Regulators need to grasp the nettle and provide transparency for firms, as specificity becomes vital in improving data quality, according to MarketAxess' head of post-trade Chris Smith. He speaks to Carmella Haswell on the firm’s RRH migration, current trends and next steps
The end of Q1 2022 marked the official integration of Deutsche Borse’ Regulatory Reporting Hub (RRH) to the MarketAxess Post-Trade platform. The firm’s Dutch entity, MarketAxess Post-Trade B.V., purchased the RRH in November 2020, sparking an 18-month venture to migrate 500 new clients, widening the firm’s continental footprint.
Adapting to the change, MarketAxess produced quarterly programme increments for the onboarding clients. The firm pinpointed the highest priority issues, built features in response, and introduced a rolling roadmap throughout the course of 2021. The features presented by MarketAxess included building translation tools and layers, as well as building new links to National Competent Authorities (NCAs).
The RRH is a pan-European reporting and compliance platform that enables buy- and sell-side clients to meet their regulatory obligations across multiple regulations, including the second Markets in Financial Instruments Directive (MiFID II) and the European Markets Infrastructure Regulation (EMIR).
Since the acquisition, migrating clients have onboarded to MarketAxess’ Securities Financing Transactions Regulation services — provided in partnership with EquiLend — and, therefore, MarketAxess has built extra links to Regis TR. The service was unavailable on the RRH after efforts to provide services for the reporting regulation under the Hub were discontinued in 2019.
Reflecting on the migration, Chris Smith says: “It is a learning curve, it was a big undertaking, there were various streams — including legal, client communication, technology and product streams — that we ran in terms of a programme. It has felt at times like I was a conductor in a very large orchestra, and hopefully, we were making sweet music for our clients.”
Onboarding clients across its services — including the approved reporting mechanism (ARM), approved publication arrangement (APA) and its MIFIR services suite (RTS 23) — has had its fair share of challenges. “The end of 2020 was when true Brexit happened, so all of a sudden, if you were UK-based, you had an obligation to report to the FCA and you could not be a European firm passporting in and doing reporting,” Smith explains. “Therefore, we had some immediate work to do with some clients to get them onto our systems before the end of 2020, which we undertook and built tools to help those clients.”
An expanding footprint
Expanding upon its already established continental footprint, MarketAxess found itself with a completely different proposition with the level of clients onboarding onto its platform. “We had a couple of clients in Denmark prior to the RRH acquisition, but now we are providing services to some of the very biggest banks in that region. We did have a footprint there, but we ended up with new NCA connections — taking our total count of NCA connections to 24, which includes the UK, FINMA in Switzerland, and the GSIC (Gibraltar).”
“What is interesting to me, for transaction reporting, is that none of these NCAs use the same systems,” Smith interjects. “They all have different formats and technology solutions. It takes a lot of work to figure out how to connect to those NCAs and how they respond to your files when you send them transaction reports.”
MarketAxess’ acquisition of RRH led to the firm entering new markets including Austria, Luxembourg and Liechtenstein. The drive behind the purchase of the RRH was to achieve scale, and to move MarketAxess’ footprint more into continental Europe. Smith indicates the importance of scale, suggesting any business within the post-trade market requires scale to generate sufficient revenue and, therefore, continue to invest in the business.
Looking on the horizon for further opportunities to expand, Smith explains that the regulatory reporting landscape never stands still. He has witnessed the UK and Europe diverge in terms of their reporting, calls for removing the RTS 27 and 28 Best Execution Reports under MiFID II. In addition, there remains constant change in how transactions are reported and published, and a tightening of the derivatives reporting regime for EMIR Refit.
“Our reporting business in particular, is very EU and UK focused, but we are also starting to look at obligations for regulatory reporting in other jurisdictions around the world. The most important thing is that if you do not have the scale, and therefore the investment coming in, then you cannot make those investments in new technologies and new jurisdictions,” comments Smith.
Forming an alliance
As the UK and Europe weave their own way through the regulatory reporting landscape, further changes are anticipated for the industry. To help the industry navigate this process, a trade association has been formed to provide consistent input on regulatory challenges and alterations.
