The European Securities and Markets Authority (ESMA) last month launched consultations on supervisory fees and derogation for data reporting services providers (DRSPs). Both consultations close on 4 January.
Crucially, authorisation and supervision of DRSPs will now move from national competent authorities to ESMA, unless the DRSP is considered of limited relevance.
‘Given the cross-border dimension of data handling, data quality and the necessity to achieve economies of scale, and to avoid the adverse impact of potential divergences on both data quality and the tasks of data reporting services providers, it is beneficial and justified to transfer authorisation and supervisory powers in relation to data reporting services providers from competent authorities to ESMA,’ the ESMA derogation consultation states.
It adds: ‘the provision of core data services is pivotal for users to be able to obtain the desired overview of trading activity across Union financial markets and for competent authorities to receive accurate and comprehensive information on relevant transactions.’
However, certain ARMs and APAs may be exempted from direct EU supervision if they’re considered of limited relevance for the internal market.
The extent to which services are provided to investment firms authorised in one Member State only, the number of trade reports and transactions, and whether the DRSP is part of a wider group operating cross-border, are being proposed as the deciding factors to determine whether a DRSP is relevant or not.
The transfer of authorisation and supervisory powers for DRSPs from National Competent Authorities to ESMA is justified given the benefits it will bring. These include: centralized expertise, the cross border view on data sharing and data handling, and streamlining of the authorisation and the implementation of a common supervisory process.
Overall, we believe that the criteria set out for determining whether a DRSP should have a derogation from ESMA supervision are sound.
These criteria would look at market concentration, cross-border reach and also the wider organisational structure of the DRSP. Many DRSPs are operating cross-border, connecting into multiple NCAs. It’s also evident that NCAs have technical implementation differences. DRSPs are uniquely placed to understand these differences and share this information at a European level.
Many of the ARMs will have dual authorisation and supervisory requirements if they wish to continue to operate as a DRSP in the UK and the EU 27 region, and so the supervision moving to ESMA should be of limited impact to them. It will be interesting to observe how the authorisation and supervisory approach of ESMA and the FCA will diverge, if at all.
At the same time, the ESMA DRSP register will be expanded to include the jurisdictions that each DRSP is operating in. This will bring greater transparency to MiFID firms who are migrating to a new DRSP, or seeking to report to a new jurisdiction.
Given the centralised supervisory role that ESMA will take on, it will be interesting to see if it focuses on systemic risk in certain markets where a single DRSP is processing a significant percentage of all market transactions.
Final consultation reports will be published sometime in Q1 2021. We look forward to following the consultation process over the next quarter.