Although market participants all agree about the benefits of greater transparency and data quality, there are worries over the cost and complexity over the creation of a consolidated tape (CT) for derivatives.
The International Swaps and Derivatives Association (ISDA) expressed its concern in its response to the European Union proposals under MiFIR.
ISDA said that “the creation of a CT for derivatives subject to the clearing obligation (CO) is premature, and that there is at present) a limited use-case for a CT for derivatives.
We understand that there is limited support for a CT for derivatives among market participants (in contrast to the widespread support for a CT for equities and bonds and we don’t believe that any cost-benefit analysis has been undertaken to justify a CT for derivatives.”
It added that the nature of trading, liquidity and transparency was different and that although similar derivatives contracts are traded through different trading protocols, on- or off-venue, it does not mean that liquidity is fragmented.
This is because liquidity does not depend upon the availability of a finite pool of securities issued by a single company.
“Credit institutions/ Investment Firms can offer derivatives on the same underlying asset without any limitation and under different contractual conditions,” it added.
The trade group also noted that the interest rate and credit derivatives covered by the proposed CT are traded by sophisticated counterparties for risk management purpose and they do not need a tape to locate liquidity.
Unlike other asset classes such as equities and fixed income, there is little retail participation.
ISDA believes that CT should not be authorised until the data quality issues apparent in and resulting from the use of International Securities Identification Numbers (ISINs) – as mandated under MIFIR technical standards – are resolved.
It argued that” ISINs are unsuited to reporting of derivatives and their use obscures and undermines trade transparency efforts. We believe it possible that no CT provider will bid to offer a CT service, if mandated, as a result.
In addition, it said that a further precondition should be that that derivatives liquidity providers remain protected from ‘undue risk’ relating to publication of information on trades above certain sizes on the CT.
“We also suggest narrowing of the scope proposed for a derivatives CT, if mandated, at least initially with possibility of expansion if the CT is successful,” it said.
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