The trade associations – namely, the Association for Financial Markets in Europe (AFME), BVI (German Investment Funds Association), Bundesverband der Wertpapierfirmen (bwf), the European Fund and Asset Management Association (EFAMA) and the International Capital Markets Association (ICMA) – have released a joint statement on behalf of their members active in the EU bond markets, including the sell-side, buy-side, and financial market infrastructures.

The associations noted that distinguishing between investment grade (IG) and high-yield (HY) corporate bonds is a key component to tap into greater transparency in more liquid bonds, while ensuring protection for those bonds.

Particularly, as overly prompt dissemination of trade information could lead to a negative impact on market liquidity.

“Having a distinction between IG/HY corporate bonds allows for more tailored transparency levels for instruments with different price volatility profiles,” the trade associations said in their joint statement.

The associations highlighted sophisticated bond markets outside of the EU for calibrating transparency for corporate bonds according to the credit rating of the issuer, adding that “not adopting a similar methodology would put EU corporate bond markets at a disadvantage globally.”

As a result, policy makers have been urged to ensure that the European Union will maintain its competitiveness in the global fixed income markets, alongside preserving and potentially expanding existing liquidity in EU bond markets, which in turn will continue to ensure issuers have an effective way to finance their investment needs.

“It is clear that there are precedents for using credit ratings, not just across jurisdictions but also under other EU regulations,” added the trade associations.

Credit ratings, which has been a criterion used by TRACE in the US for years, as well as the more recent UK adoption of credit ratings through the FCA, were noted by AFME as an approach that can “provide sufficient reassurance for regulators in the EU as well […] and can help achieve the goal of competitiveness of EU capital markets with other leading global financial centres.”

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The European Fund and Asset Management Association (EFAMA) said that due to the inability to meet internal custodian deadlines – based on their trading patterns and relationships – 40% of daily FX flows will no longer be able to settle through the CLS platform.

In response to a request for comment however, CLS – which settles on average USD6.5 trillion per day for over 70 settlement members and 35,000 third-party participants – noted that its own asset manager research showed that 40-50% of the 1% of CLSSettlement average daily settlement value (ADV) could be impacted by the move to T+1 and could settle outside of CLS. 

Lisa Danino-Lewis, chief growth officer, CLS, added: “The outreach also revealed that without any changes to custodian cut-offs or CLS deadlines, more than 50% of respondents said that the majority of their risk can still be mitigated through CLS, while 35% of respondents still have not decided how to respond to the impact of T+1.”

The EFAMA report noted that once shortened settlement cycles are put into place within North America, specific areas of the market, including European asset managers, will have limited access to CLS for their USD trades; CLS having been established to mitigate settlement and counterparty risk.

With a large chunk of trading occurring on market close, asset managers will be left with little time, if any, to submit FX trades to CLS, which has a cut off time of 6pm EST.

The inability to use CLS will ultimately require asset managers use costlier and riskier alternatives, including prefunding, which EFAMA noted as being an inefficient use of capital.

Elsewhere, asset managers could be led to carry out operationally complex FX on trade day with a ‘true-up’ required the next day against the confirmed trade, or in some cases, bilateral settlement with the counterparty bypassing CLS altogether.

EFAMA has urged central banks and regulators to take a more pro-active role in requiring mitigating measures such as an extension of the CLS cut-off time, and improved cut-offs and alignment among the custodial community.

“Without necessary adjustments to make the CLS platform accessible (this will require changes to cut-off times both by CLS and custodians’ own internal deadlines), the asset management industry cannot agree that T+1 will make the system ‘safer for everyone’,” said EFAMA in a statement.

“T+1 implementation today does not represent an absolute reduction of risk in the system. From where asset managers sit, it looks more like a shift away from credit and market risk to an increase in operational and settlement risk.”

EFAMA suggested that regulators should take mitigating measure including requiring the extension of the official CLS cut-off time, as well as encouraging the adoption of later cut-offs which are more aligned with CLS by the custodian community.

Danino-Lewis, added: “Any changes to the existing CLSSettlement service would require regulatory engagement, a comprehensive risk assessment supported by detailed modelling and analysis, as well as requiring the whole ecosystem to make changes to their systems and processes. CLS will monitor the impact of T+1 implementation on the FX ecosystem by continuing to engage its members and the buy-side community and will continue to explore possible solutions to address any challenges which may arise in partnership with our community and other market participants.  

