As part of the ongoing wider review of MiFID II, ESMA is consulting on the rules around transparency. The consultation focuses on technical issues relating to post-trade data, among other things.

In its recommendations, the European regulator revisits the groundworks to adjust the foundations for any future consolidated tape (CT). After the heavy lift of MiFID II for 2018, the industry is preparing to bear the cost of additional amendments, even before a first tape is cut.

Improved transparency is key to well-functioning markets and regulators have been making refinements in this area of the rules for decades. Innovative solutions within the industry have coded to the rules. Since 2007, to remedy the fragmentation brought about by MiFID I, sophisticated trading platforms have been providing one view of the markets for determining liquidity. Industry initiatives to standardize the use of post-trade flags (like the MMT) have helped to facilitate a single post-trade view. The regulations over the years have seen requirements for certain trade flags come and go, and now another round of changes is proposed.

The much-debated European consolidated tape promises market participants a low-cost data stream for better price formation, improved trade analysis, and best execution. The easy consolidation of post-trade data requires consistency and comparability of source data, including standard use of post-trade flags. Ensuring a high level of data quality is key for a tape to succeed and makes up much of ESMA’s focus.

Other success criteria include a sound governance model and a robust regulatory framework around the tape provider (CTP). With no tape yet emerging out of MiFID II, ESMA has made recommendations to the European Commission in a December 2019 report for the appointment of a real-time post-trade tape for equity instruments. They acknowledged that getting the CT off the ground would be a complicated and lengthy process, requiring changes to current legislation. ESMA estimated that it could take at least another five years until any go-live.

Meanwhile, a new set of changes is proposed to support an integrated view of EU trading, including post-trade transparency fields and flags. Additional amendments to pre-trade fields, deferred publication, application of transparency calculations, and more makes this a large-scale review.

By ESMA’s own admission, some of their recent suggestions depart significantly from the current technical standards covering the rules (RTS1 and RTS 2). Changes to the equity and non-equity regimes indicate considerable upgrades to IT systems. Much of the work will fall to the exchanges and APAs, if proposals are adopted. However, market participants generating source trade reports and those consuming the market data will all be impacted.

The proposed six month implementation period from publication of final report also poses challenges. For planning purposes, it makes sense for sufficient lead-time to be considered to dovetail the implementation of more data quality improvements with the arrival of a tape. But with a tape still several years away, coordination is important to improve efficiency and reduce costs across the markets.

After all, it is to be expected that at the start of its operation, the CT quality may not immediately be perfect. Realistically, a project as big as establishing the tape will take some time to bed-in and will likely require yet more adjustments to the source data.