A Way Forward for the Consolidated Tape?

One of the objectives of the second iteration of pan-European securities regulation the Markets in Financial Instruments Directive (Mifid II) was to create a consolidated tape of European equities data, to match the consolidated marketplace for pan-European equities created by the first version of the directive in 2007. To achieve this, Mifid II proposed the creation of commercial consolidated tape providers, whom it assumed would willingly come forward to take up the mantle. But two-and-a-half years later, not a single company has emerged as a consolidated tape provider in any asset class.

There are two main obstacles to the tape at this point. First, there are concerns around data quality, with market participants saying that Approved Publication Arrangements (APAs), which would have to contribute data to the tape, don’t follow the regulators’ technical standards, and that there is inconsistent reporting of trades conducted via systematic internalizers or over-the-counter. After all, there’s no point in a consolidated tape if the data is not consistent and of high quality.

The other obstacle is probably more urgent because it is foundational, and it’s this: the best governance and commercial model for the consolidated tape provider (CTP) is now in question, as, clearly, becoming a CTP is not an enticing prospect to any commercial companies.

Potential providers appear to see the tape as something of a “poisoned chalice,” with little upside and a lot of complexity and risk. The tape is envisaged as a record of both equities and non-equity instruments, so it draws in many different competing interests—data providers, a wide range of data consumers, and market participants from banks to asset managers, and the APAs. Having to cater to so many different needs, and for uncertain gain, is not a welcoming prospect for any provider. An analogous tape, TRACE—the Trade Reporting and Compliance Engine run by the Financial Industry Regulatory Authority (Finra) in the US—has been deemed mostly a success over its 20 years of existence, but TRACE confines its remit to a limited product set: corporate bonds.

So, if a commercial CTP is not going to happen, it seems like a good idea to give ownership of the project to the regulator, the European Securities and Markets Authority (Esma). That would sidestep competition issues, and calm fears about inadvertently forming a data monopoly, which is a reasonable concern where there is centralization of data and services on one for-profit company.

Some might argue that putting Esma in charge would sacrifice innovation, as regulators aren’t generally very good at this—regulators are not technology companies, after all. But how important is innovation for a tape that basically needs to capture, aggregate and disseminate data to market participants?

Esma taking over is a moot point at this stage, however: the European Commission has said that it does not want Esma to outright own the consolidated tape. So what are some other options for governance models?

The International Capital Market Association (ICMA) earlier this year put forward variations on four possible models for governing the CTP: a self-regulatory entity, a public-private partnership, a consortium of APAs, or a private provider.  

And then last week, a report backed by the European Commission and written by consultancy Market Structure Partners, said the optimum design and delivery of a consolidated tape is via one provider that is run as a utility.

“Technology alone cannot deliver CT data. To bridge the gap between the market requirements, current challenges and the technology available requires a single, organizational layer as the official manager of CT data governance and standards,” the report says. “This ECTP [exclusive consolidated tape provider] should be the undisputed authority and trusted source of EU CT data.”

Competition will not achieve this, the report continues, and so the optimal organization for the CTP would be CTP under the authority of Esma, not subject to competition, and “run as a utility across all asset classes.”

All data aggregators would be members of this SRO and would pay membership fees. Any revenue would be shared among these data contributors, depending on their contributions. Esma would empower this single CTP to levy penalties and other sanctions against non-conforming members. This structure is analogous to Finra, which has the authority to write and enforce rules governing registered brokers and broker-dealers in the US.

This solution is more or less along the lines of ICMA’s first option: a kind of self-regulatory organization that would collect membership fees and is empowered by Esma to levy fines against its membership. This kind of model has many benefits, according to the ICMA paper. It wouldn’t charge an end-user fee, Esma would be involved in its governance, and providing post-trade data to an SRO, rather than a commercial entity, would be more palatable to trading venues. These are persuasive benefits.

Is it a perfect model? Not at all. Any model for the CTP will have to balance pros and cons. As the ICMA study points out, with fee-based utility models, collection of membership fees can be a challenge, as members don’t pay on time. Fees may not be legally enforceable in all countries of the EU. Firms might not want to subscribe to data they aren’t going to use.

And, probably most serious of all, the MSP report says it’s not possible to build a full solution at this stage due to legal limitations: the tape would have to be for post-trade only, as the data that must be given up for a pre-trade tape is not specified in the law. 

However, the market has waited long enough.

“Enough stakeholders appear ready to engage to help bring it to fruition and to delay further raises the risk that it may not be delivered at all,” the report says. It recommends that the commission should move forward on a post-trade tape, using its power under Mifid II to request Esma to use its public procurement process to establish one as soon as possible. 

Clearly, this is not a perfect solution. But market forces have failed to materialize any consolidated tape at all. If the regulator wants a consolidated tape, it may have to do it itself.