“In the meantime, execution and operational efficiency across the asset manager and fund community will be paramount, and for instructions that are same day and do not meet CLS’s 00:00 CET deadline, CLSNet, an automated and standardised bilateral netting calculation service, can reduce funding requirements and the number of payments required by calculating net payment obligations that facilitate payment netting.”

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Announced in December, the proposal by the European Commission would require all market participants to hold active accounts at EU central counterparties (CCPs) for clearing a portion of certain systemic derivatives contracts.

Read more: Post-Brexit derivatives clearing tussle continues as European Commission clamps down on non-EU CCPs

The new clearing threshold calculation has been designed to increase the attractiveness of EU CPPs, according to the European Commission, with the EMIR 3.0 proposals currently being debated by co-legislators in the European Parliament and Council.

In the joint statement, European trade associations including AIMA, EFAMA, BFPI Ireland, EACB, FIA EPTA, Federation of the Dutch Pension Funds, Finance Denmark, Nordic Securities Association, ICI Global, FIA and ISDA, have urged EU policymakers to delete the proposal and instead focus on streamlining the supervisory framework for EU CCPs across member states.

The trade associations noted that incentivising measures would offer sustainable growth of EU CCPs while maintaining competitive and open markets.

Read more: European clamp down on non-EU CCPs using mandated active accounts could counter competition, EFAMA finds

The negative impacts the proposed active account requirement would have on EU capital markets were highlighted in the statement, including introducing fragmentation, loss of netting benefits and reducing the resiliency of the EU to market stresses with no benefit to EU financial stability. The associations emphasised that the proposal will ultimately harm European pension savers and investors.

Elsewhere, the associations highlighted that the new requirement would create a competitive disadvantage for EU firms when compared to third-country firms, which would still be able to transact in global markets without restrictions.

To comply with an active account threshold, EU clients required to clear at an EU CCP would be forced to accept an uncompetitive price in instances where the price available at an EU CCP is higher than that available at a Tier 2 CCP.

“When making important decisions, such as imposing an active account requirement, policymakers should act prudently and be guided by comprehensive and robust cost-benefit assessments that include a review of the risks and impacts on financial stability and on the competitiveness of EU market participants,” the trade associations said in a statement.

“To date, such a comprehensive and robust cost-benefit assessment has not been produced.”

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Ahead of the next set of Trilogue negotiations which are set to take place next week, the Association for Financial Markets in Europe (AFME), the European Fund and Asset Management Association (EFAMA) and the German Investment Funds Association (BVI) have released a joint statement urging co-legislators to take an evidence-based, ambitious approach, even if ultimately it results in a longer time frame to complete the negotiations.

The Mifid/r review forms a key base for the completion of a Capital Markets Union (CMU) that works for investors and issuers, a necessary element to ensure that EU capital markets across asset classes are more integrated and competitive globally.

With respect to equity markets, AFME, EFAMA and BVI highlight that EU companies are continuing to take their initial public offerings (IPOs) outside of the EU or move their listings elsewhere to seek better valuations – emphasising that EU equity markets cannot continue to lag behind their peers.

“In making rules, policy makers must consider in particular the impact that such rules will have on market liquidity, which is a key consideration for companies seeking better valuations to finance their investments,” said the three trade associations in a joint statement.

Investors, banks and additional market participants have already been clear that a consolidated tape for equities should include five levels of real-time pre-trade data, while also being priced reasonable in order to succeed – otherwise, it would not be beneficial for consumers of such data and not commercially viable for its operator.

Read more: A regulatory backtrack on pre-trade data for EU consolidated tape would not be ‘commercially viable’, says EU asset managers

“EU policy makers already failed to effectively deliver the consolidated tape once, in 2018,” noted the trade associations.  

“We therefore urge the co-legislators and the Commission not to be complacent by conceding to the loudest voices of established interest parties, and to rise to the challenge of delivering efficient, more integrated, and globally competitive EU equity markets.”

The trade associations also emphasised that fixed income markets that are liquid and attractive globally are a key component of establishing a successful CMU.

