ESMA Consultation on MiFID II/R Market Data Obligations: Member Call on 15 December 2020 at 4:00-5:00 pm GMT/11:00 am-12:00 pm ET
[32973]
December 10, 2020 TO: Derivatives Markets Advisory CommitteeEquity Markets Advisory Committee
Fixed-Income Advisory Committee
ICI Global Regulated Funds Committee
ICI Global Trading & Markets Committee RE: ESMA Consultation on MiFID II/R Market Data Obligations: Member Call on 15 December 2020 at 4:00-5:00 pm GMT/11:00 am-12:00 pm ET
On 6 November 2020, the European Securities and Markets Authority (ESMA) published a consultation paper (CP) on draft guidelines for the market data obligations under MiFID II/MiFIR.[1] ESMA is inviting comments on the CP through a response form by 11 January 2021.[2] ICI Global intends to submit comments and is organising a member call via Zoom to discuss the CP and ICI Global’s response on Tuesday 15 December 2020 at 4:00-5:00 pm GMT/5:00-6:00 pm CET/11:00 am-12:00 pm ET. Zoom details for the member call are below.
Link: https://ici-org.zoom.us/j/8451715029 Meeting ID: 845 171 5029 Dial-in numbers: https://ici-org.zoom.us/u/aVUAdy4pr
The memo provides an overview of the CP. Annex (i) contains a list of relevant MiFID II/MiFIR provisions. Annex (ii) contains a list of questions in the CP. Annex (iii) contains ESMA’s proposed guidelines.
Background
On 5 December 2019, ESMA published its first review report[3] (“Market Data Report”) on the development of prices for market data and the consolidated tape (CT) for equity. The Market Data Report follows an earlier consultation[4] to which ICI Global responded.[5] In the Market Data Report, ESMA committed to develop supervisory guidance in the area of market data. In the CP, ESMA has proposed guidelines which are intended to ensure better and uniform application of MiFID II/MiFIR obligations and support consistent, efficient and effective supervisory practices. ESMA has developed these draft guidelines through input received from questionnaires, bilateral meetings with stakeholders and a roundtable organised in June 2020.[6]
Consultation Paper
ESMA notes that provision of market data is essential for market participants to obtain a desired overview of trading activity. Furthermore, ESMA recalls that MiFID II/MiFIR introduced provisions to: (i) ensure that market data is available to market participants in an easily accessible, fair and non-discriminatory manner; (ii) decrease the average cost of the market data; and (iii) make data available to a wider range of market participants.
ESMA notes that MiFID II[7] and MiFIR[8] provisions, including level 2 measures,[9] require market data providers (MDPs)[10] to provide data on a reasonable commercial basis (RCB) and ensure non-discriminatory access to that data. These provisions include the requirement for trading venues (TVs),[11] Approved Publication Arrangements (APAs)[12] and Consolidated Tape Providers (CTPs)[13] to make data available free of charge 15 minutes after publication (“delayed data”).
Applicability of draft ESMA guidelines to MDPs offering market data free of charge
ESMA notes that MDPs offering market data free of charge are exempt from most of the MiFID II/MiFIR level 2 provisions on market data,[14] but that the following provisions apply:
- the requirement to make market data available to all customers on the same terms and conditions;
- the requirement to have scalable capacities in place to ensure that customers can obtain timely access to market data at all times on a non-discriminatory basis; and
- the requirement to offer unbundled market data.
ESMA proposes that its guidelines, including on the provision of delayed data, should also apply to MDPs providing market data free of charge and asks for stakeholder views on this proposal (Question 1).
Provision of market data on the basis of costs
ESMA notes that MDPs should charge market data fees that are based on: (i) the costs of producing and disseminating the data, including an appropriate share of joint costs for other services provided; and (ii) a reasonable margin.[15] In its Market Data Report, ESMA concluded that:
- it should provide guidance on the accounting methodologies for setting market data fees; and
- MDPs should be able to demonstrate that they have compliant accounting methodologies, in particular that market data fees must be based on the cost for producing and disseminating market data.
