For the duration of Mifid II’s short life, data has been central to it. With its hyper focus on reporting it permeates every element of the framework, often described as the regulation to reward the data-haves and punish the have-nots. Sitting at the centre of it all is FIRDS, Esma’s financial instrument reference database.
FIRDS, which dictates whether or not an instrument is traded on a trading venue (TOTV), thus subject to Mifid’s transparency obligations, has had a tough year. Market participants across Europe have been quick to criticise it, with one transaction reporting head recalling the not-so-well-known adage “crap in, crap out” to describe it earlier this year. Incomplete or duplicate records have been concerning firms across the Mifid universe for the duration of 2018, with many calling on Esma itself to clean it up.
So the authority’s late September press release on its plans to publish ‘new data completeness indicators for trading venues’ bucked both convention and expectation. Focused on double volume caps and the bond liquidity calibration specifically, Esma has clearly become just as frustrated as the users about the quality of the data in the system. So, using the so-called completeness ratio and completeness shortfall, the agency plans to essentially name and shame venues it feels are not upholding their end of the bargain of submitting data.
Sources at trading venues spoke to Practice Insight on this only on the condition of strict anonymity, not wanting to antagonise their supervisors further. But those who did speak voiced disappointment that they were not being given the benefit of the doubt. Many spoke of the need for cooperation between regulators and the market, rather than passive aggression. Others felt they were being infantilised by such a public shaming, arguing that a private note to the firms concerned – especially considering there aren’t hundreds of venues out there – would have been both more appropriate and constructive.
The focus on trading venues specifically, who have until now managed to escape much of the regulatory-driven negative attention compared to banks, is also an early indication of a paradigm shift. Despite also bearing significant compliance costs, infrastructure providers have made no secret of the windfall post-crisis regulation – particularly venue-loving, transparency-heavy Mifid II – has given them.
Some called pot kettle black – after all, FIRDS is Esma’s system, and it was Esma who drafted the rules and accompanying guidelines for how to submit data. The occasional disconnect between the pan-European authorities and national regulators was also mentioned; many feel NCAs have approached them in constructive ways.
There is also sympathy here. Market participants often reflect upon the thankless task the increasingly important authority has been given, with responsibility for drafting the technical standards and various annexes and Q&As, and managing one of the most important databases in financial markets. Naturally limited by the budget and personnel constraints typical to any public sector institution, it’s a huge task, and for the most part, Esma is good at it.
Plus, others think Esma has a point. As is only natural in such a competitive environment, there’s been no shortage of mudslinging between trading venues on how each interprets the rules. So some feel the announcement is evidence of regulators finally heeding the calls of the market to clean up the data, starting with those who submit large parts of it.
It’s not as if the authority has been light on detail. Along with levels one and two of the original text, there are hundreds of pages of regulatory technical standards, annexes, Q&As and press releases providing further guidance. Its double volume cap reporting instructions alone are 39 pages long. Venues argue that the problem lies in the fundamentals: that what works well for equities does not necessarily work for other financial products. That will be harder to resolve.
Everyone is right to be concerned about the quality of the data in FIRDS. It’s hugely important in determining the transparency obligations for both institutions and instruments daily, and in the longer term, will be used to make future policy decisions. But regulation, particularly regulation as transformative as Mifid II, does not work without trust, and the tangible sense of betrayal felt by some is not a good sign. The first year was always going to be tough. As it draws to a close, here’s hoping to a more trusting 2019.
Esma had no comment on this piece, but reminds the market that the first data completeness indicators for bond liquidity will be published next week.