EU Fixed Income Markets to Get a Tape
Posted by Colin Lambert. Last updated: June 23, 2022
Three of the largest fixed income platforms have announced plans to form a joint venture to create a consolidated tape for EU fixed income markets. Bloomberg, MarketAxess and Tradeweb Markets say they intend to jointly explore a project with the intention to apply to become the consolidated tape under a previously-announced procurement process under the auspices of the European Securities and Markets Authority (ESMA).
In a statement, the three firms argue European financial markets would benefit greatly from a well-functioning fixed income consolidated tape, adding, “industry collaboration will be essential to delivering a solution that utilises existing infrastructure to provide end users with access to reliable, high-quality MiFID II data”.
A tape for both EU equities and fixed income has been on ESMA’s agenda for four years now, but previous attempts to promote a model have failed to entice private enterprise, which the EU sees as the appropriate source for delivery.
The Full FX View
The big issue in any market surrounding a tape is how much transparency should it provide? In this instance – as in most others – the devil will be in the detail, namely, what should happen to large trades?
In slower fixed income markets like corporate bonds, where trades are typically smaller an d infrequent, a tape should present few issues (and not that much information!) for participants, however when we get to larger trades – that involve risk that dealers have to properly warehouse – transparency in the form of a tape can be harmful both to their ability to manage that risk and, ultimately, levels of liquidity in the market.
Put simply, no dealer wants the world to know when they are halfway (or less) through exiting a large risk transfer trade conducted with a client. Markets are already stacked with technology-nimble players who sniff out information and then use it to position themselves. This is perfectly legal as long as the data has come from an appropriate source, but it does increase the market impact of larger trades and will, eventually, make dealers more reluctant to quote for larger tickets.
Some might say that is not a bad thing as buy side customers can break down their trades into smaller tickets and spread them around, but that’s not how it works. In that instance dealers will probably quote slightly wider and exit the risk as soon as possible, thereby passing the market impact risk – which will be magnified by multiple signals being sent out – to the client, who didn’t want it in the first place.
This means that the first challenge for any tape, including the one proposed today, is to establish exactly how long the reporting delay on large trades should be – and there should be one. The only issue then is getting that past the regulator.
“We believe that the European Commission’s draft proposed legislative revisions would open a window to developing a robust consolidated tape that will increase market transparency and help facilitate an integrated, single European capital market,” the three firms say in their statement. “With our collective expertise in fixed income markets and in operating regulatory reporting entities – notably Approved Publication Arrangements (APAs) for MiFIR reporting – we are in a unique position to deliver a reliable, efficient and cost-effective consolidated tape service that meets the needs of market participants and the objectives of the regulators.”
The joint venture will be subject to the relevant regulatory approvals and will be established and operated independently from the three owners’ respective businesses. If successful in winning the mandate, the company would be authorised and supervised by ESMA to provide transparency in fixed income markets pursuant to MiFID II.
“As a next step, we are preparing a competitive request for information process to review independent third-party technology and operating partner(s) for the consolidated tape service,” the firms conclude.