What is the “RR”?

In recent years the MTFs have significantly changed the way equities are traded in Europe. Volumes negotiated in the main MTFs (Chi-X, Turquoise, Bats) are now on average close to 20% of the total volume for the main European financial centres. Fidessa publishes a very informative Fragmentation Index for every country/index.

But one country is mysteriously different: in Spain the market share of Chi-x is a mere 1.5% on good days and nil for Turquoise and Bats.  It looks as if Mifid implementation was stopped at the Pyrenees. This issue is important, as the volume traded in Madrid is substantial: 7.12% of the total European market, London being 12.95%, Xetra 11.27% and Paris 10.20%. Additionally some Spanish stocks like Telefonica and Santander are very frequently the most heavily traded stocks in Europe.

The reason behind this situation is the continuing use of the “RR”: “referencias de registro”. The RR is a unique reference number for each trade, given by the matching engine of the SIBE, the BME (Spanish Exchanges) platform. This reference number (RR) is required in order to communicate a trade to the local CSD: Iberclear. So, Iberclear can accept operations from platforms others than the SIBE, but for this an “RR” is imperative and, surprise, only SIBE can give this RR and of course charge for it. Needless to say, the present structure of BME is an integrated silo, where the trading platform and the CSD are part of the same group with exactly the same owners.

The Spanish market regulator, the CNMV, is well aware of this situation and not happy to have fingers wagged at it in Brussels and by market participants. For this reason it published last February a document for public consultation. The goal of the CNMV is to adapt the Spanish markets to T2S, which means opening them up to accepted European market practice, including adoption of a central counterparty. The proposal of the CNMV does not eliminate the “RR”, which would have been optimal. Rather, instead of being communicated during the matching process, as today, the “RR” will be communicated afterwards, as a post trade reference. This will permit the MTFs to communicate their operations directly to Iberclear. In this case the market share of the MTFs will probably jump to 20% as in any other market in Europe.

But since February, there have been no significant changes, and it does not seem likely that there will be in the future. BME and the banks do not have any incentive to modify the present situation that is comfortably profitable for the parties involved. This situation where MTFs do not have equal access to Spanish equities is bad for market participants and for the buy side. Total trading costs in Madrid, including execution and settlement, are the highest in Europe, so sooner or later changes will arrive as Brussels will surely not allow a country willfully to ignore Mifid ad infinitum, so for all parties involved the sooner change comes, the better.

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