A Consolidated Tape for the EU Capital Markets Union and for the UK

A Consolidated Tape (CT) provides a single and near real-time overview of the price formation for financial instruments to all market players, including for equity (shares and ETFs), bonds, and derivatives. The Market for Financial Instruments Directive II and Regulation (together MiFID II, and ‘on-shored’ in the UK, post-Brexit) provides a regulatory framework for the establishment of Consolidated Tape Provider(s) (CTP(s)). However, so far, none have emerged. As examined more closely in my recent article, the EU MiFIR Review sets out to revamp the EU CTP framework. Likewise, the UK Wholesale Markets Review proposed a similar new framework for the UK.

With these new rules now (nearly) finalised, this blog post provides an update on the current status quo, including the next steps.

The EU MiFIR Review

Due to its historical development, the EU Capital Markets Union (CMU) remains a fragmented trading landscape. Consider for a moment the amount of national and regional exchanges, as well as all the other places where multilateral or bilateral price formation is taking place. A CT would bring together the dispersed and scattered trading information for all market participants. Put differently, an investor would only need to be connected to the single CTP rather than all other market data sources to view the price formation in the entire CMU for each asset class. No wonder the European Commission made revamping the CTP framework a priority in the EU MiFIR Review: a CT would assist greatly in constructing a “true” CMU. An agreement was reached in October, 2023 and ratified by the European Parliament on January 16, 2024. It envisages a single CTP for each of the three asset classes (i.e. bonds, equity, and derivatives).

The UK Wholesale Markets Review

As previously announced in the Edinburgh Reforms, HM Treasury and the FCA are also setting out a new regulatory regime for a UK CTP. Following its consultation, the FCA has made proposals for a new CTP framework (including some follow-up consultation). Whilst broadly similar to the new EU framework, there might end up being a few differences. For example, revenue sharing may look slightly different, as well as the tender process and criteria for selecting a CTP.

The US leading the way

Although different in market structure, the US is often used as an example for European capital markets. And as far as a CT is concerned, it is considered several decades ahead of Europe. In the US equity markets, a real-time consolidated feed (tape) of quote and trade data from all trading venues is managed by a single information processor (SIP), containing top-of-orderbook information enabling the construction of a national best bid offer (NBBO). It is not perfect: the exchanges, which supply the data, currently hold control, whilst the users of the tape are not involved in the governance. The SEC is currently seeking to remedy this. Where possible, the EU and UK should heed such lessons.

Next steps

One of the first next steps in structuring an effective CTP Regime is determining the time period for bonds (and derivatives) between concluding the trade and the publication of the trade information, ie the calibration of the deferral regime. The MiFIR Review has provided a broad categorisation, which needs to be filled out further by ESMA. Of course, if a large portion of transaction information is deferred, a CT would contain little real-time information and become both less useful and economically unviable. The aforementioned US framework could provide an example in this regard, given that it does not have a deferral on price but only on the size of a transaction (if sufficiently large). Whilst transparency for derivatives also involves calibrating deferrals, it has additional complexity around the selection of the most appropriate product identifier for the reporting and aggregating of interest rate swaps and of credit default swaps. A choice between the usage of International Securities Identification Numbers (ISINs) and the Unique Product Identifiers (UPIs), or a combination or extension thereof, needs to be made. In the UK, the FCA is currently consulting on a transparency and reporting regime for bonds and derivatives.

Once these issues are sorted, the next step is organising a tender for each of the CTPs for the three asset classes (bonds, shares, and derivatives). Within the EU, ESMA will be responsible and has already provided an overview of the anticipated timelines. Upon entry into force of the MiFIR Review early 2024, ESMA will have nine months to organise the tender for the CTP for bonds, taking us to the end of 2024. The evaluation and decision would take place in the first six to nine months of 2025, meaning the CTP for bonds could be authorised and operational by the end of 2025. The timelines for the CTP for equities are six months later, i.e. the tender should be organised by mid-2025. The CTP for derivatives follows another six months after that with the tender organised by the end of 2025. In the UK, the FCA will also commence with the tender for the bond CTP with a view to appoint one in 2024. The CTP would become operational second half 2025, along similar timelines as operated by ESMA. The FCA will announce further steps for the equity CTP in 2024.

With both frameworks and tenders launched around the same time, an intriguing question remains: will the UK and EU eventually have the same CTPs, allowing for an even more complete and integrated overview of trading in Europe, or will it merely lead to a more fragmented UK and EU landscape with different scoping and competing technology?

The authors’ complete article can be accessed here.

Ebbe Rogge is an Assistant Professor at the Leiden University, Netherlands, and a Senior Policy Advisor for the Dutch Authority for Financial Markets. The opinions expressed herein are solely those of the author and in no way represent those of the Dutch Authority for the Financial Markets.