MiFIR Regulation: Technical Standards for EU Financial Markets

The Markets in Financial Instruments Regulation (MiFIR) stands as a critical regulatory framework in the European Union, aiming to enhance transparency, improve data quality, and foster a more integrated and efficient financial market across the EU. MiFIR regulation plays a vital role in setting the rules and standards for trading venues, systematic internalisers (SIs), and data reporting entities, ensuring fair and transparent market practices.

The Association for Financial Markets in Europe (AFME) has provided extensive feedback on the European Securities and Markets Authority’s (ESMA) proposed technical standards related to MiFIR regulation, with a strong focus on the implementation of Consolidated Tape Providers (CTPs) and Data Reporting Service Providers (DRSPs). AFME's primary viewpoints emphasize the need to tailor technical standards to the specific requirements of different asset classes, improve data transmission protocols, and ensure that these standards align with international benchmarks to prevent unnecessary compliance burdens. AFME underscores the importance of asset-specific approaches to latency, reliability, security, and compatibility, advocating for frameworks that strike a balance between regulatory objectives and practical operational considerations.

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AFME MiFIR Review - CP on Technical Standards related to Consolidated Tape Providers and DRSPs, and assessment criteria for the CTP selection procedure

The Association for Financial Markets in Europe has offices in London, Brussels, and Frankfurt. They provided a consultation response on Technical Standards related to Consolidated Tape Providers and DRSPs, focusing on assessment criteria for CTP selection procedures. They agreed with the proposed assessment framework for transmission protocols, suggesting additional areas for assessment. They also discussed the need for tailored technical requirements for different asset classes, emphasizing the importance of considering operational and cost-related factors. Additionally, they highlighted the importance of industry standards, technology progress, and data security in developing minimum technical requirements. Finally, they raised concerns about the proposed definition of

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MiFIR/MiFID Regulation: AFME on Implementation Challenges

AFME supports ESMA’s MiFIR and MiFID regulations, tailored bond transparency, fair CTP standards, and consistent market data pricing to ensure balanced market stability and fair access for all participants.

GrandAlessandro Micagni

Key Components of MiFIR Regulation and AFME’s Technical Feedback

Overview of MiFIR Regulation and Its Objectives

MiFIR regulation, alongside MiFID II, is central to regulating trading activities and ensuring data transparency within the EU financial markets. The regulation targets key areas, including post-trade transparency, transaction reporting, and the establishment of Consolidated Tape Providers (CTPs) to aggregate and disseminate trade data from multiple venues in a standardized manner. MiFIR regulation mandates real-time transparency of trade information, specifying the speed and accuracy of data reporting and public dissemination.

This is designed to enhance market integrity by ensuring that all market participants have access to the same information simultaneously, thereby reducing information asymmetry. MiFIR’s technical standards, established by ESMA, are geared towards ensuring that data flows within the market are timely, reliable, and secure, supporting a more transparent and efficient trading environment. The regulation also includes requirements for the synchronization of business clocks across trading entities, which ensures precise timestamping and consistency in transaction reporting. AFME’s feedback highlights the importance of adapting these technical standards to the specific characteristics of different asset classes and market participants to achieve a balanced regulatory approach that mitigates operational costs while maintaining high data quality standards.

AFME’s Recommendations on Transmission Protocols for CTPs

A critical area of focus in AFME’s feedback on MiFIR regulation is the quality of data transmission protocols, which are essential for the efficient operation of CTPs under MiFIR. These protocols are responsible for aggregating and transmitting data from various trading venues and SIs, ensuring that the data is accurate, timely, and accessible to market participants. ESMA’s proposal within MiFIR regulation identifies four core categories of technical criteria—performance, reliability, security, and compatibility—that are crucial for maintaining the integrity of data transmission. AFME supports these categories but also recommends expanding the technical criteria to include:

• Documentation: Comprehensive documentation is essential for ensuring that the process of API operation is transparent and well-understood by all stakeholders. MiFIR regulation benefits from clear documentation of data transmission processes, including detailed guides, practical examples, and communication protocols for any changes or updates. This reduces the likelihood of errors and ensures consistency across different data contributors.
• Service Level Agreements (SLAs): SLAs are critical components under MiFIR regulation, setting minimum service standards with clear metrics for evaluating performance, such as latency thresholds, data accuracy, and acceptable downtime. These agreements help establish clear expectations between CTPs and data contributors, ensuring that data transmission meets the high standards required by MiFIR regulation to maintain market transparency.
• Testing Requirements: Rigorous testing is fundamental to ensuring that CTPs operate efficiently under MiFIR regulation. AFME emphasizes the need for comprehensive testing frameworks that include stress tests, compatibility checks, and scenario simulations. These measures are designed to identify potential technical issues before CTPs go live, reducing the risk of data transmission failures and enhancing overall system reliability.

