The fixed income data landscape is facing imminent change. In response to calls for greater transparency and enhanced data access, regulators are set to implement consolidated tape models in a bid to improve overall data quality and lower costs. But how will this play out empirically?
In recent years, the fixed income markets have undergone especially significant transformations, evolving from more manual to increasingly electronic workflows – via MTFs and direct connectivity – and this has made data all the more essential to traders.
When it comes to a CT, in the UK and the rest of Europe, where the data will be sourced from, and how it will inevitably be consumed, is still up for debate.
Currently, the wheels are being set in motion, with regulators aiming for a fixed income tape that can be used in both front-office execution and post-trade analysis. However, it’s become clear on both sides of the channel that simply building a tape and waiting expectantly for the market ‘to come’ is a fruitless approach – market opinion and participation is crucial to the build-out.
The market had spent decades lobbying for something akin to a CT many years prior to Brexit, but the UK and Europe’s split has exacerbated the need for a consolidated data source as regulators compete to make their markets more attractive and competitive.
The UK
The Financial Conduct Authority (FCA) is awaiting feedback from the market on the framework for a fixed income tape, following its distribution of a consultation paper (CP) earlier this year. A prior market consultation found that the development of a CT for fixed income markets should come before equity markets, given the former’s lower levels of standardised data.
The FCA currently has no detailed guidance as to reimbursing data contributors. In the recent CP it is made clear that the proposal is not to oblige trading venues (TV) and approved publication arrangements (APA) to provide data, without comment yet around incentives to do so.
Speaking to The TRADE, Nathaniel Lalone, a partner at Katten Muchin Rosenman who advises both sell- and buy-side firms active in the OTC derivatives, futures and securities markets, praised the FCA’s overall approach: “I think the FCA has been taking a very sensible, data-driven, economics-driven approach as compared to the EU approach of juggling competing political interests, which does not lead to optimum outcomes.”
Additionally, looking at the absence of empirical guidance in terms of incentivising contributions, Lalone added: “They seem to be leaving it open to the bidders to build a solution that makes economic sense. They’re leaving it up to the market to figure out a way of striking the right economic balance.”
Europe
In Europe, a CT looks set to come to fruition next year with the European Commission echoing the UK’s sentiments, having previously asserted that fixed income is the most needed and most achievable asset class when it comes to a consolidated tape.
The most recent EU proposal suggests a real-time pre- and post-trade consolidated tape per asset class, with data from all trading platforms included and a model that will reimburse all data contributors – placing a greater emphasis on data quality.
In February, the European parliament announced that “the market data contributor should at least receive a remuneration based on the costs it has incurred in generating the data and providing it to the CTP (consolidated tape provider).”
In Europe, the previously established process required CTPs to enter into licensing agreements with each separate data contributor, a costly and time-consuming process.
The new proposal is set to remove this stipulation and ensure high quality data through requirements for market data contributors to submit their data to CTPs using harmonised templates. As for the mandatory contribution rule, it has been communicated that ESMA-authorised CTPs should collate these individual data sources, with exclusions for some SME’s being discussed.
The business case
There has been a historical lack of a consolidated data source in the fixed income market, alongside a monopolistic environment when it comes to venues and execution platforms. Owing to this, buy-side firms have regularly been charged high fees for valuable transaction data – to which they have contributed, essentially paying to buy back their own data.
Speaking to The TRADE, Paul O’Brien, founder and chief executive of data sharing network Glimpse Markets, explained that this has understandably led to frustration from these firms and emphasised the importance of the buy-side being in the driving seat when it comes to how data is used currently, and going forward.
It remains to be seen as to whether high costs for the provision of data will remain part of the status quo under the new proposed set up. Venues and APA’s hold much of the information necessary for a consolidated tape and are therefore key to a CT’s potential offering.
A key hurdle for the builders of the CT is centred around the idea that without real guidance, or indeed incentives, the entities holding a vast amount of the data could slow the market and demand potentially high costs for the provision of this information, effectively maintaining the – what many believe to be unfair – status quo.
This notion hinges on how the CTP will function empirically. They need data – a lot of data, and for good or for bad, those holding the majority must be enticed for lack of a better word. Not to compensate these players will understandably risk the quality of the data itself.
The fact that no market participants came forward to be the CT provider under the previous regime is striking. DotEcon’s recent report on the appropriate economic model for a CT – commissioned by the FCA, explained that “the lack of entry of a CTP to date in both the UK and the EU at minimum indicates that a CTP’s business case is fragile”.
In terms of addressing this and compensating data providers, DotEcon highlighted the inability to impose commercial motivations when there are multiple TVs and APAs feeding into a CTP, explaining that the actual value of each data source’s contribution is marginal.