ESMA commends the steps already taken by some TVs to enhance the transparency of their cost structure and the methodology for setting market data fees. ESMA concludes that these steps contribute to increasing transparency on market data fees and helping customers and regulators to assess how prices were determined. However, ESMA expresses concern about the overall lack of transparency in market data fees calculation and is proposing further guidance to ensure MDPs have appropriate cost accounting methodologies in place to provide market participants with the necessary information to understand such methodologies. In its Market Data Report, ESMA recommended that a Level 1 requirement was added to MiFID II/MiFIR to require TVs, APAs, SIs and CTPs to share information with NCAs and ESMA on the actual costs for producing and disseminating market data and on the actual included margins.
ESMA is proposing two guidelines concerning the provision of market data on the basis of cost. The first guideline (Guideline 1)[16] concerns the methodology for setting the market data prices and proposes the following:
- MDPs should have a clear and documented methodology for setting the price of market data which should remain up to date and be reviewed on a regular basis and at least annually;
- MDPs should demonstrate in their methodology how the price for market data is based on the costs for the production and dissemination of market data and explain whether a margin is included and how that margin has been determined;
- MDPs should identify costs that are solely attributable to the production and dissemination of market data (i.e., direct costs) and the costs that are shared with other services (i.e., joint costs) through their methodology, including distinguishing between variable and fixed costs where relevant;
- MDPs should include in their methodology an appropriate justification on the costs included in the fees for market data.
ESMA is requesting stakeholder views on its proposed guideline concerning MDP’s methodology for setting the market data prices (Question 2), including whether ESMA should clarify other aspects of the accounting methodologies for setting up market data fees (Question 3).
The second proposed guideline (Guideline 2)[17] concerns auditing practices and requires MDPs to only impose penalties in consequence of an audit, where they can demonstrate that customers have not complied with the terms of the market data agreement. Furthermore, ESMA suggest that the level of penalties in case of non-compliance with the terms of the market data agreement should be based on the recovery of revenues which would have been generated in case of compliance with the license. Audits should only be aimed at identifying occurred breaches with market data agreements and overly onerous practices that result in the generation of additional revenues on the basis of non-compliance or the inability by the customer to prove compliance with the terms and condition of the license should be excluded.
ESMA is requesting stakeholder views on its proposed guidelines concerning auditing practices, including whether placing the burden of proof with respect to non-compliance with the terms of the market data agreement on MDPs can address current issues (Question 4) and whether auditing practices may contribute to higher costs of market data (Question 5).
Obligation to provide market data on a non-discriminatory basis
ESMA notes that TVs and SIs[18] are required to make market data available at the same price and on the same terms and conditions to all customers falling within the same category in accordance with published objective criteria.[19] Furthermore, that MDPs can establish categories of customers with different prices, terms and conditions provided that the categories are based on objective criteria and that the categories and the relevant criteria for defining the categories are published. Price differentials should take into account the scope and scale of the market data, and the use made by the customer of the market data. ESMA also notes that MiFID II/MiFIR[20] requires MDPs to publicly disclose the price and other terms and conditions for the provision of market data in an easily accessible manner.
ESMA’s analysis of the market data policies of TVs has highlighted challenges for customers in understanding which category they belong to and the fees, terms and conditions applicable to them. Furthermore, ESMA has identified a lack of clarity in MDPs’ assessment of the uses of data when setting up client categories and allocating customers into those categories and how fees are applied when a customer uses data for more than one purpose. ESMA has proposed three guidelines to address the issues it has identified with the provision of market data on a non-discriminatory basis.
The first proposed guideline (Guideline 3) would require the following of MDPs:
- Establish categories in their market data policy which differentiate between customers, relevant fees and applicable terms and conditions;
- Publish the criteria used to define each category, which should be based on factual elements easily verifiable and pertaining to more than one customer, and explained and supported in such a manner that customers have sufficient information to understand the category they belong to;
- Explain and justify any differentiation in the fees and terms and conditions associated to each category.
