Data providers wrestle with systematic internaliser status

Covering 80% of venues is considered enough to approximate total market size under Mifid II


  • LSEG, Thomson Reuters and Trax to provide SI determinations, but Bats and Tradeweb will not, while Bloomberg awaits regulatory clarity.
  • Esma guidelines and Q&As for implementation of Mifid II to be released "within the next weeks".
  • Reference data specialists say connecting to 100% of market venues is not necessary to calculate total market size in a given financial instrument.
  • Bank consortium Project Sentinel could assist with SI determination if a harmonised format for reference data is established.
  • Timely issue of ISINs for OTC derivatives, critical to the use of reference data for determining SI status, has been enabled with a real-time allocation engine.

Providers of reference data services are grappling with the number of venues they must plug into for dealers to determine whether they are systematic internalisers (SIs) under the revised Markets in Financial Instruments Directive (Mifid II).

Mifid II and its accompanying regulation, Mifir, will apply to European Union financial markets from January 3, 2018. Dealer banks will be classified as SIs if they meet a certain market share threshold, defined by the European Securities and Markets Authority (Esma), for off-venue trading in classes of financial instruments, including all non-equities such as fixed income and derivatives.

Provided a trade is below a large-in-scale threshold and the instrument is classed as liquid, the selling counterparty must fulfil post-trade reporting within 15 minutes through an approved publication arrangement (APA) – an entity licensed to publish transaction data.

Therefore, for SI determinations, a golden source is required for the total size of the market, both for products regulated using the individual instrument-by-instrument approach and those under the classes of financial instruments approach. Firms will be required, on a quarterly basis, to assess whether they meet the criteria for SI status, but market-makers prefer something closer to daily data.

Data services providers are responding by building out links to venues, offering services to manage those feeds and cleansing the data received. As part of its Elektron suite of data and trading services, Thomson Reuters will offer SI determination, plugging into up to 240 different trading venues. Tim Lind, global head of financial regulatory solutions at the firm, says aggregation will be available at the end of each day, since monitoring trades from multiple venues is not possible in truly real time.

It is certainly our intention to provide an SI determination tool for all Mifid asset classes
Spokesperson, London Stock Exchange Group

London Stock Exchange Group (LSEG) will also be active in the space. A spokesperson says: "It is certainly our intention to provide an SI determination tool for all Mifid asset classes."

UnaVista, LSEG's transaction-reporting service, is looking at a reference data product to support Mifir reporting. A few months ago, LSEG and Boat Services also launched TRADEcho, a new multi-asset class Mifid II reporting solution, which will include the SI requirement in its remit.

Trax, a subsidiary of MarketAxess, says its Mifid List provides an early indication of Mifid II reportable instruments on in-scope markets. Trax is currently taking feeds from exchanges, and throughout 2017 it will build out further links to multilateral trading facilities (MTFs) and organised trading facilities (OTFs) as they register. Inputs to Trax's service include feeds from data vendors such as GoldenSource.

Nick Moss, transaction-reporting product manager at Trax, says there are around 100 regulated markets and a similar number of MTFs, but it is unclear how many OTFs will register. As Trax "already sees 65% of the fixed-income market", he says it can provide an indication of whether firms will hit SI thresholds, "but we're not saying we will connect directly to every single exchange or entity within the market".

That's a downside, according to transaction-reporting provider Abide Financial. Its senior regulatory consultant and head of professional services, Mark Kelly, points out that existing Mifid eligibility offerings, such as those from providers such as LSEG and Trax, "don't carry a guarantee of completeness or accuracy".

Banks will want to monitor their SI eligibility in real time, but the interesting thing is how often does that change?
Sassan Danesh, Etrading Software

But aggregator services are unlikely to need to connect to 100% of trading venues, according to Sassan Danesh, managing partner at London-based professional services technology firm Etrading Software. "Banks will want to monitor their SI eligibility in real time, but the interesting thing is how often does that change? With a market event you can have a spike in trading activity, but typically, trading is relatively stable, so the denominator part of the SI calculation can be approximated. Therefore, you could cover 80% of market data feeds and make approximations for the other 20%," he says.