This is a key point, as every player is justifiably seeking to benefit from the build-out but demonstrably concessions must be made. It is inevitable and the balancing between these points of view is a monumental task on both sides of The Channel.
Speaking to The TRADE, the FCA shed light on its approach: “Our proposals allow [CTP] bidders to operate on a for profit basis because we think to rule this out would unhelpfully constrain the potential range of bidders.”
Economics aside, the main focus, quite rightly, is on data quality. However, as regards to the UK and Europe’s approaches, the accountability for the data itself – ensuring data submitted to a tape is correct and apt – remains key. In terms of who the responsibility for cleaning and processing data (and when needed, challenging incorrect data) will fall to remains up in the air. Will it be up to the venues themselves, or the providers of the consolidated tapes?
Speaking to The TRADE in April, Nicolas Rivard, head of advanced data services at Euronext, said: “In the end, the CTP is not responsible for the data which is provided by the contributors […] so there needs to be a feedback loop, or a virtuous circle, established from the start and enshrined in its development in order to counteract any challenges on data quality. Because if the data quality is poor, the venture will be a failure.”
Market participants naturally agree that this is a significant question and, importantly, one that needs to have a clear process laid out in terms of process and protocols in order to ensure confidence in the end-result – without which, the tape would be meaningless.
Looking from the buy-side point of view generally, O’Brien highlighted the importance of these players being appreciated, both in terms of data access and sharing: “Data feeds into every part of the buy-side workflow, across the front, middle and back office. It’s critical the buy-side are informed about their data rights, so they feel empowered to use their data in creative ways to foster greater innovation, increase competition and promote a healthy market structure.”
With this in mind, a significant aspect when it comes to the CT becomes how much autonomy and flexibility participants have when it comes to actually using the tape. ‘Mandatory contribution’ aside, there is also an argument to be made for enforcing mandatory consumption and obliging all, or parts, of the market to utilise a CT. However, this approach – for all the potential benefits it could bring – would potentially have an even bigger fall out.
The success of a CT is hinged on it being an attractive prospect for market data users, for this reason the quality of data is obviously paramount. If the market were obliged to consume the data, providers would arguably not be motivated to offer the best, most innovative data possible.
Additionally, competition considerations would need to be taken into account – smaller firms being edged out of the market through pressure to embrace the entirety of a CT’s offering could work against market diversity.
Deferrals
The question comes down to balancing the expectations across the different players so as to allow them to coexist and mutually benefit. Though a fixed income CT focused on post-trade looks to be the most popular choice, a key factor in discussions around data access is centred on timings, with post-trade publication windows up for debate.
Paramount is the users themselves viewing the contents of a CT as inherently helpful. Added to this, in terms of sourcing the content, TV’s and APA’s – specifically their business models – must be protected to ensure cooperation, and subsequently for the delivery of the CT itself, the providers must be compensated in some way to ensure quality.
Both Europe and the UK have made clear their preference for trade reports and market data to be sent as close to real-time as is technically possible. With deferrals harmonised and a real-time approach, many believe the market may face undue risk, however a long delay may result in negative repercussions when it comes to price formation.
In terms of striking the right balance, compromises must be made, however for some market participants, even a 15-minute delay would render a tape stale and effectively useless, which would indicate that a closer look into margins may still be required.
In the fixed income markets, use cases for real- time data vary across the board, however, the majority of firms use this in trading operations and within trade execution. A recent study from Coalition Greenwich found that 72% of those surveyed across both the US and Europe said they used real-time data throughout the course of the day.
The HM Treasury’s WMR review stated that almost all respondents supported the simplification – and standardisation – of the fixed income deferrals regime, working to increase the chance of success of a tape for FI instruments.
(Consolidated) tape of dreams
The overarching approach seen across Europe when it comes to introducing CT’s appears to be a Cosner-esque ‘If you build it, he will come’ approach. However, as market commentators have continually explained, in a scenario where the stakes are so high, if conditions are unclear, adoption is a big ask of both users and providers. Incentives are critical and for both consumers and potential providers of data and the CT itself, and these need to come with real parameters.
Lalone previously described the quest for a functioning consolidated tape as the “white whale” of the Mifid II framework – a relentless and complicated pursuit, inherently difficult to achieve. Theoretically, a CT could be built and ready to go and its benefits widely accepted, but the crux lies in the fact that is has so far been a concept with insufficient empirical guidance. The market is understandably cautious as belief in the success of a project has not directly translated into results thus far.
It is a balancing act, and though Brexit clearly brought with it a wave of divergence and contrary approaches, it would seem that the UK and Europe are heading in a similar, more collaborative, direction as of late.