefit from the single market and that retail investors have greater certainty dealing on a cross-border basis. As such, the review of MiFID will be incredibly valuable in ensuring that the political objectives set out in this Directive are realised, even under changing market conditions.”