UK Regulators Kicks Off Push for Fixed Income Tape
Posted by Colin Lambert. Last updated: August 9, 2023
With The Full FX View
With the push for a consolidated tape (CT) seemingly mired in a back-and-fro between regulators and markets in Europe, the UK’s Financial Conduct Authority (FCA) has pushed ahead with plans for its own tape, initially in fixed income and then in equities.
The FCA has published a consultation paper on a framework for the new tape, noting that a consolidated tape provider (CTP) is required to collect the market data from both trading venues and OTC markets, before publishing it, in a standardised electronic feed, to market participants. “By providing a single, authoritative, complete and affordable source of market data, the CT should reduce trading costs, increase liquidity and allow investors to better assess their brokers’ execution quality,” the FCA notes in the paper.
The UK regulator says only one CTP will be selected via a tender process – under the initial MiFID scheme in Europe, there was allowance for multiple tape providers in individual asset classes, however the FCA says no firm has applied for authorisation under that regime.
Responses are invited before 15 September 2023, and the FCA says it plans to finalise the rules by 2024, ahead of issuing a request for tender document later that year. It adds, it expects the winning tender to be operational in the course of 2025.
The Full FX View
While the UK’s initial move over a tape makes a lot more sense than the proposals from the European Union – after all, who really wants a fragmented tape, surely it defeats the object of the entire initiative? – there is still much that needs to be understood from the FCA’s proposal.
Primarily amongst concerns has to be how investors’ very large trades can be protected. It is all very well talking about the “efficiency” of a market, and this is indeed a good aim, but there has to be sufficient liquidity involved to ensure that those trying to trade in larger sizes are not disadvantaged. There is no coincidence in the fact that a host of high-speed firms are the noisiest proponents of “efficient” markets because it is in that environment, with minimal transparency of trade data, that they thrive.
For a firm seeking to quote for larger tickets, however – and this would be the case in FX as well, which is a much more liquid market – the rules around how these trades are published on a tape are crucial, especially if they are to continue their role as a source for risk transfer (and it is notable that in the US on the Trace system, trade data is not made public it is available to the regulators only).
The rules, therefore, will be the most crucial aspect of this whole process, and thankfully, the UK has often in the past established what many see as a sensible framework in many areas – this has to be the case here also. If the rules are wrong, however, the cost to buy side firms seeking to arrange large trades will inevitably increase because risk warehousers – already hit by sometimes crippling capital costs for holding risk – will have yet another reason not to quote.
One other aspect of the fixed income market to change as a result of a tape will probably be more an acceleration of an existing, albeit nascent trend – the greater use of algos. Some providers are rolling out algos in certain liquidity fixed income products, if the rules on the tape mean these firms take less risk, they will have to be ready with algo strategies for a wide range of products, with very different liquidity profiles.
The tape is one aspect of a series of measures the FCA says are aimed at strengthening the UK’s position as a financial centre, including a clarification of the Trading Perimeter. “’We are adapting our rules to make sure the UK market works well, providing certainty for firms and so providing a good environment for investment,” says Sarah Pritchard, executive director of markets and international at the FCA. “The new consolidated tape will help reduce trading costs, increase transparency and improve data quality. Our other measures announced today aim to further support the UK’s thriving financial services sector.”
