As with most European legislation MiFID I contained a commitment by the European Commission to re-examine the implementation and impact of MiFID I after a number of years. MiFID II is meant to address the shortcomings of the original MiFID, to extend the scope of MiFID, to respond to lessons learned during the financial crisis and to provide for market and technological developments since 2004. Let us take a closer look at how MiFID II, due for implementation on January 3 2018, will impact securities exchanges’ data businesses.
Included in the revised regulation are provisions for improving transparency and promoting better trading by making market data more accessible under reasonable commercial terms. Below are 4 key changes under MiFID II that will impact securities exchanges as well as other market participants. Not only from an operational and technological point of view, but also commercially.
Under MiFID II all trading venues are required to provide pre-trade and post-trade data in an ‘unbundled’ fashion. In addition to this, trading venues are required to further disaggregate their data by asset class, country of issue, trading currency and by auction vs continuous trading.
Splitting out data packages by the criteria set out in the legislation will drastically increase the number of data products to be offered by trading venues. This will not only lead to an administrative overhead for the parties involved, but potentially threatens the revenue exchanges currently generate from selling their “bundled” more expensive packages.
Introduction of a consolidated tape provider
Secondly, a review of the original MiFID revealed some issues related to the quality and availability of market data. MiFID II is expected to tackle these issues by introducing a Consolidated Tape Provider (CTP). CTPs will provide real-time consolidated trade data from various venues where an instrument is traded. This will put the revenues that exchanges currently receive from their “last trade” products under pressure.
While the initial scope for CTPs are shares and “equity-like” instruments there are further provisions in MiFID II that may widen the scope to non-equity instruments as well as to pre-trade data in the longer term.
Reasonable Commercial Terms
Price regulation too may have an adverse impact on the revenues that exchanges derive from the sale of market data. To ensure that fees for the provision of market data services are set at a reasonable level, MIFID I, introduced the concept of “reasonable commercial basis”. MiFID II builds on this concept and requires that fees charged by trading venues are based on a reasonable relationship to the cost of producing and disseminating that data.
Instrument Reference Data
For the purpose of effective market monitoring by competent authorities MiFID II introduces a requirement for trading venues to provide instrument reference data to their National Competent Authority (NCA). This data will then be sent to ESMA to make it publicly available (entirely free of charge) in an electronic, downloadable and machine readable form.
This 4th key change raises, apart from the technical and licensing issues, also commercial issues. If the data is of sufficient quality, then firms may use it to validate existing data or to add missing information. Some firms may also decide to standardize their systems on it putting revenues derived from the sale of reference data at risk.
The Good News
There are still a lot of questions and uncertainties as the implementation date of MiFID is approaching. What do reasonable and excessive margins look like? How will exchanges deal with the data disaggregation obligations in practice? Will paying for reference data be a thing of the past?
Exchanges argue that certain market data obligations under MiFID II such as controls of market data could have a big impact on their long-term ability to run high-quality capital markets. It is too early to tell how everything will play out. The good news for all market participants is that transparency should improve significantly. The introduction of new data packages and new data reporting services will enable customers to better aggregate data across venues and ultimately provide better market insights – a key capability that is lacking today.