In its quest to ensure fair and efficient markets, ESMA’s first report in December 2019 on the review of a consolidated tape has found that after two years under MiFID II rules, a reliable view of liquidity across the EU is still lacking. Consequently, the chair of ESMA Steven Maijoor has called for the establishment of a real-time consolidated tape to remedy the fragmentation of EU markets. As the European Commission considers ESMA’s recommendation of establishing a consolidated tape, the timing provides industry an opportunity to consider the components behind a successful market infrastructure and how to build such an infrastructure.
Criteria for Success
In the case of the consolidated tape, unlike some of the other market infrastructures mandated by MiFID II that had to be designed and built in under 18 months, industry now has the luxury of time to debate and reach consensus on the best practices that should be applied to the appointed provider.
ESMA’s analysis identified high data quality and a strong governance framework as two factors for the success of a consolidated tape. In Part 1 of this two-part series, Etrading Software highlights some key lessons for the establishment of high quality data and strong governance, garnered from its experience as the management services partner for the Derivatives Service Bureau (DSB), and how some of the lessons might be utilised for CT operations.
Two key considerations for achieving high data quality are the role of data standards and the implementation of a single consistent API for use by all stakeholders, as follows:
Data Standards drive up quality by providing a precise definition of each data element, in order to remove ambiguity and allow consistency of interpretation across all stakeholders. For regulated utilities, ISO standards are increasingly viewed by regulators as the gold standard due to the ISO organisation’s strong governance model. ISO standards, therefore, are the obvious choice where they exist. However, there may be cases where no ISO standard exists but an equivalent industry standard is already in widespread use; for example, the Market Model Topology maintained by the FIX standards body. In such cases, it will be helpful for industry to make the case to regulators of the benefits of leveraging the existing industry standard.
In either case, it is imperative that a robust standard is used to define every single data element that is within the remit of the utility. For example, the DSB maintains a comprehensive and systematic definition of every single data element, along with the source of the standard of each data element (which are primarily ISO). One of the reasons this approach has proved successful for the DSB is because the organisation is an active stakeholder in the ISO development and evolution process related to the data elements it uses. This close collaboration with ISO has allowed rapid clarification of any issues related to data definitions, as well as provided a forum for input into the standards committees to ensure the data elements remain fit for purpose. Such close collaboration with the relevant standards bodies is an essential requirement for the successful operation of a market infrastructure.
A Single API Implementation is critical to allow consistent treatment of any data that flows into the utility. To take a practical example: it is technically possible, but not advisable, for a consolidated tape to connect to each trading venue (or Approved Publication Arrangement) using the proprietary API of that organisation. However, such a model will inevitably impact data quality due to the different data formats and APIs of each organisation.
A better model is for all users to implement a single consistent API utilising a single consistent data standard for the data elements flowing across the utility. This means the connectivity model should be for users to connect to the utility using the utility’s open API, rather than the utility connecting to each user’s proprietary API.
It is worth noting that a single API implementation can still allow for multiple API flavours to be implemented (for example both FIX and REST APIs) as long the implementation underlying both APIs is consistent. In practice, this means the same organisation should design and build both APIs to the same specification and assumptions.
When a utility provides a service on an exclusive basis, users cannot rely on competition to ensure its services are cost-effective and responsive to users’ requirements. Instead users need to rely on an appropriate governance model to provide the framework for ensuring the utility provides cost-effective services that meet the needs of its users.
The role of market participants in shaping a utility service is critical because the cost of operating the utility is only a small part of the overall cost borne by the marketplace. The majority of the operational costs may well reside with individual users whose costs include the systems and people required to connect to the service and support the associated workflows on an ongoing basis. Therefore, any governance model must carefully consider how to maximise user feedback into both the design and operation of the service.
The DSB for example has a number of governance features including industry committees and consultation mechanisms that merit consideration for a best practice market infrastructure design. In the DSB’s case, the following model is used:
- A standing Product Committee (PC) consisting of industry users and regulators and focusing on data standards and data quality
- A standing Technology Advisory Committee (TAC) consisting of industry users and regulators, focusing on technology, operations and cyber-security
- An annual industry-wide consultation to shape the service provision, including any impact on the cost to be recovered, as well as raise any legal matters given the common agreement in place
- An annual third-party assurance report conducted by an independent service auditor to provide users with information on the policies, procedures and controls in place, as well as understand the design and implementation of the controls.
A consistent theme across these governance models is a need for transparency of actions and of decision making. In the case of the DSB, this is achieved by making public the minutes of its PC and TAC committees, publishing all responses to its consultations to allow all stakeholders visibility into the decision making process, and making available the third party assurance report to its users. Additionally, documentation such as APIs, service levels and release schedules are published on its website to provide full visibility to all stakeholders.
In Part 2 of the article, we will highlight two additional success criteria that have become crucial to the operational effectiveness of a modern critical infrastructure: technology and cyber-security.