MarketAxess — alongside Bloomberg, Cboe Europe, Euronext, the London Stock Exchange and Tradeweb Markets — formed the APARMA association in May 2022. “We knew there was going to be a lot to discuss that was common to us all, and it would be better to be providing a consistent input into that debate through a trade association,” says Smith.
He adds: “The Association has been extremely useful in bringing together the view of the six largest APA and ARM providers around a range of topics and, specifically, regarding proposed changes in regulation. For instance, the recent consultation for changes to RTS1 and 2, which aims to smooth the implementation of the CTP in Europe, saw APARMA members produce joint discussion papers regarding field validation and the implementation timeframe for the proposed changes.”
In Smith’s view, the biggest challenge that regulators are facing currently across Europe and the UK is getting a higher standard of data quality out of their reporting. “I still find it amazing that so many fields are required on a transaction report, or even more on an EMIR report, or even more on a Refit report. When you think about that, and the millions of transactions that are processed a day, the chances of clients getting all of this stuff right is really quite tricky,” Smith projects.
It is beholden to the regulators using this data to ensure that data quality is as high as possible. It is their responsibility to be transparent with regards to the particular values that they are expecting in certain fields. Therefore, Smith suggests that firms make sure that regulators are “grasping the nettle”. Specificity around particular fields is “absolutely vital” if the industry wants to improve data quality.
In addition to these industry trends, MarketAxess’ Smith identifies a political will in Europe to have a consolidated market data tape. “The inputs to that data tape have to be as accurate and clean as possible, otherwise there is little point in having it,” he says.
In June, Bloomberg, MarketAxess and Tradeweb announced an initiative to explore the delivery of a consolidated tape for fixed-income instruments in the European Union, with the intention of applying to become the consolidated tape provider (CTP) through the public procurement procedure.
As a collective, the firms believe that the European financial markets would benefit from a well-functioning fixed-income consolidated tape — and they suggest that industry collaboration would be essential to delivering a solution that utilises existing infrastructure to provide end users with access to reliable, high-quality MiFID II data. The firms believe that the European Commission's draft proposed legislative revisions would open a window to developing a robust consolidated tape that will increase market transparency and help facilitate an integrated, single European capital market.
The consolidated tape service is likely to be provided — subject to the relevant regulatory approvals — via a joint venture company established and operated independently from the three respective businesses. If successful in winning the mandate, the company would be authorised and supervised by ESMA to provide transparency in fixed-income markets pursuant to MiFID II.
Strategic developments and next steps
MarketAxess are investing in technology to aid the reporting process for their clients. Highlighting the sheer volume of transactions that MarketAxess is sending — either publishing through trades, sending as transaction reports or securities finance transactions, or EMIR reports to trade repositories — Smith reiterates the difficulty in getting it right every time, on every transaction.
“We see firms that end up identifying an error, maybe some months after they have started making that error, and then having to do a big correction,” says Smith. MarketAxess is looking to invest in a suite of technology that is underpinning a large portion of the real-time trade pricing transparency that the firm is bringing to bond markets at MarketAxess.
Machine learning tools, big data tools and artificial intelligence are being used to create pricing in very illiquid bonds that firms can rely upon, explains Smith, as opposed to a trade price that was struck four months ago and is not very useful or reliable.
Smith continues: “We are going to use some of those techniques and point it at our transaction reporting and our trade reporting. We aim to highlight where we believe clients are wrong with their reporting, predict which side of the reporting transaction was correct, and we will predict where they are likely to make errors going forward in certain asset classes.
“Being able to use these tools to manage that vast amount of data, review that vast amount of data, and pick up trends in where you are making errors, that is the next generation. It gives you, as a client, the same view of your reporting data that the regulators have in near real-time.”
When the tool detects an error or anomaly, through the use of artificial intelligence, it will alert the client as a trigger for the necessary investigation. It allows the client to get on the front-foot and be more proactive in their reporting.
“MarketAxess has tried very hard over the last 20 years to bring greater transparency and efficiency to the bond market that we operate in,” says Smith. “We are starting to look at ways in which we can utilise data to assist clients in achieving greater accuracy in meeting regulatory reporting standards, which are getting more and more complex.”
Smith concludes that there is a vast set of information buried in the billions of transactions for which MarketAxess holds data, across all asset classes. From this, the firm believes it can also utilise this data to provide more transparency to the historically opaque repo market.
