ESMA Publishes Opinion on Market Outages

Following a long consultation process, the European Securities and Markets Authority (ESMA) has published a final Opinion on market outages, and while the key focus of the paper is equity markets it has extended the Opinion’s reach to other asset classes.

The paper lays out the processes and procedures ESMA believes should be followed by trading venues and orders national competent authorities (NCAs) in Europe to implement the rules therein.

ESMA observes that non-equity instruments trading appears less affected by an outage, but noted its Consultation Paper published last year considered that the guidance on communication of outages should be extended to all trading venues, regardless of the instruments traded. This would ultimately contribute to the creation of a level playing field among the different platforms, the paper argued, adding that improved communication during outages occurring on trading venues would enable market participants to more promptly take the necessary arrangements to continue their trading.

On non-equity venues specifically, the paper observed that the publication of order information “seems less important for those trading venues that do not use central limit order books (CLOBs) and may create an unnecessary burden”. Thus, in the paper ESMA suggested limiting this publication to trading venues offering a CLOB.

The consultation paper also requested feedback from market participants on whether there was any issue relating to trading of non-equity instruments that should be taken into account in the guidance. In addition, ESMA was interested in respondents’ views on the direct link between an outage on an equity main market and those derivatives that have these instruments as underlyings.

This approach received, ESMA says, “broad support” for respondents to the paper, with the majority of stakeholders believing the guidance on communication should not be limited to equity markets only. It adds that respondents also considered that having a clear communication protocol in case of an outage is of benefit to all market participants.

One area that feedback suggested needed changing was the re-opening protocol, however. In the paper ESMA says platforms should give 30 minutes notice of a re-opening after an outage, but respondents argued that this was too long for RFQ-based venues, and that 10 minutes would be more appropriate.

ESMA says in the Opinion that it agrees with the concerns over the 30-minute window to re-opening on RFQ-based markets, but rather than impose a time horizon on platforms it intends to grant flexibility to trading venues on the minimum notice period.

For derivatives markets, ESMA says it seems to be the case that where the cash instrument stops trading, being equity or fixed income, the underlying derivative instrument may stop as well (or vice-versa). “Considering such correlation between derivative instrument and their underlying, ESMA expects NCAs to require trading venues which trade instruments (e.g. derivatives), that may be directly affected by outages on other trading venues, to include in their outage plan how they intend to deal with an outage that affects their underlying markets,” the Opinion states.

With the publication of the Opinion and the extension to other asset classes European NCAs now require trading venues of all types to have in place requirements for dealing with market outage events. “ESMA expects that, considering the guidance provided in this opinion, NCAs should ensure that trading venues have in place an appropriate outage plan ready to be deployed in case of an outage,” the regulator concludes. “ESMA expects that NCAs require trading venues to assess their arrangements and procedures against this opinion and reflect whether any changes should be made.”