ESMA to Issue Guidance on Market Outage, Asks for Stakeholders’ Input

The European Securities and Markets Authority (ESMA) has expressed worry over the impact of ineffective communication on trading venues during power outages.

To address the issue, the EU securities markets regulator is planning to publish a guidance report on how trading venues should communicate with market participants in the event of an outage.

The guidance "will apply to equity markets and, where applicable, to non-equity instruments," the regulator said.

On Monday, the regulator called on interested stakeholders to contribute to a consultation paper that will inform the guidance, which is to be issued in the form of an opinion.

The report is expected to be published during the first quarter of 2023, ESMA said.

Stakeholders are to give a response to the regulator’s proposal for National Competent Authorities (NCAs) to ensure that trading venues have a clear outage plan to be deployed in the event of an outage, among other proposals.

The securities markets regulator noted that it will accept feedback from market participants until December 16th, 2022.

Impact of Miscommunication

ESMA noted that the said guidance is a part of recommendations it made in its Markets in Financial Instruments Directive 2 (MiFID II) review report on algorithmic trading published a year ago.

Furthermore, the market supervisor explained that significant market disruptions in the markets have been linked to outages in trading venues’ own systems rather than recent market volatility.

It added that outages “have a detrimental effect on the well-functioning of markets.”

ESMA explained: “The ESMA report on algorithmic trading noted that an outage in the primary market impacts the trading activity on other trading venues.

“In fact, data show that when the primary market is down, trading on alternative lit venues also drops in the same proportion as that on the primary market, even though these alternative venues could be used to ensure continuity of trading.

“ESMA identified that miscommunication between trading venues and market participants contributed decisively to this as it creates uncertainty about order status on the primary market and at which time trading will be resumed.”

Meanwhile, ESMA alongside the European Banking Authority and the European Insurance and Occupational Pensions Authority recently warned financial institutions, market participants and national supervisors against “increased vulnerabilities across the financial sectors.”

A report by a joint committee of these regulatory authorities noted that the Russia-Ukraine War combined with disruption to trade has “caused a rapid deterioration of the economic outlook" in Europe.

These trends worsened pre-war inflationary pressures and have increased the risk of persistent inflation and stagflation in the continent, they said.