FCA prepares crackdown on inaccessible Mifid data

UK regulator says approved publication arrangements not observing spirit of the rules

The UK Financial Conduct Authority is preparing to take action against firms publishing trade data that does not adhere strictly to new European Union financial market rules, Risk.net has learnt from three sources with knowledge of a private conference where the regulator flagged its intention.

“There has been concern expressed by the FCA – recently [in] public – that the data is not being made available in the way they envisaged. At a meeting they said they would be looking to crack down on this fairly quickly,” says an industry source who attended a private conference held by the FCA at its headquarters in London on March 26.

At this conference, which covered issues surrounding post-trade transparency under the second Markets in Financial Instruments Directive, the FCA disclosed its displeasure.

Since Mifid II and its accompanying regulation (Mifir) took effect on January 3, firms known as approved publications arrangements (APAs) have been responsible for providing pre- and post-trade transparency by publishing data submitted by investment firms. Pre-trade transparency means publishing offered executable quotes, while the price and quantity of certain trades must be published following execution.

APAs must make the data available to the public at no cost 15 minutes after the initial, real-time publication, but they can charge users for real-time access to the data.

The rules state the data should be available in “a format that facilitates the consolidation of the information with similar data from other sources” and specifies it should be machine-readable.

However, a regulatory expert at a law firm says FCA staff said at the conference they did not believe the techniques deployed by various APAs were within the spirit – and sometimes even the letter – of the law. The regulator said it would initiate conversations with market participants to further understand what, how and when data is made available.

If the FCA goes in and is presented with a set of legal opinions that says what the APA is doing is absolutely fine, the FCA is not likely to take public enforcement action

A regulatory expert at a law firm

According to the lawyer – who was not at the conference but had been passed information by clients who were – the FCA expressed several concerns about the availability of data. These included: data that is only available briefly before being deleted; data that is not always presented in machine-readable format; and data that is sometimes only available at a cost.

A third source who attended the conference concurred with the details of the information from the industry source and the lawyer.

Esma is watching

The FCA comments came after Steven Maijoor, chairman of the European Securities and Markets Authority (Esma), wrote a letter saying “several” APAs were not adhering to the spirit of the rules and Esma would follow up on the issue with the local supervisors responsible for them.

The letter, dated March 6, was sent to Markus Ferber, parliamentary rapporteur responsible for Mifid II.

For the majority of APAs, the local supervisor is the FCA, at least until Brexit. “I suspect this is something that [will] get focused on particularly by the FCA in the next few months and [will] see some movement,” says the industry source.

Risk.net has previously reported that market participants and lawyers were not convinced that Tradeweb and Bloomberg were following the spirit of the rules. Both of these firms are regulated by the FCA, but Maijoor’s reference to “several” APAs implies a more widespread problem. Moreover, participants did not refer to the regulator’s third concern – data only available at cost – with regard to either Tradeweb or Bloomberg, which means this point is most likely related to other APAs.

Spokespeople at both Tradeweb and Bloomberg have told Risk.net in the past that their firms believe themselves to be in compliance with the law.

Rules versus aspirations

The FCA has several options available to either force or encourage APAs to change their practices. It could request the APA to follow the FCA’s desired practices, take enforcement action, create more prescriptive rules about the way content should be displayed or, in the worst-case scenario, strip an APA of authorisation.

The regulator could also wait for Esma to publish further Q&As outlining more prescriptive requirements for how APAs should publish data before taking enforcement action. Maijoor stated in his March 6 letter that Esma would consider drafting Q&As on this subject.

But if the APAs are only breaching the “spirit” of the law, they are technically in compliance.

“If the FCA goes in and is presented with a set of legal opinions that says what the APA is doing is absolutely fine, the FCA is not likely to take public enforcement action,” says the lawyer.

For example, none of the various Level 1, 2 or 3 texts of Mifid II states how long trade data has to be available to the public, which means the text allows for APAs to publish data and delete it after a few minutes.

It is fair to say in the run-up to getting things ready for Mifid II go-live, speed was valued by everyone, including the regulators, more than complete accuracy

A partner at a second law firm

In addition to the money earned from their real-time data business, APAs will also be concerned their data could be used by competitors to provide aggregated solutions to clients. An APA with many banks reporting trades to it would be reluctant to facilitate a smaller competitor scraping data.

Some APAs are planning to offer solutions to help investment firms identify whether they are systematic internalisers in a specific asset class. This designation is applied to firms executing a significant proportion of activity in the asset class bilaterally, and participants therefore need aggregated trade data as the denominator for the calculation.

“For a firm to challenge the FCA, it has to have a real material problem with what the FCA is telling it to do and think the FCA is wrong. That typically boils down to whether what the FCA is telling a firm it is going to lose that firm a lot of money. You would expect some of these firms to get very shirty about being asked to publish data to the public because that data is going to be used by their competitors to compete with them, and the real-time data is also a significant portion of turnover for some of these firms,” says the lawyer.

US sets example

According to the lawyer, the FCA suggested at the March 26 conference that the accessibility of post-trade data in the US is something that would be suitable for the Mifid II transparency regime. Under Dodd-Frank, one party to a trade – often a swap dealer – has to submit details of derivatives they transact to a swap data repository. SDRs subsequently publish the information to the public in real time.

There are a variety of techniques used by SDRs use to present this data, but, most importantly, users can copy the information and it is not deleted a few minutes after publication.

Some question why the FCA authorised APAs without checking in the first place whether they were strictly adhering to the rules. This may well be the result of the general rush to prepare for Mifid II, which included several changes by regulators themselves at the very last moment.

“It is fair to say in the run-up to getting things ready for Mifid II go-live, speed was valued by everyone, including the regulators, more than complete accuracy. So it might have simply satisfied a ‘good enough’ standard rather than [an] objectively ‘this is what we want’ standard,” says a partner at a second law firm.

The first lawyer believes the FCA might not have gone into such a granular assessment of how the APAs were going to publish the data.

“Maybe the FCA did ask what the APAs were going to do with the trade data and the APAs responded they were going to make it available on their websites, and the FCA was happy with that. Or it may be the case [that] the FCA didn’t ask further questions… Just because a firm is authorised to do an activity, it doesn’t mean they are carrying out that activity the way the FCA expects,” says the first lawyer.

The FCA declined to comment for this article.

Editing by Philip Alexander

Correction, May 3, 2018: A sentence has been amended to state that APAs must make trade data available to the public for free 15 minutes after the initial, real-time publication, rather than 15 minutes after execution of the trade.