OPINION OF THE EUROPEAN CENTRAL BANK

of 1 June 2022

on the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising trading obligations and prohibiting receiving payments for forwarding client orders

(CON/2022/19)

(2022/C 286/03)

Introduction and legal basis

On 3 February and 4 February 2022 the European Central Bank (ECB) received requests from the European Parliament and the Council of the European Union for an opinion on the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising trading obligations and prohibiting receiving payments for forwarding client orders (1) (hereinafter the ‘proposed regulation’) and on the Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments (2) (hereinafter the ‘proposed directive’).

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union since the proposed regulation and the proposed directive contain provisions affecting (a) the basic task of the European System of Central Banks (ESCB) to define and implement the monetary policy of the Union pursuant to Article 127(2) of the Treaty, and (b) the ESCB’s task to contribute to the smooth conduct of policies pursued by the competent authorities relating to the stability of the financial system as referred to in Article 127(5) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

General observations

1.   Objectives of the proposed regulation

1.1.

The ECB welcomes the main objective of the proposed regulation to amend Regulation (EU) No 600/2014 of the European Parliament and of the Council (3) (hereinafter ‘MiFIR’) in order to enhance market data transparency across European Union (EU) trading venues by creating a new regulatory framework for the production of a ‘consolidated tape’ for trade data, including a new process for selecting a single consolidated tape provider for each asset class.

1.2.

The proposed regulation also includes significant changes to the EU pre- and post-trade transparency rules for equity and non-equity financial instruments, such as greater harmonisation of rules for deferring publication of transaction details, updates to the obligations regarding EU share and derivative trading, a ban on payments for order flow and other changes to the EU regime for securities and derivatives trading. The proposed amendments aim to further support the integration of European capital markets and to further harmonise relevant financial market supervisory rules across the Union. The ECB strongly supports the general aim of further supporting capital markets integration, in particular through the proposed enhancements to market data transparency. Deeper and more integrated capital markets are needed from several perspectives. Not only can they mobilise the resources needed to support the euro area economy, but they will also make the financial system generally more resilient. Moreover, the integration of European capital markets can be expected to improve the transmission of the single monetary policy to all parts of the euro area, and to facilitate market participants’ access to green finance and to funding for the transition towards a digital economy. To that end, the ECB reiterates the importance of promptly adopting the further initiatives under the European Commission’s 2020 Capital Markets Union (CMU) action plan as well as fully implementing them, where that is legally required, at the national level.

1.3.

Enhancing the transparency of market data will contribute to the development of EU capital markets, with the wider availability of price and liquidity information to investors and issuers creating more investment and funding opportunities and reducing the cost of raising capital for issuers. At the same time it is recalled that higher levels of transparency may enable certain traders in certain circumstances to take greater advantage of information on existing orders in the market through their ability to trade faster on that information using the latest technology.

1.4.

The ECB is specifically interested in these legislative proposals in view of the ESCB’s participation in the non-equity (bond, including sovereign bond) markets in the performance of the ESCB’s monetary policy and other Treaty-mandated tasks, and in view of the need to safeguard the confidentiality of such sensitive transactions. Therefore, the ECB would additionally like to comment on other provisions of MiFIR (4) which, although not the subject of the proposed regulation, affect ESCB central banks and their market transactions in financial instruments (see paragraph 7).

2.   Objectives of the proposed directive

As the proposed directive sets out only limited amendments to Directive 2014/65/EU of the European Parliament and of the Council (5) (hereinafter ‘MiFID II’) that largely flow from the proposed changes to MiFIR, the ECB does not see a need to opine on that proposal.

Specific observations

3.   Consolidated Tape

3.1.

The ECB welcomes the introduction of the proposed enhanced regime for the ‘consolidated tape’ (CT) and the competitive bid process for the selection of a consolidated tape provider (CTP) for each asset class. As previously noted by the ECB, proper transparency can only be appropriately ensured with the establishment of one single CTP (6) for each relevant asset class. The CT has several benefits for investors, and these support the CMU objectives of making capital market financing more accessible to investors and reducing fragmentation of the EU capital markets. It should help increase transparency and investors’ access to market data, thus reducing liquidity and trade execution risks, and market fragmentation. It may also substantially reduce transaction costs for investors. Enabling investors to have a real-time overview of trading activity at a reasonable cost should increase the use of the EU capital markets by corporate and retail investors for financing and investment.

