MiFID III and MiFIR II:Market Data Pricing Reforms

In a joint statement made by several key industry associations, including the Association for Financial Markets in Europe (AFME) and the European Fund and Asset Management Association (EFAMA), concerns were raised regarding the proposed regulations under MiFID III and MiFIR II, specifically focusing on the pricing of market data. Issued in October 2024, the statement emphasizes the need for market data to be priced based on the actual costs of its production and dissemination, with only reasonable margins allowed, in line with Article 13 of MiFIR II. The purpose of this statement is to advocate for a regulatory framework that ensures transparency and fairness in market data pricing, preventing inflated costs that could undermine competition and harm investors.

The MiFID III/MiFIR II regulatory landscape surrounding market data pricing has undergone significant transformation. These frameworks aim to ensure that market data is made available based on its actual production and dissemination costs, with a reasonable margin, while prohibiting value-based pricing. As market data is a critical by-product of trading activities, it is essential that its pricing is transparent, fair, and aligned with the MiFID III/MiFIR II regulatory objectives of enhancing competition and reducing excessive costs for market participants.

In this article, we delve deeply into the technicalities of market data pricing under MiFID III/MiFIR II, with specific reference to Recital 12 and Article 13, as well as key challenges identified by industry associations.

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Guidelines on the MiFID II/ MiFIR obligations on market data

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MiFID II and MIFIR review

The adoption of the MiFID II / MiFIR review marks the transition to the revised Single Rulebook for securities markets. Those changes constitute an important step towards the Capital Markets Union (CMU) with more integrated and transparent EU capital markets. This section centralises the information related to MiFID II / MiFIR review, providing an overview of the amendments and their implications, and also considering that certain elements of the revised rulebook will phase in over the coming years.

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Overview of MiFID III/MiFIR II Market Data Requirements

The core of MiFID III/MiFIR II's market data regulation is the need for a cost-based pricing model. The European Securities and Markets Authority (ESMA) is tasked with ensuring that the prices of market data reflect the cost of producing and disseminating the data, rather than the value of the data to the market participant. This marks a departure from previous practices, where value-based pricing led to significant increases in costs, to the detriment of the broader financial ecosystem.

Under Article 13 of MiFIR II, pricing models for market data must adhere to specific principles:

1. Cost Transparency: Market data providers are required to provide a clear breakdown of costs associated with producing and disseminating market data.
2. Reasonable Margins: While market data providers are allowed to make a profit, the margins must be reasonable and reflective of the actual costs.
3. No Value-Based Pricing: Any attempt to price market data based on its perceived value to end-users is strictly prohibited under MiFID III/MiFIR II.

However, the implementation of these principles is complex, and industry stakeholders have raised concerns about ESMA's proposals on Level 2 measures, which are designed to enforce the Level 1 mandate of MiFID III/MiFIR II.

MiFID III/MiFIR II: ESMA's Level 2 Proposals

Several industry bodies, including the Association for Financial Markets in Europe (AFME) and the European Fund and Asset Management Association (EFAMA), have expressed concerns regarding the effectiveness of ESMA’s proposed Level 2 measures under MiFID III/MiFIR II. These concerns are rooted in the perceived misalignment between the Level 1 objectives and the Level 2 implementation, which may not adequately address the underlying issues related to market data costs.

Here are the key issues raised:

1. Joint Cost Perspective: The proposal takes a joint cost perspective, where costs are aggregated across various activities. This approach risks allowing market data providers to inflate prices by including costs unrelated to the production and dissemination of market data, which contradicts MiFID III/MiFIR II's objectives.
2. Continued Value-Based Pricing: Despite the regulatory mandate against value-based pricing in MiFID III/MiFIR II, certain price categorisations in the ESMA proposal could allow value-based pricing to persist. This would undermine the goal of ensuring that market data is priced according to its actual production costs.
3. Lack of Clear Cost Calculation: The cost calculation methods proposed by ESMA allow for the inclusion of additional costs that are not directly related to market data production. These undefined costs could lead to continued price inflation, counteracting the regulatory objective of cost reduction under MiFID III/MiFIR II.
4. Inadequate Market Data Policy Standards: ESMA's proposals lack standardised definitions and templates for market data policies. Without clear guidelines, market data providers may continue to implement opaque pricing structures, making it difficult for market participants to understand the true costs, which is against MiFID III/MiFIR II's transparency goals.
5. Limited Transparency: The proposals for increased transparency are insufficient. Market data providers are not required to disclose detailed breakdowns of their pricing models, margins, and costs, which limits the ability of regulators and market participants to assess the fairness of pricing, a key requirement under MiFID III/MiFIR II.

