16 janv. 20233 min de lecture

Adamantia feasibility study on the European Fixed Income Consolidated Tape

The European Fixed Income CT could provide key benefits for the Capital Markets Industry as per Adamantia assessment together with a group of Financial Institutions.

Key conclusions of Adamantia's analysis, the 13th of January 2023.

In September 2021 a group of global European sell-side and buy-side institutions among which Barclays, BNP Paribas, Crédit Agricole CIB, Deutsche Bank Group, Natixis CIB and Société Générale signed up to a joint feasibility study to assess the viability of the European Consolidated Tape (CT). They mandated the consultancy Adamantia to conduct an analysis of the functional and regulatory requirements as well as the business case supporting the establishment of a successful and economically viable CT for both Equity[1] and Bonds, in line with the Capital Market Union objectives.

Adamantia has worked together with the participating institutions in the study on looking at all aspects of the provision of a Bonds CT and is pleased to share the results of this analysis: specifically, the prerequisites for creating a CT which meets the financial industry needs and use cases, the technical feasibility, and the business case.

The following points are the result of extensive workshops with key subject matter experts and represent a strong consensus among the participating institutions. All surveys and data collection were done based on confidentiality and in compliance with laws including adherence to antitrust principles.

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EXPECTED BENEFITS FOR THE CAPITAL MARKETS INDUSTRY

1	Increase transparency and level playing field in EU capital markets	Address the European Market fragmentation, increase transparency, and level the playing field with respect to the access to post trading information. Access to an aggregated view of the European bond liquidity (prices, volumes) in a centralized place, thus facilitating decision-marking processes to all market participants, large and small.
2	FI CT as a “golden source” of market data	Benefit from a trustworthy data source of information (« golden source ») on all executed prices, common to and accessible by all market participants, and which can be used for a great number of use cases (liquidity analysis, assessments of execution quality & post trade analysis, back testing, risk management, performance measurement, valuation processes, regulatory, audits and controls, market surveillance...). The challenge and key success factor for the Bonds CT will be to provide accurate / high quality data to the users.
3	Well-calibrated deferrals regime	Define a well-calibrated transparency deferrals regime for bonds, thus avoiding undue risk for liquidity providers especially when trading in illiquid instruments or transactions above a certain size (which would otherwise lead to diminishing the liquidity available to corporates and investors).
4	Reduce market data costs	Provide access to market data at a reasonable price for all market participants (The CT will operate on a utility-based cost recovery model).

CHARTER OF KEY PRINCIPLES FOR THE BONDS CT

The following principles are considered as critical for the success of the European Bonds CT:

1	Mandatory Contribution	The European Bonds CT shall consolidate post trade data, based on a mandatory contribution from all EEA venues.
2	Latency	The CT shall distribute market data on a near real-time basis for display and non-display usages (NB: “real time” does not mean low latency). A delayed CT, either 15 min or End-of-day, will not respond to the industry needs. The CT does not intend to serve latency-sensitive users who will continue to use direct low-latency data feeds from the venues. This real-time basis and latencies considerations apply to the technology feeds and are independent from deferrals that must continue to apply.
3	CT Economic Model	The CT shall be a utility, run on a cost recovery basis (no objectives to generate profits from the CT)
4	CT Commercial Model	The CT data shall be accessible at a reasonable price for all market participants (professional & retail investors) based on a simple subscription model. The CT must propose a simple licensing framework covering a variety of use cases with a transfer of data IP rights to the users, except for redistribution purpose (where a specific licensing shall apply). The CT shall be free for academics and non-professional/retail users.
5	CT Governance Model	The CT governance shall represent the overall market’s interests, with no particular group having undue influence. It should be composed by at least 50% of market data users (buy side and sell side).

BONDS CT USE CASES

50 use cases were screened across Front Office, Risk, Middle/Back Office, Regulatory, Audit and Control functions. Each individual use case was assessed and challenged in terms of i) type of data consumed (pre-trade data, post-trade data, end-of-day statistics, historical data, market event) and ii) time of use (real-time, near-real time, intraday delayed, end-of-day).