Lind at Thomson Reuters agrees: "When products are introduced to trading and we can see the overlap of the same instrument on multiple venues, then we will have an idea of the requirement to get a good baseline for market volume."

The extent to which Esma can assist with calculating total market size in any given instrument reference data remains uncertain. Some data will be available for free from Esma on a daily basis from January 2018, such as lists of instruments traded on a venue, but it is thought the organisation will only provide volumes quarterly. It is also unclear how Esma will get information out of its database and into the market; will it push data to market participants or will they have to request it?

A spokesman for Esma says these issues are currently being worked on as part of ‘Level 3 measures', which further detail the implementation of Mifid II, mostly comprising guidelines and Q&As, adding: "However, given these are not yet final, we cannot pre-empt their final shape. We should have more information normally within the next weeks."

For SI determination, it is still unclear how the data needed for the calculation will be made available
Mark Croxon, Bloomberg

Before deciding what role they can play in SI determination, other data providers await regulatory certainty from Esma.

Mark Croxon, head of regulatory and market structure for Europe, the Middle East and Africa at Bloomberg, says: "We plan to consume and publish the data necessary to help firms determine which products, quotes and pricing are reportable from a transparency perspective. For SI determination, it is still unclear how the data needed for the calculation will be made available. The market is awaiting clarifications from the regulators, and until then we continue to work with our clients to inform them and help them prepare."

Simon Maisey, global head of business development at electronic over-the-counter marketplace operator Tradeweb, agrees Esma has left some unanswered questions: "We've had discussions with Esma. They've got a lot of work to do themselves. It's a big undertaking for them in technology build and it's not yet clear how exactly they're going to get information into the market. A lot of venues like us will need that information and we'll make that available to people too if that's helpful for them."

Tradeweb has decided to limit its role in SI determination. It will collect reference data, and make it available to its users and other aggregators, but it will not offer an SI determination service itself.

Likewise, Bats Global Markets has ruled itself out of the space. The firm will provide a Mifid share flag in its reference data specification, but it will not be providing a total market size such that firms can determine whether they are an SI.

Collective endeavour

Separately, a consortium of up to 10 banks is partnering Etrading Software in the Project Sentinel initiative to mutualise the cost of Mifid II implementation in the OTC front office – a collaboration that could assist with SI determination. The project aims to create systems for real-time SI monitoring in a cost-effective way, either through a vendor or by achieving aggregation directly.

Crucial to its success will be efforts by the Financial Information eXchange (Fix) Trading Community, which is working with APAs to establish a harmonised format for reference data to allow banks to aggregate it directly. If this is not possible, going through a vendor to facilitate aggregation might make more sense, says Etrading's Danesh.

The next phase of the initiative will define interoperability standards for the Sentinel components, thereby allowing integration and interoperability between the technology platforms of the consortium banks, which include ING, Nordea and Santander.

Danesh explains: "You've got this collaboration where groups of banks are saying individually we can't do this, but if we all get together then actually, in the same way [as] the vendor is aggregating on behalf of individual clients of theirs, a group of banks can just do that. The incentive to mutualise those sorts of costs is huge in order to allow direct aggregation where possible."

There seems to be a global trend that most large firms will become SIs because it makes it easier to provide liquidity to their clients
Head of global execution, a large dealer

The timely issue of International Securities Identification Numbers (ISINs) for OTC derivatives is also critical to the utilisation of reference data needed to determine SI status. This month, the Association of National Numbering Agencies (Anna) announced that, under a consulting contract with Etrading Software, the core functionality of a real-time allocation engine for OTC derivatives has been implemented.

In Q4 Anna will publish the Fix open standard technical specifications to enable market participants to connect their trading platforms to the engine. They will be able to publicly preview it with a web interface and provide early feedback. Formal industry testing of the engine will begin in Q1 2017. Market participants spoken to for this story agree that, at the very least, banks will want to go live with Mifid II compliance systems before the start of Q4 2017.

An alternative to becoming an SI is to set up as an MTF. A head of global execution at a large dealer says: "There seems to be a global trend that most large firms will become SIs because it makes it easier to provide liquidity to their clients. Another option is for us to offer a combination of SI and MTF, but we are waiting for the Mifid II rules to be transposed."

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