MiFID II: FCA to review competition concerns in wholesale data markets
The FCA has announced that it will launch two market studies later this year to investigate access to wholesale data following concerns that limited competition in the markets for benchmarks and indices, credit ratings and trading data may increase costs for investors and affect investment choices. The FCA will also carry out further work focused on the pricing of trading data.
Overview of FCA feedback statement
The announcement was accompanied by an FCA feedback statement (FS22/1) and follows an FCA's call for input from March 2020 which sought to identify possible issues caused by the changing use and value of wholesale market data. The feedback statement indicates that respondents highlighted several areas where competition may not be working as effectively as it should, and where the FCA agreed that further FCA work was required.
On trading data (i.e. the provision of real time or delayed pre- and post-trade transparency data), concerns identified by the FCA for further investigation are:
- Whether the fact that (e.g.) trading venues own the relevant data give them market power to increase data charges, ultimately leading to higher costs for end investor.
- Whether this may impact asset managers' investment decisions and therefore competition between asset managers, e.g. if it results in managers purchasing insufficient data or deciding not to enter new asset classes or markets because of the market data costs involved.
- Whether this could limit trading efficiency with an impact on price formation.
- Whether the rules on free delayed data (i.e. data made available free of charge after 15 minutes) may not be efficient.
The FCA identifies the following concerns in the context of access to benchmarks:
- Complex contracts / Ts&Cs may make it difficult to compare the quality, charges and innovation between different benchmark providers.
- There are several barriers to switching. Some of these are inherent (e.g. due to brand strength or customer preference; or due to administrative costs and costs of rebalancing portfolios to a new benchmark; and the issues with monitoring long-term performance of portfolios after switching benchmarks). But the FCA also notes other barriers to switching, such as contractual terms (such as notification periods, exit fees, and the removal of historical data when switching).
The FCA identifies the following concerns with market data services (which involve formating, aggregating and distributing market data, e.g. from different venues or bundled with other data, and/or other services):
- High barriers to switching similar to those identified for benchmarks above.
- Concerns about credit rating agencies, including price increases on renewal, non-transparent contractual terms, issues arising from the bundling of products / services, and concerns about the market position of the big three CRAs.
There are some overarching “themes" in all of the three areas:
- Vertical integration: Many businesses in the wholesale data space are vertically integrated (e.g. a trading venue or benchmark administrator may also be a data aggregator / vendor), and FS22/1 flags concern about the impact of this on competition.
- Bundling of services: The FCA is interested in the impact of bundling on both cost of wholesale data and competition (e.g. due to the difficulty to compare prices of individual components, and impact on the ability to switch).
- Multiple charges for different uses of the same data: In all three parts of the FS, the FCA focuses on the fact that data users are often charged more than once for the same data, depending on the way the data is used (the “use case").
Upcoming FCA work & timings
- In Spring 2022, the FCA also announced that it will commence an information gathering and analysis exercise in Spring 2022, focusing on the pricing of trading data, underlying costs, and the terms and conditions of the sale of trading data.
- In Summer 2022, the FCA will begin a market study to look into pricing and concerns that complex contracts for benchmarks and indices prevent switching to cheaper, better quality or more innovative alternative providers.
- By the end of 2022, the FCA will launch a second market study to assess whether high charges for access to credit ratings data is adding costs to investors and limiting new market entrants. In addition to pricing, the focus will be on contractual relationships, barriers to entry and scope for innovation.
- The FCA has also commissioned research on new data uses and data analytics. This was also a focus in the call for inputs but the FS does not identify specific concerns at this stage.
Commentary on potential outcomes
The feedback statement does not identify ultimate outcomes which the FCA may take should it decide to address any of the above concerns. Importantly, the FCA may decide not to take any action.
But there are certain points of interest as to potential outcomes:
- On trading data:
- The FCA notes that providers and buyers of market data have very different views as to whether market data is reasonably priced. The regulator acknowledges that there pricing needs to allow market data providers to invest in quality of data and innovation. Striking the right balance between this and offering value for money is likely to be key feature of the further FCA work in this space.
- It is likely that HM Treasury's legislative proposals in the Wholesale Markets Review (which are expected in early 2022) would impact on the FCA's ultimate proposals to address competition concerns. This is because HM Treasury is expected to propose the creation of consolidated tape (at least for some asset classes), with producers of relevant raw market data obliged to provide that data to the CTP, which would then enable other market participants to access that data.
- ESMA has recently finalised market data guidelines which have applied since 1 January 2022. These guidelines (which respond to concerns identified by ESMA at a time when the UK was still an EU Member State) address many issues identified in FCA FS22/1. For example, the ESMA guidelines aim to increase transparency of pricing methodologies (rather than imposing pricing limits) and to limit the ability to charge more than once for the same data, as well as giving guidance on delayed data (including requirements as to the format in which that data should be provided). The FCA may use the ESMA guidelines as a base for any UK guidance in this space.
- The FCA flags that it has previously contacted trading data providers (in 2019/2020) about their obligations in respect of delayed data. It is possible that this could become a supervisory focus with individual firms.
- On benchmarks, the FCA does not indicate any potential outcomes. But where the concerns identified are similar to those on trading data, it is possible that the FCA may apply some of the solutions above to benchmark providers. For example, if the FCA decided to introduce market data guidelines similar to the ESMA ones, certain aspects of these (such as on the transparency of contractual terms and pricing methodologies) could be extended to benchmark providers, possibly as guidance under the fair, reasonable and non-discriminatory access requirements under Art. 37 of UK MiFIR.
- On market data services, the FCA is focusing on credit rating agencies only, which have recently become subject to FCA supervision. Again, it is possible that the FCA could mirror certain solutions on trading data or benchmarks for CRAs, where they address similar issues (e.g. transparency of contractual terms or pricing methodologies). But it will be interesting to see if the FCA would produce guidance or requirements for CRAs without extending them to other market data vendors as this may create “unlevel" playing field issues. Where other vendors are outside the scope of regulation, it is possible for the FCA to encourage “industry led" solutions or standards to address these concerns.
- Interestingly, the FCA flags that “in some circumstances" vertically integrated or bundled services could amount to a competition law breach. The FCA may look at this particular aspect in supervision with some individual firms rather than put in place wider regulation or guidelines on integrated/bundles services.
Documents and related materials
The FCA press release is available here, and the feedback statement, published on 11 January 2022, is here.
See our earlier note on HM Treasury's consultation on changes to the regulation of wholesale financial markets, which include proposals for the creation of a CTP, here.
See our earlier note on ESMA's market data guidelines here.