Instrument Reference Data: Who’s on FIRDS?
By George Bollenbacher, Capital Markets Advisors
Originally published on the TabbFORUM
It’s an open secret that transaction reporting, one of the bedrock components of global market reform, has been a disappointment. And one of the primary reasons has been a lack of uniformity in the definition of instruments. As a result, ESMA is developing the Financial Instruments Reference Data System. But the initiative already has three strikes against it, says George Bollenbacher, Capital Markets Advisors.
It’s an open secret that transaction reporting, one of the bedrock components of global market reform, has been a disappointment, to say the least. And one of the primary reasons has been a lack of uniformity – or even coherence – in the definition of instruments. After all, if everyone can’t agree on exactly what you’re trading, or if the agreed-on definitions of the same instrument are different in different geographies, we shouldn’t expect transaction reporting to be very useful. And it’s not.
As a result, in June of 2016 ESMA published Regulation (E.U.) 2016/1033 which announced that …
“… a new data collection infrastructure, the Financial Instruments Reference Data System (‘FIRDS’), is being developed by the European Securities and Markets Authority (‘ESMA’) in conjunction with national competent authorities (‘NCAs’). FIRDS will cover a wide range of financial instruments brought into the scope of Regulation (E.U.) No 600/2014 [MiFIR] and it will link data feeds between ESMA, NCAs and trading venues across the Union. The vast majority of the new IT-systems underpinning FIRDS will need to be built from scratch, based on new parameters.”
Needless to say, that’s a big order.
Then in October ESMA issued a Reporting Instructions document, designed for, “National Competent Authorities, Trading Venues, Systematic Internalisers [SIs] and Data Reporting Service Provider (including Approved Publication Arrangement and Consolidated Tape Providers), who are going to implement system interfaces for the uploading of data to the Financial Instruments Reference Data System.”
Any time the regulators begin an effort of this magnitude, a host of questions pop into my head. Let’s look at three of them and see if we can discern any answers.
- What financial instruments are covered? The financial markets are, by definition, incubators of new instruments. As rapidly as instruments become standardized, and their spreads start to narrow, dealers and traders come up with new combinations and products. Invariably, those new products are where the most risk resides, and often where most of the growth occurs. So we should take very little comfort from a reference data project that only focuses on standardized products. In this case, to figure out what is covered we have to wend our way back from Reg 2016/1033 to Article 27 of MiFIR, which refers us to Article 26 of MiFIR, which limits its scope to instruments listed “on a trading venue” which, according to Article 4 of MiFID II, means “a regulated market, an MTF or an OTF.” So, apparently, FIRDS only applies to listed instruments. Strike one.
- Who creates the FIRDS entries? According to Regulation (E.U.) 2016/1033, “The new legal framework requires trading venues and systematic internalisers to provide competent authorities with financial instrument reference data.” So, if two venues and a SI in different geographies begin trading an identical product independently, each one will submit its reference data to its NCA. Only if the NCAs can identify that these are actually identical products would they know to normalize the reference data. Strike two.
- What are the standards for instrument reference data? This may be the most important question of all, given the answers to the first two. If ESMA and the NCAs can come up with a taxonomy for describing instruments, and apply it across the E.U., we have the first step toward a workable rule. In the standards case, the Reporting Instructions refer to Table 3 of the Annex of the Regulatory Technical Standard on MiFIR Article 27. That table begins by using ISIN “to identify the financial instrument,” which is already a problem, since many non-securities financial instruments, such as swaps, don’t have ISINs. And, go look for yourself, it doesn’t get any better from there. Strike three.
Fortunately (or maybe unfortunately) there is still time to get this right. But it will take work.
Beyond the questions above we need to know how new instruments will be reported and monitored. So the Reporting Instruction document has a schematic showing this, reproduced below.
For those whose eyesight, like mine, is less than perfect, the most important section of the picture is the three vertical bars on the left side, which say, “Check for transmission errors,” “Check for format errors (XML validation),” and “Check for data content errors.” It is here that the value of the whole effort is realized, or maybe thrown away. We have seen this kind of filtration in the past, in such efforts as EMIR reporting, and we know that check three is devilishly difficult to do well. Not having any specificity about the data standards, we should expect this filtration to be inadequate, at best, and maybe much worse.
On the other hand, we all have an investment in helping ESMA get this right. If the regulators choose the example-driven taxonomy we currently see in use, we can foresee that this effort will, like so many others, consume lots of resources and end badly. If, on the other hand, ESMA follows a parameter-driven structure, we might just see a level of rationality appear on the horizon.
Perhaps we will finally understand that dealing with modern market structures is a cooperative effort, as opposed to an arbitrage. But that will take real leadership, which may be asking a lot. Do I see a volunteer? Or will we end up with Abbott & Costello.
Originally published on the TabbFORUM
This column does not necessarily reflect the views or opinions of FinReg Alert or Tradeweb Markets LLC.