Regulatory Impacts on the Nordic Secondary Bonds and Derivatives - - PowerPoint PPT Presentation

Regulatory Impacts on the Nordic Secondary Bonds and Derivatives Market

ICMA Copenhagen, 27 October 2015

Fredrik Jenestrand, Head of Regulatory Strategy and Implementation, Markets FICC

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EU’s regulatory express trains continue at high speed, but the EU growth agenda may slow things down

Securities Law Legislation Financial Transaction Tax (FTT) Recovery and Resolution for FMIs Bank Structural Reform (Liikanen) MiFID II / MiFIR EMIR CSD-R PRIIPs Initial margin for OTC derivatives Dodd-Frank Act Banking Union Basel III / CRD IV / CRR Leverage Ratio LCR Fundamental Review of the Trading Book BRRD

& our customers

NSFR SSM SRM Volcker Shadow Banking MAD/ MAR SFT Transparency Financial Benchmarks Cross-border harmonisation TLAC LEI Solvency II IORP II UCITS V AIFMD

*Institutions only regulation

EU bank and capital markets regulation has mainly focused on financial stability and control… …but must now co-exist with EU’s growth agenda

Capital Markets Union Review of EU regulatory reform CRR review Other growth initiatives

VS.

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The combination of market structure and banking prudential regulations has and will put pressure on many market models

Transparent, electronified, centralised, market micro structure More, longer, costlier funding and liquidity for banks More, better, costlier capital and controls

MiFID II, EMIR, CSDR (2016-2018) NSFR, LCR, Bank Structural Reform (2015-2018?) CRR/CRD IV, FRTB, Leverage ratio, MiFID II (2014-2018) Uncertain execution + High cost of balance sheet = Powerful driver of change Key considerations:

• Transparency vs liquidity?
• Stability vs liquidity?

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How has the market responded so far to the regulatory developments?

Significant risk shift from dealers to investors Volatility spikes and liquidity droughts are at least not less likely with less risk taking capacity for dealers

Source: FT.com Source: Citi

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• Small markets
• Own currencies
• Large transactions
• Infrequent trading
• Limited number of

liquidity providers

• Limited number of

end-clients

The Nordic markets are similar to other EU markets, but has also evolved to work well in the local context

Defining characteristics

• f the Nordic markets

Resulting (main) Nordic market model Limited “natural” market liquidity The Nordic challenge The role of the dealer:

• Find buyer/seller
• Bridge time and size
• Transform risk
• Manage counterparty risk
• Take and hold risk
• Provide financing
• Dealer to Client

(off trading platform)

• Request For Quote

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The Nordic market model is under regulatory pressure, which will drive changes in some areas

Relative market model impact from regulatory requirements

Orders (Agency Trading) Request For Quote (Balance Sheet) Trading Venues Dealer to Client (Nordic market model) Capital requirements Funding requirements Pre-trade firm quoting Post-trade transparency Bilateral margining Mandatory buy-in

? ? ?

We should embrace the positive changes, but remember that the direct dealer to client relationship is necessary for many products and end-user segments

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EMIR: Half way there, but the CCP clearing obligation and Margin requirements for non-cleared derivatives are yet to come

Trade reporting & Risk mitigation techniques CCP Clearing Obligation Margin requirements for non-cleared OTC derivatives Sep 2016-Sep 2020 2016-2018 2013-2014

• Corporates & Financial

Institutions (FC)

• All OTC derivatives
• Financial Institutions (FC)
• Some OTC derivatives:

In: G4-IRS, Index CDS Out: FX forwards/swaps Maybe: Scandi IRS? FX Options?

