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European Commission’s Leaked MiFID Review Paper Highlights Data Standardisation Challenges Ahead

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Following on from the slew of technical advice and consultation papers that have been issued by the Committee of European Securities Regulators (CESR) over the course of this year, the European Commission has finally drawn together its public consultation document on the subject of the MiFID Review, a draft of which was leaked last week. The paper highlights the seriousness with which the Commission is treating data standards, with a whole section devoted to the subject of “data consolidation” and the goal of improving the quality of “raw data” (section four of the document).

The 80 page document contains a total of 143 different questions related to the proposals within a potential sequel to MiFID, which extends the directive’s remit beyond the equities market and adds more detail to the current requirements around areas such as best execution and transaction reporting. The issue of pre and post-trade transparency has been an enduring theme within the review process thus far and the paper reprises this subject, with a view to ensuring: investors have “access to information about current trading opportunities, to facilitate price formation and assist firms to provide best execution to their clients”. To this end, there is quite a lot of detail about the waiver regime and how this can be improved across Europe.

Market data related proposals include specifying that post-trade information should be published as close to instantaneously as possible and reducing the deadline for trade reporting from the current three minutes down to one minute. This will also have an impact on the underlying reference data, as it will need to be provided in support of the market data and firms will need therefore to be able to pull this data from a repository quickly and be sure of its accuracy. The move from “batch” systems to real-time reporting will therefore require investment in firms’ underlying data architectures.

These transparency requirements would not just apply to the equities world either, the Commission is planning to extend them to “equity like” instruments such as depositary receipts, exchange traded funds and certificates issued by companies. Moreover, new levels of transparency are being proposed for the non-equity and OTC markets, with trading on regulated markets and clearing via central counterparties on the cards. Of course, these will both have reference data impacts via the need for new codes to be created for these instruments in order to facilitate the move from the bilateral world to automated trading and clearing.

The Commission’s paper notes that the non-equity markets will pose a challenge, as they are different in their information requirements depending on the asset class in question. “In order to minimise information asymmetries and improve pricing, the post-trade transparency regime would be transaction-based. It would provide data on transactions in terms of price, volume, time of trade, and the main reference characteristics of the traded instrument rather than aggregate data,” proposes the Commission.

The consolidated tape proposals (a popular topic of late) indicate that market data should be able to be “brought together in a way that allows comparison of prices across different venues”, which essentially comes down to data standardisation. The Commission indicates that it is apprised of the fact that the main problems are related to quality, data formats and cost, and it is these three things that it is seeking to tackle with MiFID mark two. It therefore suggests the introduction of mandatory data standards for trade and transaction reporting, including new client and counterparty identification standards.

There is a whole section dedicated to proposals regarding transaction reporting, including extending MiFID and the Market Abuse Directive (MAD) transparency regime to trades that happen on MTFs only and to commodity derivatives, which are both outside of the current regime. The new European Securities and Markets Authority (ESMA), which is essentially a new and improved version of CESR, will be put in charge of proposing “technical binding standards on the storage of order data”, which must be available for five years.

The two most important reference data related proposals within the transaction reporting framework of MiFID II are the requirement for these reports to include client identifiers and, potentially, an identifier for the trader who executes the transaction; and to empower ESMA to mandate these standards. “Transaction reports would need to identify the person who has made the investment decision through the chain of order transmission to the final execution of the transaction. This would require that all entities in a chain of transactions have the obligation to pass on all the details of the trade including client identifiers as in b) above they are themselves not subject to transaction reporting,” states the paper.

ESMA will be able to propose technical standards on a common European transaction reporting format and content, including: “the reporting form, identification of the instrument traded, date and time, price against which the transaction took place, identification of the reporting parties, identification of the client, trading capacity, number of the report, technical format of transmission, and way of transmission.”

Of course, the document also contains a lot of proposals related to trading venues such as the reclassification of broker crossing networks and systematic internalisers past a certain size as multilateral trading facilities (MTFs), which would also impact the reference data world due to the need for the addition of new codes for the affected trading venues.

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