Mifid data vendors face 4,000% supervisory fee hike

Inflation is the 2022 story no-one can escape. Spare a thought for those facing perhaps the most eye-watering increases of all. The firms that collect and publish regulated trade data for off-venue trades in the European Union are fearing rises in their supervisory fees of up to 4,000%.

“We have gone from paying €30,000 [$32,660] to our regulator to paying a million euros,” says a regulatory expert at a regulated data provider. “We question the viability [of the business] because of the enormous increase in our cost base and we have not been taken seriously. They do expect us to swallow it.”

The colossal increase is a result of the largest providers of regulated off-venue market data having their supervision transferred from national supervisors to the pan-European regulator, the European Securities and Markets Authority, from the beginning of this year. A derogation is available from Esma supervision for smaller data reporting service providers (DRSPs).

European legislators and data providers have been wrangling over the details of how the fees should be calculated since November 2020. On March 10, the European Commission published the final delegated act laying out the way in which the fees will be determined. For 2022, the delegated act provides a fixed fee for the year based on total reported volumes each vendor was responsible for in the first six months of 2021.

Approved publication arrangements (APAs) disclose the price and volume data of executed off-venue trades in shares, bonds and over-the-counter derivatives to the public, in line with the Markets in Financial Instruments Regulation. Under the same regulation, investment firms can use approved reporting mechanisms (ARMs) to report a list of all transactions they execute off-venue to their local regulator. In the majority of instances, trading platforms operate these data providers as well, and some have both APA and ARM businesses.

For ARMs that submit less than 10% of transaction reports to regulators from the total population of ARMs, and APAs that publish less than 10% of total reports, either equity or non-equity, a €50,000 ($54,300) fee is charged in 2022.

Those submitting more than 10% of reports in the first six months of 2021, however, pay far more. APAs must pay €350,000, while ARMs must pay €650,000 ($706,300). The maximum a company will need to pay if they run successful ARM and APA businesses is therefore €1 million.

“This is like, OK, it’s either very small or very large,” says a manager in charge of regulatory reporting services at a second Mifid data provider that will be supervised by Esma but doesn’t expect to be caught by the higher fees. “Even for large entities, this fee is enormous. As I understand, it is disproportionately large [compared] to any fee that those entities have paid for supervision before.”

We question the viability [of the business] because of the enormous increase in our cost base

Regulatory expert at a regulated data provider

Two providers spoken to for this story believe they will be charged €1 million.

“[I can take] a fairly educated guess that we will be above that [10%] and we will be incurring the higher fee,” says a senior manager at a third Mifid data provider, confirming he believed it for both their APA and ARM businesses.

The regulatory expert at the first Mifid data provider says the supervisory fees it paid to its national supervisor ranged from €30,000 to €50,000 for the business. The senior manager at the third Mifid data provider says the fixed fee charged by its regulator was €25,000 ($27,000), adding the new fee will be “significant multiples” more.

According to calculations by sibling publication Risk.net, the fee increase for these two entities that have gone up to €1 million ($1,1 million) is between 20 and 40 times more than they were previously paying.

A consultation paper published by Esma in November 2020 lists the supervisory fees set by various national regulators. This shows that the AMF had the lowest disclosed fees, charging €450 ($490). The UK’s Financial Conduct Authority set the highest fees of £26,265, which would be €31,443 according to exchange rates on April 7. The UK has since completed its exit of the EU, meaning APAs and ARMs operating in the UK will not be supervised by Esma.

“Esma is required to cover all its supervisory costs for DRSPs with fees from the supervised entities, which is different from what was the case until now under national supervision,” says a spokesperson at Esma. “Esma has made an important effort to adjust its supervisory budget to ensure reduced fees for the DRSPs under Esma’s supervision.”

Esma is also interested in ensuring that the supervisory fees are set at a level that is sustainable for the industry, the spokesperson adds, “while respecting the existing legal framework”.

The European Commission did not respond to requests for comment in time for the publication of this article.

New addition

The fixed fees are a new addition to the delegated act and were not in draft plans the European Commission consulted on between July and August last year.

After 2022, the delegated act envisages a revenue-sharing model whereby variable fees are calculated by dividing Esma’s total estimated expenditure for its supervisory tasks for the upcoming year among the providers it supervises. Each provider’s portion of the expenditure will be correlated to the share of revenue they earn relative to the other providers under Esma’s supervision. Those earning more revenue will pay higher fees than those earning less. Revenue figures will be based on accounts from the second or third year prior to the current year.

The recently published delegated act states the fixed fees for 2022 were needed because it was difficult to obtain information to determine the “cost-based supervision” fees at this stage.

Data providers say they have no way of calculating their fees past 2022, and are nervous of how much their bill will be. Esma will have all the necessary information and send invoices at least 30 days before the final payment date—March 31.

“The main issue we have is the total incalculability of the fees because of how the fee structure is composed,” says the head of regulatory reporting services at the second Mifid data provider. “Now we know the fees for this year, but the uncertainty for next year is still exactly the same as it was.”

Esma’s total budget for supervising Mifid data providers in 2022 is €3 million, according to a breakdown of its budget for this year released on February 8.

The data providers have a rough idea of the entities caught by Esma—nine in total, according to two sources. An Esma spokesperson confirms this is consistent with the regulator’s preliminary calculations but says there will be a further assessment that will be finalized in the second quarter of this year.

However, individual service providers are unaware of how much they earn relative to their peers, and therefore cannot calculate the potential fees they will pay under the new formula.

“At the moment, as DRSPs, we don’t have all the information that we need to be able to project and predict what that might be in any real, accurate way,” says the senior manager at the third Mifid data provider.

Final straw

The cost hike is a further threat to the commercial viability of data service providers—particularly for those offering ARMs—on top of existing questions over business models.

One ARM may already have fallen victim. Risk.net understands that Nasdaq turned off its ARM ahead of the introduction of the new fees, in reaction to uncertainty over the potential supervisory costs. According to Esma’s register for Mifid data providers, Nasdaq’s ARM had its authorization withdrawn on December 20 last year.

A spokesperson for Nasdaq confirmed it has discontinued its ARM but declined to comment on the reasons behind the move.

Whereas publishing disaggregated trade data via an APA is obligatory, ARMs are optional, because Mifid investment firms can choose to report straight to their national competent authorities (NCAs). Many of them use unregulated middleware providers to help manage their data flows directly to supervisors, rather than running the data through an ARM.

“In Europe, culturally, firms tend to go directly to the NCAs and not necessarily use an ARM,” says the senior manager at the third Mifid data provider. “I think is fair to say that the larger reporting volume in Europe is probably direct reporting rather than via an ARM.”

Mifid regulatory reporting businesses have been under pressure for a while. In 2020, CME and Deutsche Börse announced plans for the closure of their services, which both have since concluded. Brexit has also added costs to the business, as data providers were obliged to split their operations into separate EU and UK entities.

“You look at all these things together and some DRSPs—maybe specifically ARMs—will probably need to have a closer look at what all of this means for them because it will absolutely 100% put additional strain on the industry,” says the senior manager at the third Mifid data provider.