BUSINESS CASE

The analysis of the financial scenarios shows positive outcomes for the Bonds CT:

Based on a formal request for quote issued to the technology firms engaged in developing technology solutions for the CTP, the Adamantia analysis study confirms the technical feasibility;
We estimate that the Bonds CT will represent a one-off build cost of c. 7,5 M€ and annual running cost of c. 6 M€;
The financial scenario presented below is based on reasonable assumptions on the number of subscribers for the Bonds CT and ramp-up over time, as well as the price that the firms would be ready to pay for the CT data;
Based on this scenario the total initial investment to cover the build and the first years of run of the CTP would represent a peak of c. 14 M€ in year 2, before being progressively recouped by revenues and fully reimbursed at the end of Year 5.

KEY ASSUMPTIONS ON THE BUSINESS CASE

Build costs	The one-off costs include all the investment required before starting operating the CT in production: set up of IT solution, creation of the legal CTP structure, HR hiring and training, global project management and application to the ESMA tender. The estimates are based on the assumptions of the EC proposal, typically connectivity costs to be borne by the data contributors.
Running costs	Running costs include all the recurring expenses to manage the CT. They include the monitoring and maintenance of the IT solution (license, maintenance, IT support, production monitoring, hardware, continuous improvement) and the operating CTP structure (board, administration, legal, operations, marketing, KYC …). Some functions shall be specifically reinforced at the launch of the CTP to support the client ramp up (client support, KYC, data quality monitoring), and decrease in the future.
Fee schedule	The approach is to propose a simple and clear fee schedule for the CT service. Considering that the CT must be accessible to the largest possible population (PRO and NON-PRO), the main drivers taken are: No constraint on the design of the fee schedule (as Intellectual property is fully transferred to the CT); Non-professional users and Academics: free of charge; Simple and readable fee schedule; A single license per firms for professionals, whatever the number of users or devices; The per firm licence assumes that a low cost shall incentive a large volume of firms to subscribe to the utility.
Pricing	It is understood that each legal entity must subscribe to the CTP individually (head office, branches, subsidiaries…). Our pricing model introduces a tiering (Tier 1: large groups with more that 10 legal entities, Tier 2: groups with 5 to10 legal entities, Tier 3 for individual investment firms) and a fee cap for these groups. The pricing model is based on a “cost plus margin” approach (see below: no benefits): the monthly subscription fee per firm decreases over time once the initial investments are recouped.
Users ramp-up	The ramp-up phase is spread over the first 5 years. The assumption is that the largest investment firms will subscribe from the beginning, testing the reliability and quality of the CT. This shall bring more confidence to the rest of the industry which would subscribe progressively. The increase of the number of subscribing firms will automatically allow to decrease the fee for the CT service.
Numbers of subscribers	The scenario is based on reasonable assumptions on the number of subscribers for the Bonds CT and ramp-up over time. Following the ramp up phase, we consider that the objective in terms of subscribers is hit at year 5, with up to 800 firms, which is a conservative estimate[2]. A higher number of subscribers shall automatically decrease the cost of the CT, and by way of consequence its price to the users.
Revenue sharing	No revenue sharing mechanism is considered for the Bonds CT.
No benefits	The CT will be set-up as a utility, run on a cost recovery basis. The yearly fee is calculated to allow the reimbursement of the initial investment over the 5-year period and then a financing capacity of 2M€ per year for the CTP to contribute to the development of the Capital Markets Union (research, education…).

BUSINESS CASE OVERVIEW

The below business case is a simulated example of how costs could be recovered based on the assumptions outlined. Any CTP would need to make its own assumptions and provide for its own financial analysis to ensure that costs are recovered in a reasonable timeframe.

CONCLUSION

Adamantia initial assessment has shown that there is broad industry support for a European Bond CT with a relatively mature view of requirements, and vendors currently working on practical CT solutions.

Based on the results of the study, there is a viable case for the set-up and running of a Bonds CT that meets the needs of the industry.

Antoine Pertriaux, Partner at Adamantia Advisory

Disclaimer:

This document is intended for general information only and is not intended to be and should not be relied upon as being legal, financial, investment, tax, regulatory business or other professional advice. Although the information provided in this study is derived from sources believed to be reliable, neither Adamantia nor the participating firms do represent or warrant that this report is accurate, suitable or complete and none of Adamantia or the participating firms shall have any liability arising from, or relating to, the use of this document or its contents.

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