Read more: Ongoing Mifir Review and regulatory complexity is harming liquidity in Europe, says AFME

“We urge policy makers not to undermine the future viability of EU corporate and sovereign bond markets by enshrining in legislation requirements that fail to deliver a well-calibrated transparency framework that protects investors and fails to address the challenges arising from future evolutions in the regulatory environment outside the EU,” added the three trade associations.

When reviewing the EU framework for bond deferrals, the trade associations urge policy makers to consider the detrimental impact that new rule could potentially have on market liquidity, which they claim have not been discussed or demonstrated. The trade associations stated that the current calibration ignores the fact that price and volume deferrals should be aligned, especially for the larger, less liquid trades.

Elsewhere, the trade associations welcomed efforts to strengthen the protection of data users through making it clear that prices of market data should be based on cost of production and through the recognition that market data is a by-product of trading.

“We, [however], note that the proposed compromise still allows for the practice of charging for data based on the value it brings to the user (so called value-based pricing). Value-based pricing should be disallowed to achieve better outcomes for investors and the general public,” concluded the trio.

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In the joint industry letter, members of the European Fund and Asset Management Association (EFAMA) – signed by firms including JP Morgan Asset Management, UBS and Vanguard – stated that they believe the consolidated tape should include ETFs and equities on a single tape and that data should be as close to real-time as technical possible.

Members also noted that it should provide both pre- and post-trade transparency in the form of five layers of pre-trade data and should benefit from a robust governance framework.

European asset managers support the European Parliament’s proposal for an equities/ETFs consolidated tape, however, noted that a potential backtrack on pre-trade data resulting in a post-trade only tape will not meet market demand required to make the tape commercially viable.

“This would be a legislative setback that European capital markets can ill afford with competing markets globally offering better trading conditions, and demonstrating growth to prove it,” said Tanguy van de Werve, director general of EFAMA.

In the joint industry letter, EFAMA attributed a reduction in trading volumes in European capital markets compared to the US and APAC to the absence of a consolidated equities tape – emphasising that it is difficult to showcase scale and stimulate cross-border investments without a single, reliable source of market data.

Global investment flows were also highlighted to have been impacted by a lack of consolidated price and liquidity data, with EFAMA noting that Asian and Latin American investors that are unable to access real-time volume data efficiently are overlooking EU ETFs when comparing those listed in jurisdictions where this data is available.

EFAMA also stated that the lack of consolidated liquidity data had a negative impact on small and mid-cap stocks alongside the acknowledgement that increased visibility and the ease of accessing complete liquidity and price data in a single place would provide an important boost for smaller markets.

Elsewhere in the joint industry letter, EFAMA emphasised the need for an EU consolidated tape to be fairly price to attract users, especially given that the market for trading data already has high prices and is suffering from a lack of competition.

“Cost of data already acts as a deterrent for banks/brokerages who choose not to trade in given markets given the high cost of market data,” noted EFAMA in the joint industry letter.

“The equities/ETFs tape should at the very least draw a line on these pricing practices that overall impair the ability of the Capital Markets Union to thrive.”

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The EC’s proposal announced at the end of last year included simplified product approvals, faster model change authorisations and increased margin model transparency, alongside the proposal of a new clearing threshold calculation, designed to increase the attractiveness of EU CCPs.  

EFAMA said the objective of maintaining a competitive and efficient clearing ecosystem would be undermined by the proposal to introduce mandated active accounts at EU CCPs, suggesting the proposal leaves various key questions open around the methodology for determining the clearing thresholds and the level at which they would apply (client, fund or investment manager).

“Asset managers require a free choice of CCP in order to fulfil their fiduciary duty to act in their client’s best interest and obtain the best investment outcomes. The measures to enhance EU CCP attractiveness should in themselves draw greater clearing activity organically, without the need to introduce an active account obligation,” said EFAMA in a statement.

The association also noted a few issues related to active accounts including that it forces them to split up while also creating diversion to a smaller liquidity pool which EFAMA states will increase spreads and reduce the netting benefits available to clearing clients, with the impact passed on to the end-investor.

EFAMA also noted that the proposal underestimates the required operation build to implement active accounts. To conform to the new proposal, various clearing clients would have to transition from a mono-clearing channel to a dual clearing channel, which will have related subscription costs and technical set-up.

Another overlooked element highlighted by EFAMA is the ongoing monitoring and calculation activity that is required to manage two separate trading flows which must meet externally set thresholds.

