Industry Updates

Exchanges need to plan for market blackouts, ESMA warns

Trading venues must have a plan for closing auctions, key for ETF pricing

Theo Andrew

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Exchange venues across Europe must have a detailed plan in place to deal with potential market blackouts, the European Securities and Markets Authority (ESMA) has warned.

ESMA said trading venues must have a clear outage plan in place as well as a clear communication strategy to ensure market participants and the public are informed as soon as possible.

The guidance comes after the European regulator launched a consultation last September on how exchanges should manage their operations during market outages such as those seen in the volatility of 2020.

Exchanges globally have experienced outages in recent years due to failures in their technology, resulting in significant knock-on effects for the rest of the market.

This has led ESMA to intervene in a bid to minimise market disruption, particularly to ensure participants are provided with a closing price for the day, a key reference price used for the valuation of ETFs, funds and benchmarks.

Euronext suffered a three-hour outage in October 2020, during which shares continued to trade beyond market close, missing the closing auction, meaning that ETFs were unable to see a reference point to pricing.

The regulator reiterated its requirements for all trading venues to have “clear arrangements and procedures” in place to ensure the market is provided with a closing price.

Despite this, ESMA said it is not mandating trading venues to nominate an alternative venue to run the closing auctions but that venues should have the “flexibility to nominate an alternative venue” to run the closing auction.

It added trading venues should also be able to postpone the closing auction with a time limit set after which the closing suction should not be held.

Respondents to the consultation noted that the introduction of a real-time pre-trade consolidated tape would enhance the resilience of markets and provide a “more stable benchmark to set a closing price”.

Trading venues may be reluctant to invest in new technology with exchanges no longer delivering the growth they once did. For ETFs, request for quote (RFQ) platforms such as Tradeweb and Bloomberg continue to dominate the trading landscape.

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