Viewpoint: Establishing a clear path forward

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Tim Whipman from TransFICC provides an update on the consolidated tape for European fixed income, and explains the key requirements, hot topics and technology implications.

There was a lot of discussion about a European consolidated tape late last year and early in 2022. Where are we now?

Momentum behind the development of a fixed income consolidated tape (CT) has continued, more so than in other asset classes – derivatives and equity. The desire to enhance transparency and produce a golden source for bond prices looks like the biggest win for a CT, and fixed income participants appear more aligned in how this can be achieved.

The recently adopted MiFID/MiFIR proposal, to enhance transparency and pave the way for a European consolidated tape is currently being discussed by the European Parliament and the Council as they seek agreement on setting out the guiding principles around the governance framework. Once agreed, we expect ESMA to establish and conduct the consolidated tape provider (CTP) selection process next year.

At this point, several market participants have expressed interest in tendering to be the fixed income CTP, including various fintechs, established technology companies and buy-side, sell-side and venue consortia.

Are the requirements for regulators, sell side, and buy side very different?

Ultimately, there seems to be positivity amongst all participants in the fixed income market for a CT in some form. Greater transparency and a level playing field in terms of information should provide valuable insights to investors, liquidity providers and issuers. Europe’s capital markets will grow, be more efficient and globally competitive as a result of an affordable, trustworthy price source for bonds.

A recent working group from the Dutch Authority for Financial Markets (AFM), spanning banks, buy-side and sell-side firms and venues, agreed upon some high level technical principles for a CT, driving optimism that agreement from the various market participants could be reached. The working group supports a post trade real time tape with applicable deferrals based on mandatory contributions from APAs and venues as defined in the November 2021 European Commission Review Proposal.

Of course, not all participants agree on the detail. Debate continues around appropriate deferrals, which bonds should be included, governance of the CTP and even the CTP selection process.

What are the key requirements and hot topics?

The three topics which seem to draw the most attention are the deferrals regime, data quality and the commercials of the tape.

Defining a suitable deferral regime to prevent information leakage from penalising the sell side is critical to preserve market liquidity. A periodically reviewed set of deferral buckets, reflecting trade size, outstanding issue size and bond type seems a reasonable solution.

Much attention has been paid to data quality. Defining a core set of reportable fields based on RTS2 and their required format is critical to the success of the tape if it is to be meaningful and useful. The industry would benefit from a data quality working group to work in parallel with a CTP to help align current trade reporting standards.

Perhaps the most important requirement of all, to level the playing field and create true transparency across the bond market, is that the fixed income CT must be affordable and easily accessible. The CTP should leverage existing proven, efficient, resilient technology to reduce initial development costs, maintain low ongoing operating costs and a reduced time to market for the CT.

In your opinion what does a CTP need to deliver in terms of technology?

Importantly, this is not just about collecting data from APAs or venues and creating a few value-add propositions to leverage the data for specific use cases. The market and EU require a reliable, resilient and efficient infrastructure with no single point of failure, delivered timely and all at a reasonable price point.

The main task for the CTP is “to ensure a solid and secure technical platform for processing, (cloud) storing and harmonising data contributions for consumption”, as confirmed by the AFM working group consisting of buy-side, sell-side and trading venue participants. The EC itself laid out a broadly similar list of attributes required from a CTP, and these were largely technical, focussing on low latency, high throughput data dissemination, technical resilience, modern interface technology and protocols to prevent and address outages.

What is the selection process for the EU CTP and a UK CTP?

The EU is proposing a single CTP for each asset class. ESMA will establish and manage the selection process for the fixed income CTP next year. If no provider comes forward, ESMA could be the backstop provider.

In the UK, the FCA have been granted rule-making powers for data reporting service providers and therefore will be responsible for setting up the CT framework. Although no firm decision has been taken yet, the UK has indicated that there may be room for multiple tape providers to generate competition amongst them, yielding a better quality, lower cost tape. There are drawbacks to this, as integration costs for users will be higher connecting to multiple tapes and regulators would have to monitor each CTP. There is also concern that potential providers may not emerge as sharing the potential revenue would not make this economically viable.

TransFICC has been running a CT pilot. What have you learnt from this?

Our test pilot uses key components from TransFICC’s normalised post-trade feed and has invited clients to test it for performance, resilience, and ease of integration. Over 5 months buy side, sell side, market data firms and venues have successfully tested data contribution and data output, running at speeds of 30 messages per second, to prove that our current technology also works as CT technology. Testing the pilot is via TransFICC’s Client Library API, which supports 10 global banks in production today for pre-trade data, CLOB/RFQ trading protocols and post-trade for all major trading venues in Europe.

The pilot shows that from a technology perspective there is no barrier to the creation of an EU fixed income CT. The technology (connectivity, hosting, security, resilience) is already in production today and can simply be repurposed for the CT to ensure Europe delivers a cost effective, timely solution to improve transparency for all. 

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