MiFID II Non-equity CTP: Missed Opportunity
Non-equity CTP proposals: Our View
Last Friday (31 March 2017), ESMA released its long-awaited report (“The Final Report”) into the scope of financial instruments and trading venues that are to be included in the non-equity consolidated tape.
In order to mitigate against the last decade’s market fragmentation, article 65 of the MiFID II Directive calls for the existence of authorised Consolidated Tape Providers (CTPs) who will consolidate trade reports (executions) into “a continuous electronic live data stream providing price and volume data per financial instrument” This would create “a more integrated European market and make it easier for market participants to gain access to a consolidated view of trade transparency information that is available”.
There will be two types of CTPs. One equity and the other non-equity.
The simpler Equity CTP would “consolidate data from all APAs and trading venues”. (Recall that MiFIR equity post-trade transparency requires equity trades to be made public within 1 minute of transactions.) In simple terms, by subscribing to a single electronic data stream, users will obtain updates for every equity (and equity-like) transaction that occurs within the EU. Not bad!
However, given the relative complexity, fragmentation and illiquidity of non-equity financial instruments, while the MiFID II directive calls for the creation of a similar non-equity CTP, it deferred the discussion on the precise “financial instruments, the trading venues and APAs which need to be included”. (Recall from MiFIR, non-equity trades must be reported within, ultimately, 5 minutes.)
Thus the non-equity CTP scope is limited in
a) financial instruments and
b) data sources.
The Final Report which includes ESMA’s draft RTS now provides the much-awaited details.
Why the difference in scope between the (all-encompassing) equity CTP and the non-equity CTP?
[Legislators must strike] the right balance between being sufficiently attractive for potential consolidated tape providers (CTPs) and at the same time providing market participants with an accurate picture of the markets they are interested in. While having an all-encompassing CT in the non-equity space would have the advantage of offering a one-stop shop for users, one should bear in mind that too stringent requirements on the non-equity CT may render the business case for potential CTPs unattractive, thereby making it unlikely for a non-equity CT to be established in the first place.
ESMA confirmed this view as it “continues to believe that the requirement of a full coverage / all-encompassing consolidated tape would make the business case unattractive and likely result in no CTP.”
ESMA’s RTS proposal
Regarding a) financial instruments, ESMA proposes to allow CTPs to specialise in asset classes as set out in RTS 2. To varying degrees most market participants’ responses supported this view. One respondent disagreed. We too disagree, for reasons we will discuss shortly.
Regarding b) data sources, ESMA initially proposed an inclusion test where only “trading venues and APAs that report more than 2.5% of the total number of transactions reported in the Union, either in terms of the total volume or in terms of the total number of traded reported”. It now proposes for CTPs to “be free to include any APAs and/or trading venues they wish but would have to make sure that their cumulated coverage ratio exceeds a threshold of 80%. This requirement should be satisfied per asset class the CTP will be operating or plans to offer data on”. 
The coverage ratio is defined as:
- The number of transactions published by a CTP in an asset class as specified in paragraph 1 represents at least 80% of the total number of transactions in the relevant asset class published in the Union by all APAs and trading venues during the assessment period;
- The volume of transactions published by a CTP in an asset class as specified in paragraph 1 shall represent at least 80% of the total volume of transactions in the relevant asset class published in the Union by all APAs and trading venues during the assessment period.
ESMA will publish the information in order to determine the coverage ratio at the same time as the data necessary for the SI determination will be published.
In stating our view we acknowledge we are in the minority. While we salute the EU for calling for a non-equity tape, we feel EMSA – in line with EU legislators – have lacked ambition in its scope requirements. While the equity tape is all-encompassing thereby representing a one-stop-shop to monitor where liquidity lies, the non-equity CTP will merely represent 80% of volume/transactions on a per 13 asset-class basis.
For us, this represents a bitter disappointment as the non-equity CTP is what would truly be beneficial for market participants – both buy side and sell side. Given that non-equity trades only have to be reported within (ultimately) 5 minutes, no expensive direct connection infrastructure is required. A simple secure connection over the internet to the TV/APA’s data feed is all that is required. Would it really be such a complex suite of hardware and technology for a company to establish internet connections to all the EU’s TVs/APAs and consolidate the data into a single stream?
The sell-side is denied a simple single-source to analyse in near-real time where liquidity lies (if x number of y credit derivatives were sold on venue z, there’s a good chance venue z might have some more).
We will have to wait and see the number of non-equity CTPs that prop up and which asset-classes they cover to assess how consolidated a view will be provided.
Finally, we have stated before to be fully MiFID II compliant, one must adopt an end-to-end holistic view of the package of legislation. The CTP aspects of MiFID II interface tightly with trade transparency obligations for the sell-side. There is also considerable interface with Best Execution. How is the sell-side incorporating the CTP data into its execution decisions? What real-time analysis are they conducting? If none, why? How did the CTP data influence a particular execution decision? These and many other questions need to be considered.
A piecemeal, tick-box exercise has been explicitly cited by the FCA as unacceptable and superficial cover documentation will no longer appease regulators in the event of a client complaint or investigation.
- (“The Final Report”) Final Report: Draft RTS specifying the scope of the consolidated tape for non-equity financial instruments; ESMA/2017/70-8792942901-40
- MiFID II Directive 2014/65/EU
 MiFID II Article 4(1)(53)
 MiFID II Recital 117
 MiFID II Recital 117
 The Final Report 2.3
 The Final Report 6.2 (12)
 The Final Report 6.2 (1), (7)
 The Final Report 6.2 (8)
 The Final Report 6.2 (14)
 The Final Report 6.2 (26)