UK, EU prepare for bond tape tender as Ediphy enters fray

The finish line is in sight for the much-awaited consolidated tapes for bonds. The EU and UK regulators have had a busy summer laying the groundwork for their respective tender processes, and are poised to select a provider in the first half of 2025.

Plans to build the bond tapes—key pieces of market infrastructure that provide investors with a live stream of trade data from venues across the jurisdiction—have been in the making for decades. However, progress has stalled due to wrangling over how the tapes should be set up and what data they should include. And crucially, regulators on both sides of the Channel have historically struggled to find firms willing to bid for the role of consolidated tape provider (CTP).

Now, in a sign that both jurisdictions are confident that there will be competition for the role, regulators have confirmed their timelines for the beginning of a tender process.

The UK’s Financial Conduct Authority plans to launch its tender before the end of 2024, but the deadline for firms to register their initial interest in submitting an application was in September. Meanwhile, on September 30, the European Securities and Markets Authority confirmed that its own tender process would run from January until July 2025.

In late September, a second public contender for provider of the UK bonds tape entered the race. FairCT is an initiative led by fintech Ediphy and backed by participants from the buy and sell sides, as well as tech providers and venue operators. So far, the initiative has only gone public with its intention to bid for the UK tape, but it has not ruled out running for EU CTP, too.

Sources say that more contenders are likely to announce bids in the coming weeks.

FairCT

Chris Murphy, CEO of Ediphy, tells WatersTechnology that the company has been sizing up the consolidated tapes project since the advent of Mifid II, a package of market reforms that established the need for a future consolidated tape. Having been involved with the implementation of Mifid II for UBS, Murphy saw the potential implications of the regulation for the future of capital markets. This was fresh on his mind when he left to form Ediphy.

“Right from the beginning, we started to engage with the delayed market data that was freely available, and we started to build an internal consolidated tape for our own purposes,” Murphy says.

Early conversations with other firms about a joint bid for the role of provider started by considering what the best possible CTP would look like. “Very quickly, we were discussing how it would be unfortunate if the CTP was another data monopoly that could extract large rents, and that the ideal [setup] would be if it was operated on a utility cost recovery basis.”

FairCT says that it aims to return any economic value generated by the tape “over its costs and reasonable returns” to the users. This is in line with the main selection criterion of the UK’s tender process, which will ultimately anoint a CTP based on which bidder is able to build the tape at the lowest cost to the industry.

Alongside Ediphy, known members of the initiative are Cboe Global Markets, FactSet, Google Cloud, Norges Bank Investment Management, TP Icap and UBS. FairCT has confirmed that it also has members that are not disclosed on its site.

The other public contender for CTP of the bonds tapes is technology provider Etrading Software. In December 2022, the company raised funds for its bid in the form of an investment from private equity firm LDC.

Notably absent from the public bidding process are the “big three” fixed-income venues—Bloomberg, MarketAxess, and Tradeweb—which will be providing the lion’s share of the data to the consolidated tape. The three firms joined forces to launch an early bid for CTP, but the venture collapsed at the end of 2023 with the members citing “various developments” including “uncertain outcomes around product definitions and structural complexities.”

Sassan Danesh, CEO of Etrading Software, points out that the EU Commission’s market data expert group, which advises the legislative body on matters surrounding the consolidated tape, is comprised mostly of tech companies on the fixed-income side.

“It is striking that there’s almost no data vendor there. They’re fintechs, on the whole. Why is that? I think it’s actually driven by the reasonable commercial basis and this utility model, which I feel naturally fit the business models of technology firms, compared to data firms.”

In other words, the thin margins of the tape might be a more acceptable commercial proposition to technology firms than to data providers, which are used to gross margins in the range of 70% or higher.

But the big three data providers are also much better capitalized than most fintechs, and are geared up for selling data products to the industry. Speaking before the fairCT announcement, Alex Wolcough, CEO of consultancy firm GreenBirch Group, suggests that one likely outcome is that fintechs join forces with data vendors.

“None of these organizations, I think, necessarily do this by themselves. I think they need to work with larger firms, which are better organized for selling market data. They’ve got a sales force that is capable of going out there, a distribution network which is capable of distributing the data. It’s not impossible, but I still think that there needs to be some involvement by some of the larger market data providers.”

Sources say that each consolidated tape is likely to cost several million dollars to build. Operating costs are also likely to be in the range of several million dollars.

“Nobody’s going to make a lot of money out of producing the consolidated tape,” says Wolcough. “It’s a prestige thing rather than anything else.”

Vendors assemble

Both the EU and the UK have historically had difficulty enticing firms to come forward as CTP hopefuls. Mifid II, implemented in 2018, worked on the assumption that private CTP initiatives would emerge within two years.

Instead, regulators have had to work hard to convince prospective CTPs to participate in a public procurement process. Both the UK’s Financial Conduct Authority and the European Securities and Markets Authority have engaged with the industry to implement the changes needed to incentivize bidders for the role of CTP.

For example, private initiatives seeking authorization to become CTP under the old rules would have to demonstrate that they had access to at least 80% of real-time data for fixed-income markets in the jurisdiction, which would be very expensive to acquire commercially.

Following the regulators’ tender processes, on the other hand, trading venues and agreed publication arrangements (APAs) will be required to provide the winners with real-time market data free of charge. This will make the tapes much cheaper to run.

Another incentive for the future CTP comes in the form of changes to the bonds deferral regime, which is being recalibrated in parallel with plans to build a consolidated tape. The expectation is that more bond-trading activity—as much as 90% in Europe’s case—would be printed in real time or with a reduced deferral period. This would bolster the commercial case for the tape by ensuring that it includes more real-time pricing data.

Last month, a participant in the EU consolidated tapes panel at the World Financial Information Conference in Austin summed up the mood among prospective bidders. “Initially, there was not a very clear argument as to why you would take on the role of CTP—which is incredibly onerous and costly—for no real potential gains. Especially if you’re an APA and you already have this data.”

Now, though, they said that discussions around licensing fees and even potential revenue sharing with data contributors had made the proposition more interesting. “And the notable way the narrative has changed is the suggestion that CTPs can now create value-added services using that same CTP data. Ironically, APAs do that today anyway.”

But there are still plenty of unanswered questions, too.

The challenge for CTP hopefuls for the rest of this year before the tender process begins will be to work out how much the tape will cost to build and operate, how much demand it is likely to get, and how cheaply they can commit to offering it to regulators.

But these equations are heavily dependent on factors that are still under discussion, including how the regulators will define value-added services (which will have to be sold by a separate legal entity to the CTP) and what additional features are a necessary function of the tape in order to attract demand.

Another significant question for the UK tape, which will be awarded to the bidder who quotes the lowest price for data users, is how the CTP’s licensing model will work. “The only way you can collapse the framework to a single price is if the FCA nails down all the details that can affect the price. And the license terms, of course, are a big part of that,” says Etrading Software’s Danesh.

He adds that the FCA will have to stipulate how many license types there will be, whether there will be tiering according to the size of the data user, and how that tiering will be structured. “Otherwise, it’s like ‘oh, it’s a Picasso painting.’ But which one? You’ve got to know which Picasso painting everyone’s bidding on.”