AFME stresses that the technical criteria under MiFIR regulation should not only meet high standards but also be adaptable to the unique needs of different asset classes. This approach ensures that CTPs operate efficiently without imposing excessive costs on market participants. MiFIR regulation’s requirements for near real-time data transmission must be carefully calibrated to reflect the specific market dynamics of equities, bonds, and derivatives. For example, latency and throughput requirements should be adjusted based on the nature of the market—equity markets with high-frequency trading require lower latency compared to bond markets, where trades are less frequent and data transmission can tolerate slightly higher latency. By aligning technical standards with the operational realities of each asset class, MiFIR regulation fosters a balanced approach that enhances data quality and market efficiency without imposing undue compliance costs.

Tailored Technical Standards for Different Asset Classes under MiFIR Regulation

The Markets in Financial Instruments Regulation (MiFIR) aims to create a harmonized set of requirements across equity, bond, and derivatives asset classes. However, the Association for Financial Markets in Europe (AFME) argues that MiFIR regulation should avoid a ‘one-size-fits-all’ approach due to the differing market structures and operational needs of each asset class. AFME’s feedback highlights the need for tailored technical standards to optimize MiFIR regulation’s effectiveness while avoiding unnecessary costs and compliance burdens.

• Latency Requirements: For equities, maintaining latency below 100 milliseconds is crucial due to the fast-paced nature of the market where real-time data access is critical. However, such stringent standards may be excessive for bond trading, where trades are less frequent and real-time dissemination can extend up to five minutes. AFME suggests that MiFIR regulation should adjust latency requirements based on each market’s characteristics to prevent disproportionate costs that do not add significant value.
• Throughput Adjustments: MiFIR regulation should calibrate throughput levels according to the data volume typical of each asset class. Equities, with higher trading volumes, require greater throughput capacity compared to bonds. This adjustment ensures that CTPs operate cost-effectively while meeting MiFIR’s performance standards, supporting transparency without excessive operational demands.

Reliability Standards and Data Quality

AFME agrees with the high reliability standards in MiFIR regulation but emphasizes practicality and alignment with existing market conditions. In fixed income markets, where manual processes such as voice trading are prevalent, overly automated error correction mechanisms may not be feasible. AFME advocates for a balanced approach that combines manual and automated corrections, particularly in non-equity markets where human oversight remains essential. This ensures that MiFIR regulation supports reliable data transmission while accommodating market-specific practices.

AFME also stresses the importance of harmonizing MiFIR regulation with similar international initiatives, such as the U.S. TRACE system, to avoid regulatory fragmentation. Aligning technical standards across jurisdictions helps maintain data quality, reduces compliance complexities, and mitigates operational risks associated with divergent regulations.

Security Measures and Cost-Benefit Considerations in MiFIR Regulation

Security is a cornerstone of MiFIR regulation, with ESMA setting stringent requirements to protect data during transmission. AFME emphasizes leveraging existing industry standards and regulatory frameworks like the Digital Operational Resilience Act (DORA) to ensure robust security without imposing excessive costs on market participants. MiFIR regulation should strike a balance between necessary security measures and cost implications, ensuring data protection without unduly burdening market operations.

• Data Encryption: AFME recognizes encryption as a crucial security measure but advises that its implementation under MiFIR regulation should be weighed against time and cost impacts. Encrypting publicly available trade data may not always be necessary unless it demonstrably enhances security. MiFIR regulation should allow flexibility, justifying deviations from standard practices only when clearly needed, thus preventing unnecessary cost escalations.
• Distinction Between Private and Public Data: MiFIR regulation should differentiate security requirements based on data sensitivity. AFME suggests that private data, such as transaction party identities, require stricter security compared to public trade data. This approach allows CTPs to maintain high security standards without imposing disproportionate security measures that could hinder market efficiency.

Compatibility and Backward Compatibility

AFME supports MiFIR regulation’s standards for compatibility, stressing that CTPs must be capable of accommodating changes without disrupting existing systems. Backward compatibility is vital to ensure that updates do not render current data transmission methods obsolete, which could impose significant additional costs on data contributors. MiFIR regulation should prioritize solutions that maintain seamless data operations while allowing CTPs to evolve in line with technological advancements.

Real-Time Data Transmission and Deferred Publication Challenges

One complexity under MiFIR regulation is the requirement for real-time data transmission, particularly for transactions subject to deferred publication. MiFIR mandates data transmission to CTPs as close to real-time as technically possible, but AFME disagrees with ESMA’s proposal to base latency measurements on the execution timestamp. This method can be problematic for transactions reported via Approved Publication Arrangements (APAs), where delays often occur after execution due to verification processes.