3.2.

The proposed enhanced regime is technically and operationally complex and includes a revenue remuneration scheme. In order to guide the balance between quality and the level of its investment in producing the consolidated data-set for the given asset class, it is therefore crucial that the CTP can rely on the quality, completeness and prompt delivery of the data provided to it by market data contributors (investment firms, trading venues, approved publication arrangements and systematic internalisers). In this regard the ECB understands that under the proposal the CTP will only be responsible for consolidating the core market data and disseminating it commercially to the market and that the quality of the contributed data, which remains wholly the responsibility of the market data contributors, will be regulated by the Commission on the basis of a delegated act, based on the advice of an expert stakeholder group and of the European Securities and Markets Authority (ESMA).

3.3.

Should the CTP concession need to be terminated by ESMA for any reason, to make the option of re-tendering the contract credible, the technical standards to be developed by ESMA could require the CTP to make its technical connection parameters for market data contributors and its data dictionaries public so that they are available to other entities wishing to compete for the contract.

3.4.

The ECB understands that the proposals on the CT do not affect the confidentiality of ESCB ‘monetary, foreign exchange or financial stability policy’ transactions, which continue to be exempt from disclosure under Article 1(6) of MiFIR. Accordingly the ‘market data’ to be specified by the Commission pursuant to the proposed Article 22b(2) and the ‘core market data’ that CTPs would sell to users would not include data from ESCB policy transactions (such as on price, volume and time of conclusion).

4.   Pre-trade transparency regime for equities: ‘dark trading’

The ECB welcomes the proposed regulation’s streamlining of the pre-trade transparency regime for equities, by replacing the double volume cap with a single volume cap set at 7 % of the total volume of trades that are executed in the relevant financial instrument in the Union under the reference price waiver or the negotiated trade waiver (7). This simplifies the transparency regime and makes the monitoring of the levels of dark trading less complex. The proposed lower EU-wide volume cap intends to compensate for the abolition of the venue specific threshold, so the overall proposal aims to increase the level of pre-trade transparency in equities. At the same time, it is noted that the interaction between the abolition of the venue specific volume cap and the lowering of the EU-wide cap is complex, as these proposed changes are expected to have diverging effects on transparency. The ECB suggests therefore that the pre-trade transparency regime for equities, in particular the calibration of the volume cap, should be kept under review.

5.   Prohibition of payment for order flow

The Commission proposal (8) includes a further restriction of payment for order flow (PFOF). The ECB considers that PFOF can impede market efficiency and the transparency of European capital markets.

6.   Ending open access for exchange-traded derivatives

While in principle supportive of measures that strengthen EU clearing markets, it is important to consider the possible implications that the removal of the open access provision could have for competition, innovation and market integration, and to carefully balance potentially competing objectives.

7.   Other MiFIR provisions and their impact on ECB/ESCB market transactions

The MiFIR provisions which mainly affect ECB/ESCB market transactions are not the subject of the proposed regulation. The ECB takes this opportunity, however, to propose that the formulation of certain MiFIR provisions could be further improved in the light of the ECB/ESCB’s experience with conducting market operations on EU trading venues.

7.1.   Exemption from MiFIR transparency requirements for ESCB transactions carried out pursuant to the Statute of the ESCB

The ECB considers that the current formulation of the exemption of ESCB policy transactions from the pre- and post-trade transparency requirements (9) pursuant to Article 1(6) of MiFIR should be amended, so that instead of the exemption being stated to apply to ESCB central banks’ transactions ‘in performance of monetary, foreign exchange and financial stability policy’, which would then need to be further defined in Commission Delegated Regulation (EU) 2017/583 (10), the exemption would be broadened so that it would apply expressly to all of the activities carried out by Eurosystem central banks pursuant to Chapter IV of the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’). The ECB considers that only the types of investment transactions entered into by ESCB central banks that are set out in Article 15, points (a) and (c), of Delegated Regulation (EU) 2017/583 must be disclosed by the counterparty of the ESCB central bank. Those types of transactions should be expressly laid out in the revised Article 1(7) of MiFIR, instead of, as currently, in Delegated Regulation (EU) 2017/583.