Elsewhere, EFAMA recognised that the removal of FX forwards and swaps (hedging instruments) from the clearing threshold calculation would be useful, comparing it to the same rationale that sees them excluded from variation margin requirements today.

“Such an exclusion is already applied to non-financial counterparties. EFAMA further supports the conversion of the temporary exemption from margining requirements for single stock and equity index options into a permanent exemption as this would level the global playing field and ensure the competitiveness of EU firms,” said EFAMA.

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The European Fund and Asset Management Association (EFAMA) has confirmed its approval of the recent agreement between a group of European exchanges to build a consolidated tape for equities – a move it believes will improve best execution on trades for both institutional and retail customers.

“This affirms the buy-side’s longstanding view that a European consolidated tape is key to completing the objectives of the Capital Markets Union and ensuring that European capital markets remain globally competitive,” said the association. “We also believe in the potential of the equities/ETF consolidated tape to attract more capital flows into mid-cap and small-cap stocks, as well as smaller markets generally.” 

The agreement, announced last week, marks a landmark moment in the hitherto fragmented approach to a consolidated tape from disparate European markets: with exchanges including Deutsche Borse, Nasdaq, Euronext and Six Group joining forces on the proposal.  

Read More – European exchanges to collaborate on consolidated tape for equities 

“Nevertheless,” warned EFAMA director general Tanguy van de Werve: “It is important that the resulting equities tape displays both pre and post-trade equities/ETF data in real-time.” 

From a cost perspective, the association also noted that any equities/ETF consolidated tape should be provided on a “reasonable commercial basis” to ensure wide take-up, as well as stressing that it should meet the needs of market participants, and “in no way” be used to render European exchanges’ own proprietary feeds more attractive. 

However, as with any proposal, concluded EFAMA: “The devil will be in the detail.” 

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Among the various aims of the new proposals, the EC sought to encourage clearing in the EU by simplifying the procedures for central counterparties (CCPs) when launching new products and changing risk models by introducing a non-objection approval for certain changes that do not increase the risks for the CCP. 

The EC also looked to make EU CCPs more resilient by further enhancing the existing supervisory framework through the new proposals, alongside efforts to strengthen EU open strategic autonomy and safeguard financial stability.

 The International Swaps and Derivatives Association (ISDA), the Alternative Investment Management Association (AIMA), the European Fund and Asset Management Association (EFAMA) and the Futures Industry Association (FIA) have responded to the EC’s proposed EMIR amendments with the following:

“Such measures would further reinforce the positive trends already observed in the clearing of euro-denominated contracts at EU CCPs. A strategy based on organic growth and market-driven solutions would best support the competitiveness of EU CCPs in a global clearing marketplace.”

However, the associations were less complementary about the EC’s proposals which would require firms subject to the EU clearing to have an active account at an EU CCP, alongside enabling the European Securities and Markets Authority (ESMA) to define the portion of certain euro and Polish zloty-denominated contracts that should be cleared through those accounts through secondary regulation.

“Changes to capital rules would reinforce this, making it less commercially viable for EU market participants to clear through CCPs based outside the EU,” highlighted the associations.

“We remain convinced that these measures, as proposed, would be harmful to EU capital markets. They would make EU firms less competitive and would have a negative impact on the derivatives market, EU clearing members and their clients, EU investors and savers, and the Capital Markets Union. For EU firms, this would not only hinder their ability to provide best execution to clients, but would also be costly to implement.

“We believe the EC should substantiate the risk of clearing through tier-two CCPs based outside the EU and provide a robust cost-benefit analysis of the proposed active account requirements.”

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Following a working group meeting of the Council of Ministers on 24 May, Cboe and industry associations AFME, the European Fund and Asset Management Association (EFAMA) and German funds association BVI have published their position on plans for a tape: including their preference for a single pre-trade real-time tape provider and a recommendation for mandatory contributions.

The firms said the intention was to “demonstrate a consensus” among data consumers.

“There are no technical barriers to the introduction of a real-time pre-trade consolidated tape. There are only commercial ones. The tape poses no threat to the revenue of smaller exchanges. Only a real-time pre-trade tape is going to enhance and strengthen the European markets,” Cboe Europe’s head of European equities Natan Tiefenbrun told The TRADE.