The second guideline (Guideline 4), would require MDPs, where their data policy entails different customer categories, to consider cases where a customer could potentially belong to more than one category, and in such instances to classify customers only by using one category of data usage, in order to ensure the same data is charged only once.
The third guideline (Guideline 5), would require MDPs to offer the same technical arrangements (e.g. latency and connectivity) to all customers in a particular category, ensure these arrangements are non-discriminatory and justify any differentials.
ESMA is requesting stakeholder views on its proposed guidelines for the provision of market data on a non-discriminatory basis (Questions 6-8) and whether ESMA should clarify other elements in this regard (Question 9).
Per user fees
ESMA notes that MDPs are required to charge for the use of market data on the basis of the use made by individual end-users of the market data (“per user basis”) and that MDPs should have arrangements in place to ensure that each individual use of market data is charged only once.[21] Furthermore, MDPs may decide not to make market data available on a per user basis if that would be disproportionate to the cost of making the data available and subject to website disclosure of the grounds for doing so.
ESMA’s analysis has identified the need for additional guidance to address divergence in the application of per user fees, including instances of MDPs charging according to the use made by individual customers of the market data rather than on an individual per user basis. ESMA is proposing the following three guidelines to clarify the meaning of the obligation to charge on a per use basis.
The first guideline (Guideline 6) clarifies that the per user model requires MDP to charge fees for display data per active user (based on a unique “user-id”) and not per device or data product. ESMA considers that such an approach enables users to optimise their data costs and to avoid unnecessary multiple billings when the same data is sourced through different market data providers or products.
The second guideline (Guideline 7) requires MDPs to ensure that any conditions imposed on market data users to enable them to qualify as eligible for the per user model, are only those necessary to make the per user model feasible, namely the following:
- identify correctly the number of active users who have access to the data within the organisation;
- report to the MDP the exact number of active users.
The third guideline (Guideline 8) requires MDPs which do not offer to make market data available on a per user basis to publish the reasons which make the adoption of the model disproportionate to the cost of making the data available, including relevant specific features of their business model (e.g. excessive administrative costs).
ESMA is requesting stakeholder views on its proposed guidelines for per user fees, including its interpretation of the per user model (Question 10), the conditions that need to be met by market data users to permit the application of the per user model (Question 11), the requirement for MDPs to publish grounds for refusing to adopt the per user model (Question 12) and whether ESMA should clarify other elements of the obligation to provide market data on a per user fees basis (Question 13).
Obligation to keep data unbundled
ESMA notes that certain TVs[22] and SIs are required to make market data available without being bundled with other services, including MDPs offering data free of charge.[23] ESMA considers that the relevant MIFIR provisions aim at ensuring that users of market data only pay for data they are interested in rather than being forced to buy additional services, which may include other data or other services of little interest to them. Furthermore, ESMA considers that references to “other services” in this context should be understood as any value added service offered to the customer in addition to the provision of raw market data, such as pre trade analysis and data cleaning or provision of analytical data.
ESMA is proposing a guidance (Guideline 9) to clarify that MDPs should always make available the purchase of market data separately from additional services and inform customers of this possibility. Through this guidance, ESMA is seeking to ensure that MDPs offer users the option to buy market data separately from any other additional services or added value data, so that users are free to choose products according to their needs, without being obliged to pay for additional services (which they do not make use of).
ESMA is requesting stakeholder views on its proposed guideline for data unbundling (Question 14) and whether it should clarify other elements in relation to the obligation to keep data unbundled (Question 15).
Transparency Obligations
ESMA notes that MDPs are required to publicly disclose the price and other terms and conditions[24] for the provision of market data in an easily accessible manner.[25] ESMA’s analysis suggests that there is merit in standardising the reasonable commercial basis (RCB) information that MDPs have to disclose, which would increase transparency, timeliness and comparability of information.
