FIX EMEA 2023: EMS still at risk of venue classification

Despite ESMA’s recent decision that an EMS is not a trading venue, audience members at the FIX EMEA conference were divided when asked if the debate could now be put to bed.

Execution management systems (EMS) are not yet in the clear when it comes to being classed as a multilateral trading facility, an audience at FIX EMEA 2023 Suggested last week.

A poll taken during a “devil is in the detail” fixed income panel found that half of the audience did not think ESMA’s recent decision to leave EMS out of the scope of its definition of an MTF had not put the debate to bed.

Following a year-long consultation kicking off at the start of 2022, the regulator concluded that so long as EMS were not bringing together third-party interests that could interact with one another, they should not be considered multilateral or be charged the same as a venue.

The decision was met with relief from many and is potentially expected to open the door for more direct connectivity between the buy and sell-side.

“Participants can trade on voice directly with clients so they should be able to do that electronically,” said one panellist. “There is software to connect to market and there is software you can use to trade as a venue. It needs to be clarified. There are still some grey areas.”

The market is now waiting on the UK Financial Conduct Authority’s (FCA) decision on a similar consultation. But not everyone agrees.

“This will never be put to bed, that’s not the purpose of guidance,” warned one panellist. “The main difficulty is that the perimeter was created 60 years ago before the technology of today. Technology evolves over time and we need a tool which is more flexible.”

Data and transparency

A key regulatory area of focus in the fixed income markets is data and transparency, in particular developments around the implementation of a consolidated tape in a post-Brexit landscape. Several consultation papers on transparency in bonds remain open also on either side of the channel.

“A global asset manager needs to be able to access data in Europe and the UK,” said one panellist. “They’ll likely be trading a 50/50 split of bonds in both regions. You can’t ignore one side of the channel. This will likely make the T+1 debate more relevant.”

Panellists were divided in terms of how useful the recent moves by regulators to implement T+1 would actually be – in particular due to the knock-on effects the move would have on other aspects of the market.

“The beauty of trading in Europe of the UK is you can catch the beginning and end of the Asia and US time zones. Moving to T+1 might see the market switch to having a US dedicated desk. We might move away from the European time zone,” said one panellist.

Others noted it was dangerous to make drastic moves in the settlement space before first addressing the repo market.

“It doesn’t feel like an enormous problem we should be restructuring the market for,” said another panellist. “T+1 is about reducing counterparty risk. You halve the number of open trades. In the repo market, the trader tries to cover the day before settlement or they’ll end up short. T+1 means they’ll have to cover that in real time. You need the supply of lending of instruments to be more liquid.”

Liquidity and trading tinder

While transparency is a key regulatory focus for fixed income in the coming months, panellists warned that unlike in other asset classes, this needs to be a nuanced process – and that there were some areas of the market where liquidity might suffer at the hands of too much transparency.

“There are some types of trading that are enhanced by more data through informational intermediation. The trick is finding them. If only there was a trading tinder,” said one panellist.  “If there isn’t someone else on the other side then you need a risk-taking intermediary/liquidity provider. That can be worsened by the increase in transparency.”

One aspect of fixed income transparency discussed by participants was the sharing of axes, where again panellists agreed a cautious approach should be taken to shining too much light on them.

“When we think about transparency, most people will agree the ideal version is no one gets to see your axes and you get to see everyone else’s,” said a panellist.

“Traders want to see market maker axes but these are current or previous client axes – in the middle of a big trade do you want the market seeing that?”