• Financial Institutions (FC)
• Non-CCP cleared OTC

derivatives

• Variation Margin: All FC

(March 2017)

• Initial Margin: Only a few

very large FC



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MiFID II (MiFIR): Very broad scope, but greatest impact will come from non-equities trading and transparency obligations

MiFID II bonds and derivatives trading and transparency Main requirements Liquid instrument transactions below “SSTI” (if traded on a trading venue) Liquid instrument transactions above “SSTI” Illiquid instrument transactions

• A. Derivatives platform

trading obligation (FC only) Mandatory Not determined Exempt

• B. Pre-trade transparency

(Firm quoting by Systematic Internaliser) Mandatory Exempt Exempt

• C. Post-trade transparency

(15 minutes) Mandatory 48h + deferral 48h + deferral MiFID II is in effect from 3 January 2017

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MiFID II: Nordic instruments defined as liquid according to ESMA in December 2014 – This will change, but not necessarily too much…

Interest Rate Derivatives FX Derivatives Bonds

Most Govern- ment bonds A few Corpo- rate bonds SEK FRA SEK IRS NOK IRS DKK IRS EUR- SEK Forward EUR- NOK Forward EUR- SEK Swap NOK- SEK Forward USD- NOK Forward USD- DKK Swap USD- SEK Swap EUR- DKK Forward USD- SEK Forward USD- NOK Swap

Nordic instruments defined as liquid (in some tenors) by ESMA in Dec-2014 Most EUR and USD interest rate and FC derivatives were defined as liquid

Many Mort- gage bonds

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• FX derivatives defined as not liquid

(until better data is available)

• Bonds defined as liquid based on

number of trading days and total trades

• Interest Rate Derivatives defined as

liquid only if traded 10 times per day

• Size thresholds for transparency as

percentiles: 60th for most derivatives and bonds, 40th for mortgage bonds

MiFID II: ESMA’s Final RTS on 28 September gave some answers, but much of the important information comes in 2016

• Liquid instrument

definitions

• Size threshold values
• Post-trade transparency

deferral timings

• Systematic Internaliser

threshold values Some major updates in ESMA’s final RTS (28 September 2015) Additional information expected mid- to late 2016

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We must all make an effort to create and adapt to the new world

Banks Politicians/ Regulators End-users Infrastructure providers The Nordic market Balance financial stability, transparency and market liquidity; engage in active dialogue and inform market participants Launch fit for purpose trading venues and other infrastructure Establish connectivity and prepare for changes in trading approaches Establish connectivity and prepare for changes in trading approaches

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The road map ahead

• Finalisation of Rules (2015–2016)
• Clearing and Platform Trading (2016-18)
• Transparency, Capital and Funding (2016-18)

A healthy secondary market? (2019+)

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Abbreviation Explanation AIFMD Alternative Investment Fund Managers Directive CRD IV Capital Requirements Directive IV CRR Capital Requirements Regulation BRRD Bank Resolution & Recovery Directive BSR Bank Structural Reform CCP Central Counterparty (Clearing House) CDS Credit Default Swap CSA Credit Support Annex CSD-R Central Securities Repository Regulation EMIR European Market Infrastructure Regulation FRA Forward Rate Agreement FSA Financial Supervisory Authority FTT Financial Transaction Tax HQLA High Quality Liquid Assets IORP II Occupational Retirement Provision Directive IRS Interest Rate Swap LCR Liquidity Coverage Ratio LEI Legal Entity Identifier LIS Large In Scale Abbreviation Explanation LR Leverage Ratio MAD Market Abuse Directive MAR Market Abuse Regulation MiFID II Markets in Financial Instruments Directive MiFIR Markets in Financial Instruments Regulation MTF Multilateral Trading Facility NSFR Net Stable Funding Ratio OIS Overnight Indexed Swaps OTC Over The Counter OTF Organised Trading Facility PRIIPs Packaged Retail Investment and Insurance-based Investment Products SFT Securities Financing Transactions SI Systematic Internaliser SME Small and Medium Enterprise SRM Singe Resolution Mechanism SSM Singe Supervisory Mechanism SSTI Size Specific To the Instrument TLAC Total Loss Absorbing Capital

Appendix: List of abbreviations

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Fredrik Jenestrand fredrik.jenestrand@nordea.com