ESMA is proposing a standardised publication format for RCB information (Guideline 10),[26] including a standard publication template, on which it is seeking stakeholder views (Question 16-17). Furthermore, ESMA has identified that the terminology used for the disclosure of the price and other terms and conditions for the provision of market data is inconsistent. ESMA believes this is detrimental to market data customers who may fall into different categories depending on the policy of the MDP and makes comparison between fees more difficult. ESMA is proposing to standardise the key terminology used by MDPs in their market data policies and price lists, including definitions of key terms (Guideline 11).[27] ESMA is seeking stakeholder views on its proposed definitions (Questions 18) and whether other terminology needs to be standardised (Question 19).
ESMA has concluded that MDPs’ disclosure of information on accounting methodologies to set market data fees is not satisfactory. ESMA is therefore proposing that MDPs publish a detailed explanation of their accounting methodology for setting market data fees using its proposed standard publication template (Guideline 12). The explanation would list: all the types of cost included in market data fees; “allocation keys” for joint costs; and whether a margin is included in the fees. ESMA is not proposing to require MDPs to disclose the actual level of margin, but explain why they consider the margin reasonable and, if applicable, explain why the margin differs from one category of market data to another. ESMA is seeking stakeholder views on its proposed cost disclosure requirements (Question 20) and whether other information should be disclosed to improve transparency on market data costs (Question 21).
ESMA acknowledges the importance of auditing, to enable MDPs to ascertain customer use of market data in accordance the terms and conditions of the data license. ESMA notes that market data users do not always have sufficient information on various aspects or consequences of the audit and how they are expected to demonstrate compliance with market data agreements where the burden of proof is placed on them to do so. ESMA is proposing guidance to ensure that data customers understand how audits are carried out and how they can demonstrate compliance with the terms and conditions (Guideline 13). ESMA is seeking stakeholder views on its proposed guidance (Question 22).
Making data available free of charge 15 minutes after publication
ESMA notes that TVs,[28] APAs[29] and CTPs[30] are required to make data available free of charge 15 minutes after publication (“delayed data”).[31] ESMA has published Q&A to clarify aspects of the delayed data obligations, including that:
- Delayed data should replicate the information published on an RCB and be made available directly to end users;[32]
- TVs, APAs, and CTPs may not impose redistribution fees on redistributors or third parties unless redistributors and third parties charge for the distribution of data and/or commercialise value-added services created from such data;[33]
- Delayed data should be published in an easily accessible manner for all potential users using a format that can be easily read, used and copied (e.g. by an average reader), including for large scale regular data publication using a machine-readable format which allows for automatic access.[34]
ESMA continues to receive regular complaints from data users concerning the lack of compliance with delayed data provisions by many trading venues and APAs. ESMA proposes to convert its existing Q&A into guidelines and expand the content. ESMA is proposing three guidelines to address the complaints it has received and the issues it has identified. The first two guidelines cover the general obligation to make market data available free of charge 15 minutes after publication and the third covers data redistribution and value-added services.
The first guideline (Guideline 14) would require MDPs to provide access to the delayed data for both professional and non-professional customers. ESMA proposes that MDPs may require a simple registration for the purpose of monitoring who has access to the data.
The second guideline (Guideline 15) would require MDPs to provide delayed data in a useful format adapted to the users’ needs, and available for a sufficient period of time.
The third guideline (Guideline 16) would permit MDPs to charge for the use of delayed data, where a delayed data user re-distributes the delayed data for a fee (including a general fee for accessing its services) or creates value-added services which are sold for a fee to third parties. ESMA defines “data redistribution” as a business model of selling the data in unchanged form to third parties, either directly by access to that data, or via a general access fee and defines “value added services” as the creation of a product made on a basis of raw delayed data or combining it with other information, and offering it as a product to third parties.
ESMA is seeking stakeholder feedback on the elements of pre-trade and post-trade data publication that it should require (Question 23) and the use cases and format that are relevant for data users (Question 24). Furthermore, ESMA is seeking feedback on the definitions of data-distribution and value added services it has proposed which would permit MDPs to charge for the use of delayed data (Question 25) and other stakeholder comments on its proposed guidelines (Question 26) along with the level of financial or other resources which would be required to implement them (Question 27).