AFME recommends measuring latency from when data is ready for public dissemination, aligning with existing Service Level Agreements (SLAs) under MiFID’s post-trade transparency framework. This adjustment prevents unnecessary pressure on data contributors and aligns MiFIR regulation with established standards, ensuring practical and consistent data reporting across different markets. By adopting a flexible approach that reflects operational realities, MiFIR regulation can effectively balance transparency requirements with the specific needs of each asset class.

Recommendations on Data Formats and Protocol Flexibility

Regarding data formats under MiFIR regulation, AFME raises concerns over ESMA’s proposal to mandate JSON as the standard format for data transmission. While JSON is widely used for its simplicity, AFME argues that enforcing a specific format through regulatory technical standards could significantly reduce flexibility for Consolidated Tape Providers (CTPs) to adapt to evolving market needs. AFME recommends that CTPs should have the autonomy to propose their preferred data protocols, such as the Financial Information eXchange (FIX) protocol, which is extensively utilized in the financial markets for its robustness and adaptability. This flexibility would allow CTPs to select the most effective data formats for each asset class, ensuring that MiFIR regulation remains aligned with technological advancements and the diverse operational requirements of market participants.

AFME also emphasizes that prescribing data formats in MiFIR regulation should not limit future innovation. Protocols should be adaptable, enabling CTPs to integrate new formats as industry standards evolve. This adaptability is crucial for maintaining the effectiveness of MiFIR regulation in a rapidly changing technological landscape, allowing the market infrastructure to stay responsive and cost-efficient.

Governance and Revenue Distribution Mechanisms

Robust governance is critical under MiFIR regulation to ensure that CTPs operate transparently and without conflicts of interest. AFME advocates for strong governance frameworks that involve stakeholder representation, particularly data users and contributors, in the decision-making process. AFME recommends establishing advisory committees with significant representation from fee-paying professional users, which would help maintain the integrity and objectivity of CTPs. This stakeholder involvement is crucial for MiFIR regulation, ensuring that CTPs act in the best interests of the market and not solely for profit maximization.

Furthermore, AFME opposes granting CTPs enforcement powers, such as the authority to levy penalties on data contributors for non-compliance. AFME argues that enforcement should remain under the jurisdiction of regulatory authorities to maintain impartiality and prevent potential conflicts of interest. MiFIR regulation should clearly delineate these responsibilities, ensuring that CTPs focus on data aggregation and dissemination rather than punitive actions.

On revenue distribution, AFME highlights the complexities in allocating revenues among data contributors. AFME advises a balanced approach that prevents CTPs from inflating operating costs or imposing excessive fees on end users. MiFIR regulation should establish clear guidelines that promote fair and transparent revenue allocation, avoiding incentives that could distort market practices. This approach ensures that CTPs remain financially sustainable without burdening market participants with unreasonable costs.

Clock Synchronisation and Accuracy Standards

MiFIR regulation sets stringent requirements for clock synchronization to ensure that trades are timestamped accurately, aligning with Coordinated Universal Time (UTC). Accurate timestamping is crucial for maintaining data consistency and integrity across trading venues, systematic internalisers (SIs), and other market participants. AFME supports ESMA’s proposed granularity standards but stresses the need for synchronization requirements tailored to the specific trading activities of different market participants.

For example, SIs often involve manual trading processes that differ significantly from the high-frequency, automated environments of trading venues. AFME argues that applying the same synchronization standards to both could result in unnecessary compliance costs and operational inefficiencies. Instead, AFME recommends differentiated standards under MiFIR regulation that reflect the distinct characteristics of various trading activities. This tailored approach would maintain data integrity while reducing the regulatory burden on entities that operate in more manual or less time-sensitive trading environments.

Modern Interface and Connectivity Standards

The MiFIR regulation emphasizes the importance of modern interface and connectivity standards for CTPs, focusing on scalability, low latency, and high security to ensure reliable data dissemination. AFME supports these minimum requirements but highlights the need for flexibility within the regulatory framework to accommodate different asset classes and trading environments. MiFIR regulation’s one-size-fits-all approach could lead to inefficiencies, particularly in markets where trade frequencies, transaction volumes, and data sensitivity vary widely.

AFME argues that interface standards should be adaptable, allowing CTPs to optimize their technology infrastructure based on specific market demands. For example, the data processing needs of high-frequency equity markets differ significantly from those of fixed income or derivatives markets, which often involve less frequent but more complex transactions. By enabling CTPs to customize their interfaces, MiFIR regulation can foster a more efficient market infrastructure that supports diverse trading practices without imposing disproportionate costs.

Overall, AFME’s feedback emphasizes the need for MiFIR regulation to balance strict data and governance standards with the flexibility required to adapt to different market conditions. This approach ensures that MiFIR regulation continues to enhance transparency and data quality across the EU financial markets without creating unnecessary operational burdens for CTPs and market participants.