Recommendations for Aligning Level 2 Measures with Level 1 Mandates

To ensure that the Level 2 measures under MiFID III/MiFIR II align with the objectives, the following recommendations have been put forward by industry associations:

• Clear Cost Definitions: A precise and exhaustive list of costs that may be included in market data pricing should be established. This would ensure that only costs directly related to the production and dissemination of market data are considered in pricing models, as required by MiFID III/MiFIR II.
• Margin Definition: Operating margins should be clearly defined and capped to prevent excessive profits. A reasonable margin, as stipulated in the regulations, should reflect industry norms and ensure that market data providers are not overcharging for their services under MiFID III/MiFIR II.
• Standardised Per-User Pricing Models: The implementation of a per-user pricing model should be standardised across market data providers. This would create a more consistent and transparent pricing structure, making it easier for market participants to compare costs and select the most cost-effective data providers, in line with MiFID III/MiFIR II principles.
• Comprehensive Transparency Requirements: More detailed transparency requirements are necessary under MiFID III/MiFIR II. Market data providers should be required to publish detailed price lists, cost breakdowns, and revenue reports. This would enable both market participants and regulators to monitor the true cost of market data and ensure compliance with the MiFID III/MiFIR II regulations.
• Consistent Monitoring and Enforcement: National Competent Authorities (NCAs) should be given the tools and resources necessary to consistently monitor and enforce the new pricing regulations under MiFID III/MiFIR II. This would prevent market data providers from exploiting loopholes or engaging in practices that are inconsistent with the regulatory objectives.

The Role of Market Data in Financial Markets

Market data is indispensable for the functioning of financial markets. Investment firms, both buy-side and sell-side, rely on accurate and timely market data for a wide range of activities under MiFID III/MiFIR II mandates, including:

• Trading and Execution: Market data is critical for traders to make informed decisions, execute trades, and achieve best execution. Without access to accurate pricing and trading information, firms would be unable to compete effectively in the marketplace, as required by MiFID III/MiFIR II.
• Compliance and Regulatory Reporting: Regulatory frameworks such as the Market Abuse Regulation (MAR) and the Fundamental Review of the Trading Book (FRTB) require firms to monitor market data to ensure compliance. Firms use market data to detect and report suspicious trading activities, as well as to support risk models required by regulators under MiFID III/MiFIR II.
• Investment Strategy and Research: Analysts and portfolio managers use market data to inform their investment strategies. Historical data, pricing trends, and trading volumes are all essential inputs for research and decision-making processes in compliance with MiFID III/MiFIR II standards.
• Risk Management: Firms rely on market data to monitor and manage their risk exposures. Accurate market data is essential for calculating potential losses and assessing the impact of market movements on a firm's portfolio, as mandated by MiFID III/MiFIR II.

MiFID III/MiFIR II Market Data Reforms Challenges

While MiFID III/MiFIR II have set ambitious goals for market data pricing, their successful implementation is not without challenges. One of the biggest obstacles is the complexity of the cost structures associated with market data production. Market data is not a standalone product; it is a by-product of trading activities, and disentangling its costs from other operational costs can be difficult under MiFID III/MiFIR II frameworks.

Furthermore, market data providers, which are often exchanges or trading platforms, have a strong market position, and there is limited competition in the market data space. This allows providers to maintain high prices, even in the face of regulatory pressure from MiFID III/MiFIR II reforms.

Finally, the regulatory frameworks themselves are evolving, and there is a risk that new loopholes or grey areas may emerge. Without clear and consistent enforcement from NCAs, market data providers may continue to exploit these ambiguities to maintain their current pricing models under MiFID III/MiFIR II.