Next Steps
ESMA is accepting comments on the CP by 11 January 2021 and expects to publish a final report and final guidelines by Q2 2021.
Giles Swan
Director of Global Funds Policy
ICI Global
endnotes
[1] Consultation Paper: Guidelines on the MiFID II/MiFIR obligations on market data, 6 November 2020, available from https://www.esma.europa.eu/sites/default/files/library/esma70-156-2477_cp_guidelines_on_market_data.pdf
[2] https://www.esma.europa.eu/sites/default/files/library/response_form_cp_guidelines_on_market_data.docx
[3] See ICI Memorandum No. 32082, RE: ESMA Report on the Development of Prices for Market Data and a Consolidated Tape for Equity, dated 6 December 2019, available from https://www.iciglobal.org/iciglobal/pubs/memos/ci.memo32082.global
[4] See ICI Memorandum No. 31857, RE: ESMA Consultation on the Development of Market Data Prices and an EU Consolidated Tape, dated 17 July 2019, available from https://www.iciglobal.org/iciglobal/pubs/memos/memo31857
[5] See ICI Memorandum No. 31938, RE: ESMA CP on the Development of Market Data Prices and an EU Consolidated Tape, dated 5 September 2019, available from https://www.iciglobal.org/iciglobal/pubs/memos/memo31938
[6] See Section 10.3, Annex III of the CP for a summary of the roundtable on market data organised by ESMA on 29 June 2020.
[7] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID II”), available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0065
[8] Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFIR”), available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0600
[9] Commission Regulation 2017/567 with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions (“MiFIR Delegated Regulation”), available from https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0567&from=EN and Commission Regulation 2017/565 as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (“MiFID II Delegated Regulation”), available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32017R0565
[10] Regulated marks, multilateral trading facilities (MTFs), organised trading facilities (OTFs), approved publication arrangements (APA), consolidated tape providers (CTPs) and systematic internalisers (SIs).
[11] Article 13(1), MiFIR
[12] Article 64(1), MiFID II
[13] Article 65(1), MiFID II
[14] Article 84(2), MiFID II Delegated Regulation and Article 6(2), MiFIR Delegated Regulation.
[15] Article 85, MiFID II Delegated Regulation and Article 7, MiFIR Delegated Regulation.
[16] Guideline 1, Section 5.2, page 8, Chapter “Draft Guidelines” in CP
[17] Guideline 2, Section 5.2, page 8, Chapter “Draft Guidelines” in CP
[18] Market operators and investment firms operating a TV, and APAs and CTPs
[19] Article 86, MiFID II Delegated Regulation and Article 8, MiFIR Delegated Regulation
[20] Article 89, MiFID II Delegated Regulation and Article 11, MiFIR Delegated Regulation
[21] Article 87, MiFID II Delegated Regulation and Article 9, MiFIR Delegated Regulation
[22] Operated by investment firms and market operators
[23] Article 10, MiFID II Delegated Regulation and Article 88, MiFIR Delegated Regulation
[24] These include the current price lists, information on the content of the market data, revenue obtained from making market data available (as well as the proportion of that revenue compared to total revenue) and information on how the price was set.
[25] Article 89, MiFID II Delegated Regulation and Article 11, MiFIR Delegated Regulation
[26] Annex I, Draft Guidelines section of CP
[27] Annex II, Standardisation of terminology
[28] Article 13(1), MiFIR
[29] Article 64(1), MiFID II
[30] Article 65(1), MiFID II
[31] Article 3,6,8 and 10, MiFIR specifies the data to be published by TVs and Article 64 and 65, MiFID II specifies the data to be published by APAs and CTPs.
[32] Q9a, p24-25, ESMA Questions and Answers on MiFID II and MiFIR transparency topics (“ESMA MiFID/MiFIR Q&A”), available from https://www.esma.europa.eu/sites/default/files/library/esma70-872942901-35_qas_transparency_issues.pdf
[33] Q9b, p24-25, ESMA MiFID/MiFIR Q&A
[34] Q10, p24-25, ESMA MiFID/MiFIR Q&A