When trading, an asset manager will look to receive a timestamp for when the order was received and when it was executed. Given the speed at which FX markets move, these timestamps should ideally be provided on a millisecond basis, the IA said.

In some instances, traders will delegate their FX trading to a custodian, who may have greater expertise in a particular area. Moreover, trading may be further delegated to a sub-custodian for trades that occur in emerging market jurisdictions where that custodian does not have a local desk.

However, members of the IA have reported that on many occasions where a trade has been delegated by their custodian to a sub-custodian, the accuracy of the timestamps is highly unsatisfactory. Some members reported timestamps accurate only up to the nearest minutes, while others have received only the day on which a trade takes place.

This lack of precision makes accurate analysis of the quality of FX trades very difficult, the IA said, which in turn has a negative impact on the ability of asset managers to manage risk for themselves and their clients.

Principle 36 of the FX Global Guide states: “Market participants should keep a timely, consistent, and accurate record of their market activity to facilitate appropriate levels of transparency and auditability and have processes in place designed to prevent unauthorised transactions.” It further states that: “Information should be made available to clients upon request, to provide sufficient transparency regarding their orders and transactions to facilitate informed decisions regarding their market interactions.”

With this in mind, the IA is calling on custodians to continue to implement the recommendations of the guide and also apply pressure to sub-custodian partners to do the same.

A series of best practice recommendation was also set out by the IA, addressing engagement between clients and custodians; transparency of custodians’ approach to trading, sub-custodian appointment, and timestamping in emerging markets; and custodians regularly reviewing and applying commercial pressure to their sub-custodians to ensure, where possible, that data provision is improved.

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In a statement, FESE described the attempt to shorten the European trading day as a potential move in the wrong direction that would have no impact on the wellbeing of traders and participants, a key part of the case to reduce equity market hours.

FESE argued that the COVID-19 pandemic has also highlighted the need for regulated markets in times of high volatility and traded volumes, and that the current length of the trading day is already designed to serve investors.

Elsewhere, shortening market hours could harm price formation, the association added, and draw flow away from regulated lit markets towards other trading venues such as systematic internalisers (SIs) and over the counter (OTC). SIs and OTC markets already operate outside of market hours and are staffed by trading desks to accommodate investors, meaning a shorter trading day would have no impact on employee wellbeing, FESE claimed.

US-based exchange group Nasdaq has backed FESE’s rejection, referring to the move to shorten market hours in Europe as ‘unwise’, especially due to the recent surge in market volatility driven by the coronavirus pandemic.

“Nasdaq supports FESE’s notion that the shortening of European trading hours would be unwise, particularly in a time of high volatility and market uncertainty where all investors, including private investors, need access to financial markets,” Nasdaq said in a statement. “We will continue to be part of all discussions to make sure that our members’ interests are best taken into account in what we believe needs to be a pan-European decision, for all types of markets including MTFs and SIs.”

The rejection from FESE follows a consultation at Euronext, whereby the Association for Financial Markets in Europe and the Investment Association called for market hours to be reduced by 90 minutes. The trade groups argued that the reduction would concentrate liquidity more efficiently, have a positive impact in creating more diverse trading floors, and benefit the wellbeing of market participants.

Last month, responses to the London Stock Exchange’s consultation on the same issue revealed widespread support for the move from traders and market participants, with a majority indicating a preference for reducing the trading day in Europe from 8am-4.30pm to 9am-4pm. However, a majority also agreed that all exchanges in the region would have to implement the changes for the benefits to be fully realised.

“Given the considerations outlined above, FESE believes current trading hours best serve the interest of investors and that a shortening of the European trading day would be a move in the wrong direction and detrimental to European markets,” FESE concluded. “This is a complex issue that warrants serious reflection in terms of the competitiveness of Europe, market quality, depth of liquidity, the participation of investors in the market whilst also recognising the need to ensure the well-being of employees.”

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In a joint letter to the European Securities and Markets Authority (ESMA), the collection of industry bodies called for a phased-in approach to the settlement discipline regime (SDR), as well as a deferral of mandatory buy-ins.

Buy-ins, which are typically used at discretion as they can create unpredictable costs, are used for market participants to manage settlement risk in the case of failed trades, as the buyer goes to market to source the securities from another party.

Initiating a buy-in against a failing counterparty will become a legal obligation under the Central Securities Depository Regulation (CSDR), with limited flexibility on timing to complete the process. The payment of the difference between the buy-in price or cash compensation must also be made by the failing trading entity.

The industry’s letter was co-authored by industry groups consisting of the Association for Financial Markets in Europe (AFME), the Investment Association (IA), the International Capital Market Association (ICMA), the Alternative Investment Management Association (AIMA), and the International Securities Lending Association (ISLA), among others.

While the letter supports the rules to drive greater settlement efficiency, the consensus among both buy- and sell-side firms is that the mandatory buy-in regime will have significant negative implications on both trading and liquidity across asset classes.

“It [buy-ins] will negatively impact the efficiency of European capital markets, leading to greater costs and barriers to investing in European securities,” the letter said. “Mandatory buy-ins are expected to lead to wider bid-offer spreads in the cash markets, reduce market efficiency and remove incentives to lend securities in the securities lending and repo markets, and may ultimately favour the settlement in non-EU CSDs of less liquid securities.”

To help ease the impact of the rules on market participants, the groups are urging ESMA to only introduce cash penalties on failed settled trades once market infrastructures, banks and their clients have built and test the required new messaging and technology.

They also called for a “deferral of the mandatory buy-in regime until the effects of penalties and other measures (e.g. prompt allocation/confirmation processes) to promote settlement efficiency are implemented”.

The letter added that the European Commission should undertake an in-depth impact analysis on the buy-in regime during this period, and also proposed a replacement of the mandatory nature of the buy-in with an optional right of the receiving party to allow a buy-in of a non-delivering counterparty.

“We support the imposition of a penalty regime under CSDR as an important step towards improving settlement efficiency in European capital markets. However, we continue to be concerned that the impact of a mandatory buy-in regime will have negative consequences that are damaging to market liquidity and efficiency and restrict the growth of capital markets in Europe,” the groups explained. “We respectfully request the authorities to consider a cautious, phased-in approach to ensure the successful implementation of the cash penalty regime and reconsider the mandatory nature of the buy-in.”

A study from ICMA in November last year found the majority of asset managers and pension funds surveyed expect a negative impact on bond market efficiency and liquidity as a result of the rules, when they come into force later this year.

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The trade body representing asset managers recently published a paper on best execution 10 months on following the introduction of MiFID II in January 2018.

Asset managers are required to report on and disclose their top five execution venues on an annual basis under the new requirements, and demonstrate how they are achieving the best possible results for investors when executing bond orders.

The fixed income market has faced more challenges under these rules than the equities markets given they are less liquid and lack continuous pricing.

The IA highlights how a lack of data in the fixed income has increasingly come and subsequently suggests that regulators should up their efforts to reduce market data costs along with the development of a consolidated tape.

“Asset managers are concerned that the poor availability of data in the bond market is undermining transparency,” said Galina Dimitrova, Director of Investment and Capital Markets at the IA

“A well-functioning bond market is essential to allow companies to borrow more affordably, enabling economic growth and the creation of jobs. Our recommendations aim to improve the availability of data, which will ultimately deliver better returns for end investors.”

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