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European Regulators Propose Ways to Control MiFID II Costs

Among the many MiFID II costs are the market data fees, And MiFID II is not the only regulation that has caused the costs of data to rise in financial services firms. While the past few years of new European regulations governing financial data management and distribution created resources that firms can tap into to keep their compliance practices up to date, they also drove up data operations costs as a result. Just recently, however, regulators have started to address these data cost issues, including MiFID II costs.

MiFID II so far

The European Union’s Markets in Financial Instruments Directive II (MiFID II) and associated MiFIR rules took effect at the start of 2018. MiFID II and MiFIR aim to standardize financial practices in European countries. In addition, the EU’s General Data Protection Regulation (GDPR) took effect in May 2018, intending to protect data privacy in member countries.

Before MiFID II took effect, the European Securities and Markets Authority (ESMA) organized an IT steering group and issued a plan for a 5.8-million-euro IT project to collect compliance data that would be generated by the regulation (see pages 12-15 of this document for the timeline and scope of the project). Having standard infrastructure elements was seen, in part, as a way to control MiFID II costs for regulators and participants.

In July 2019, ESMA completed the CSDR Article 9 part of this IT project, which facilitates submission of trade settlement reports, therefore improving post-trading supervisory convergence, according to pages 29-31 of the ESMA annual report for 2019, issued in June 2020. The IT system for post-trade failed settlement reports, however, still had yet to be completed as of June.

Latest Updates and Guidelines

In an update from ESMA Executive Director Verena Ross on October 9, she noted that in December 2019, the authority concluded that MiFID II had “not delivered on its objective to reduce the cost of market data charged by trading venues and Approved Publication Arrangements.” MiFID II costs have been a recurring compliance-related complaint among financial firm. Ross went on to say that ESMA plans to offer guidelines in 2021 for “how the obligation to provide market data on a reasonable commercial basis should be applied,” along with targeted changes to how market data should be charged based on the costs of producing and distribution that information.

Just about one month later, most recently, ESMA followed up on Ross’s statement with a new Consultation Paper containing new guidelines on the application of MiFID II/MiFIR obligations for market data. The authority is accepting comments on the guidelines through January 11, 2021 and plans to publish its final report (as Ross mentioned) in the second quarter of 2021. This is effectively an opportunity for market participants to propose and comment on practical approaches to reducing MiFID II costs.

Notable points in the new guidelines include:

  • Market data providers must have appropriate accounting methodologies for market data fees, and share data on their costs and margins with ESMA. These methodologies should be reviewed annually.
  • Market data providers should only charge customers for auditing costs if customers have not complied with the terms of their market data agreements.
  • While market data providers can set customer categories with different prices, terms and conditions, the criteria for these categories must be objective and transparent. Price differences should be based on the scope and scale of the market data.
  • Market data users told ESMA they were being unfairly charged on a per device basis rather than a per user basis, when one user might have needed the data on multiple devices. This is a significant contributor to MiFID II costs. The guidelines require providers to explain why they are not using a per user model. A close reading of this provision in the guidelines makes clear that providers do not allow users to pay only once for data that goes on multiple devices, because multiple users might benefit from it.
  • Market operators, investment firms and systematic internalizers must make market data available without bundling it with other services.
  • The guidelines reiterate that delayed data (15 minutes after first publication) should be available free to any market participant, in an accessible form, complete and for a sufficient amount of time.

The MiFID II and MiFIR regulation went through the usual years-long process before being put into effect in the EU, and the new proposed guidelines have been formed after a couple years’ worth of feedback after their implementation. It will take at least another year to get feedback, revise these guidelines and address concerns about the MiFID II costs of compliance that have arisen since 2018.

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