“Implementing either a post-trade or delayed tape first is not a stepping stone to progress as these options would be a commercial failure. The chances that you then get to build on that and create a pre-trade tape is slim because there is no success to build on. Those are not compromises, those are traps.”

The position also sets out that the revenue model should include all contributors as opposed to just the incumbent exchanges, an issue that has been heavily contested by various participants since the original proposal put forward in November.

There has been a renewed push from France in recent weeks to reach a conclusion around consolidated tape proposals under its presidency of the European Council, which is due to finish at the end of June, The TRADE understands. In the meeting of the working group on 24 May, it reportedly put forward plans for a real-time pre-trade tape with a revenue allocation model that rewards all contributors.

However, other nations have relayed their concerns around the implementation of a consolidated data source, in particular the German finance ministry which, according to sources familiar with the matter, led the opposition to a European tape during the most recent working group meeting due to concerns around payment for order flow and in a bid to protect the interests of Deutsche Börse.

Deutsche Börse had not responded to a request for comment at the time of going to press.

As the EU framework allows larger member states to veto plans, if Germany were to oppose plans for a tape it could significantly delay or even throw out the plans all together.

Last week’s meeting was the first of several, and member states are expected to give written feedback to the French proposals discussed on 24 May in the coming weeks. Members of the European parliament are also expected to publish their report on the parliamentary side in the coming months. The council, parliament and the European Commission will then meet for the trialogue period at some point towards the end of this year – in a best-case scenario.

“If the interests of investors and the interests of large exchanges diverge which, appears to be the case around this topic, then surely in these circumstances it’s the responsibility of policy makers to put the investors first – including by strengthening the competition to meet their needs,” Tiefenbrun added.

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Seventeen institutional members of the European Fund and Asset Management Association (EFAMA) that manage over €8.5 trillion in assets have said current proposals are “disconcerting” in the way that they put the needs of the main stock exchanges before those of the end investors. Of those to sign it publicly are Allianz Investors’ Eric Boess, DWS’ Fiona Bassett, Fidelity’s Steve Ellis, Invesco’s Paul Squires and M&G’s Brian Mitchell.

Current proposals put forward by regulators set out that the winning consolidated tape bidder in equities will be the one that returns the highest revenue for regulated markets and the asset managers argue this will ensure “another failed CT venture for Europe” as it creates a business model around a high-cost tape that does not meet market demand. Instead, they have suggested the revenue of the contributing exchanges of the tape provider be capped to cover production costs and a “reasonable” margin.

Exchanges revenues are largely reliant on very low latency and non-display data that would not be included in the tape and therefore these revenues would not be displaced through the implementation of a consolidated public data source.

“The raison d’être of the tape is to support capital market functioning in the EU and thereby improve issuer and investor outcomes. It should not be designed to subsidise the operating models of intermediaries like the main stock exchanges,” said the institutions in their letter.

“We view the proposed operating model as a subsidy for the exchanges and not a replacement for actual lost data revenues. A real-time CT [consolidated tape] for equities, updating data on seconds speed is therefore complementary to, and not in substitution of, the exchanges’ data feeds.”

The letter highlights the “natural monopoly” that exchanges have over their own order book market data – an issue that has been heavily and vocally argued by participants for several years now – adding that the European Commission’s previous attempt to resolve this through its introduction of the reasonable commercial basis (RCB) principle and unbundling rules under MiFID II had failed.

Market data has been central to ongoing market debate for several years now, with many participants begrudged at the high prices they have to pay for essential data from both venues and the vendors that aggregate the data sourced from them. Regulators have subsequently launched investigations to explore competition concerns in this space in a bid to alleviate the issue.

“A reasonably priced CT would at the very least introduce an element of competitive tension with the prices set by venues for their proprietary data. Currently the proposal goes in the opposite direction, compounding an existing problem around market data costs,” the asset managers said.

The institutions are not the only ones to protest the remuneration plans under the consolidated tape proposals. Cboe called them “highly discriminatory” to pan-European exchanges in December shortly after the proposals were announced, while several trading associations also claimed they created an un-level playing field and favoured incumbent exchanges by giving them an unfair advantage.

Allianz, Invesco, M&G, Fidelity, and DWS had not responded to a request for comment at the time of publishing.

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