7.2.   Commission empowerment to extend the exemption from MiFIR transparency requirements to other central banks

If all Eurosystem transactions pursuant to Chapter IV of the Statute of the ESCB would benefit from the above broadened exemption pursuant to Article 1(6) of MiFIR, irrespective of which other central banks or institutions use these services, the Commission’s power under Article 1(9) of MiFIR to extend the scope of the exemption ‘to other central banks’ would become redundant. Moreover, there would no longer be any need to mandate ESMA to develop draft regulatory technical standards to specify the ‘monetary, foreign exchange and financial stability policy operations’. Accordingly Article 1(8) and (9) of MiFIR could be deleted.

7.3.   Exemption of transactions by ESCB central banks from operators of trading venues’ reporting requirements under Article 26(5) of MiFIR

Article 26(5) of MiFIR requires operators of trading venues to report to their competent authority any transactions in financial instruments traded on their platforms and executed through their systems by certain firms. The current reporting mechanism for trading venues under this provision is well established, with operational arrangements in place for the smooth reporting of data from such transactions. Trading venues have records for reporting purposes of the detailed data of ESCB transactions executed through the trading venue’s systems. In this regard the ECB understands that Union legislators did not intend that the reporting requirement under Article 26(5) of MiFIR should cover ESCB central banks’ transactions. This understanding is based on the fact that central banks benefit from explicit exemptions from MiFIR reporting obligations and, in addition, are not ‘firms’, but rather entities carrying out market operations on the basis of their public mandates, including under the Treaty. For the sake of legal certainty, Article 26 (5) should be further clarified in this respect.

7.4.   Maintaining full exemption of ESCB securities financing transactions from the supervisory reporting obligation

The ECB notes that while ESCB securities financing transactions (SFTs) are fully exempted from Regulation (EU) 2015/2365 of the European Parliament and of the Council (11) and its disclosure and reporting obligations (12), Commission Delegated Regulation (EU) 2017/590 (13) provides that SFTs (14) to which an ESCB central bank is a counterparty are to be considered transactions for the purposes of Article 26 of MiFIR (15). As a consequence, those transactions are subject to the reporting obligations of Article 26 of MiFIR. Delegated Regulation (EU) 2017/590 thereby impacts reporting obligations in respect of such transactions by ESCB central banks under MiFIR. This effective subordination of Level 1 Union legislation to Level 2 Union legislation contradicts the well-established legal principle of lex superior derogat legi inferiori (16), whereby implementing and delegated Union acts may not contravene secondary Union legislation. The ECB takes the opportunity of this opinion to highlight that this contradiction should be corrected in Delegated Regulation (EU) 2017/590, although it is not in itself a subject of the proposals on which the ECB has been consulted.

Where the ECB recommends that the proposed regulation is amended, specific drafting proposals are set out in a separate technical working document accompanied by an explanatory text to this effect. The technical working document is available in English on EUR-Lex.

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(1)  COM (2021) 727 final.

(2)  COM (2021) 726 final.

(3)  Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (OJ L 173 12.6.2014, p. 84).

(4)  See Article 1(6), (7) and (9) and Article 26(5) of MiFIR.

(5)  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173 12.6.2014, p. 349).

(6)  See paragraph 5.2 of Opinion CON/2012/21 of the European Central Bank of 22 March 2012 on: (i) a proposal for a directive on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council; (ii) a proposal for a regulation on markets in financial instruments and amending Regulation (EMIR) on OTC derivatives, central counterparties and trade repositories; (iii) a proposal for a directive on criminal sanctions for insider dealing and market manipulation; and (iv) a proposal for a regulation on insider dealing and market manipulation (market abuse) (OJ C 161, 7.6.2012, p. 3). All ECB opinions are available on EUR-Lex.

(7)  Article 1(4) of the proposed regulation amending Article 5 of MiFIR.

(8)  Article 1(26) of the proposed regulation inserting a new Article 39a.

(9)  Articles 8, 10, 18 and 21 of MiFIR.

(10)  Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives (OJ L 87, 31.3.2017, p. 229).

(11)  Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (OJ L 337, 23.12.2015, p. 1).

(12)  Article 2(2), point (a), and Article 2(3) of Regulation (EU) 2015/2365.

(13)  Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities (OJ L 87, 31.3.2017, p. 449).

(14)  As defined in Article 3(11) of Regulation (EU) 2015/2365.

(15)  See Article 2(5), second subparagraph, of Commission Delegated Regulation (EU) 2017/590.

(16)  The legal principle that a legal act which is higher in the hierarchy of legal norms overrides a legal act which is lower in that hierarchy.