MiFID II Innovation – A Consolidated Non-Equity Tape
With MiFID II headed to be in effect in 2018, coming with it are an overhaul of new reporting and market transparency rules. Among the most groundbreaking are best execution supervision that is being put in place. 
As a result, the European Securities and Markets Authority (ESMA), is creating a framework for the creation of financial product benchmark pricing standards. After an initial discussion paper on the technical standards for benchmarks was issued and received feedback from the financial market, ESMA published a new consultation paper on the subject on benchmarks at the end of last month.
As part of the benchmark pricing project, ESMA is aiming to initiate a consolidate tape of executions and available volume traded across multiple exchanges and trading venues. For exchange traded equity instruments, this endeavor is one that has been in the works since the early 2000’s across the globe.
However, where it becomes very innovative is EMSA’s plans to create a consolidated tape for non-equity securities such as OTC derivatives. To go along with this benchmark project, ESMA has released a standalone discussion paper just about creating standards for a non-equity consolidated tape. The tape itself though isn’t slated to go into effect with the first wave of MiFID II enactments, with a September 2019 scheduled date.
Fractured data and fractured vendors
One of the interesting proposals that ESMA has suggested is the availability of consolidated tape providers who aggregate information from numerous venues to specialize in specific asset types. The asset type breakdown is as follows:
1. Bonds, excluding ETCs and ETNs
2. ETC and ETNs bond types
3. Structured finance products
4. Securitized derivatives
5. Interest derivatives
6. Foreign exchange derivatives
7. Equity derivatives
8. Commodity derivatives
9. Credit derivatives
10. Contracts for differences
11. C10 derivatives
12. Emission allowance derivatives
13. Emission allowances
The rationale behind allowing specialized tape providers is that each asset type class is the sum of a fractured market that requires expertise to aggregate information for the consolidated tape. However, it could also lead to higher costs for firms complying with MiFID II that will need to engage in accessing data from numerous consolidated tape providers.
What should be reported
Another item being discussed is a threshold that obligates a trade to be reported on the tape. This means that trades from small trading venues and between counterparties that are small may be below the reporting threshold.
Also under consideration is whether thresholds should be created per asset class and not a standard level for all non-equity instruments. ESMA has also suggested that perhaps the consolidate tape providers themselves could perform threshold analysis periodically.
Overall, like many other components of MiFID II, the discussion paper on a non-equity consolidate tape left many more questions than answers of which the European financial market will be grappling for years to come.
Image: ‘Morgan Stanley ticker, Times Square’ by Jlahul Huang
