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
EU’s regulatory express trains continue at high speed, but the EU growth agenda may slow things down …but must now co -exist EU bank and capital markets regulation has mainly focused on financial stability and control… with EU’s growth agenda Initial margin for Financial Bank Structural OTC derivatives MiFID II / MiFIR Reform (Liikanen) Benchmarks Capital Markets EMIR LEI CSD-R Union TLAC PRIIPs Basel III / CRD IV / CRR Dodd-Frank Act LCR NSFR Review of EU Volcker Leverage regulatory Ratio VS. Banking Union reform Fundamental Review of & our customers SRM SSM the Trading Book CRR review BRRD Financial AIFMD Other growth Transaction Tax Recovery and (FTT) Resolution for UCITS V MAD/ MAR initiatives Solvency II FMIs SFT Transparency IORP II Securities Law Cross-border Legislation Shadow harmonisation Banking *Institutions only regulation 2
The combination of market structure and banking prudential regulations has and will put pressure on many market models More, better, costlier capital and controls Uncertain Transparent, execution + CRR/CRD IV, FRTB, Leverage electronified, High cost of ratio, MiFID II (2014-2018) centralised, balance sheet = Powerful market micro driver of structure change More, longer, costlier funding MiFID II, EMIR, CSDR and liquidity for (2016-2018) Key considerations: banks • Transparency vs liquidity? • Stability vs liquidity? NSFR, LCR, Bank Structural Reform (2015-2018?) 3
How has the market responded so far to the regulatory developments? Significant risk shift from Volatility spikes and liquidity droughts dealers to investors are at least not less likely with less risk taking capacity for dealers Source: Citi Source: FT.com 4
The Nordic markets are similar to other EU markets, but has also evolved to work well in the local context Defining characteristics The Nordic challenge Resulting (main) of the Nordic markets Nordic market model • • Limited Small markets Dealer to Client “natural” (off trading platform) • Own currencies market • Request For Quote liquidity • Large transactions • Infrequent trading The role of the dealer: • Find buyer/seller • Limited number of • Bridge time and size liquidity providers • Transform risk • Manage counterparty risk • Limited number of • Take and hold risk end-clients • Provide financing 5
The Nordic market model is under regulatory pressure, which will drive changes in some areas Relative market model impact from regulatory requirements Orders Request For Quote (Agency Trading) (Balance Sheet) ? ? Trading Venues Capital requirements ? Funding requirements Dealer to Client Pre-trade firm quoting (Nordic market Post-trade transparency model) 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 6
EMIR: Half way there, but the CCP clearing obligation and Margin requirements for non-cleared derivatives are yet to come 2013-2014 2016-2018 Sep 2016-Sep 2020 Trade reporting Margin requirements CCP Clearing & Risk mitigation for non-cleared OTC Obligation techniques derivatives • • • Corporates & Financial Financial Institutions (FC) Financial Institutions (FC) • • Institutions (FC) Some OTC derivatives: Non-CCP cleared OTC • All OTC derivatives In: G4-IRS, Index CDS derivatives • Out: FX forwards/swaps Variation Margin: All FC Maybe: Scandi IRS? FX (March 2017) • Options? Initial Margin: Only a few very large FC 7
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 Liquid instrument Liquid transactions below instrument Illiquid “SSTI” (if traded on transactions instrument above “SSTI” Main requirements a trading venue) transactions A. Derivatives platform Not determined Exempt Mandatory trading obligation (FC only) B. Pre-trade transparency (Firm quoting by Systematic Exempt Exempt Mandatory Internaliser) C. Post-trade transparency 48h + deferral 48h + deferral Mandatory (15 minutes) MiFID II is in effect from 3 January 2017 8
MiFID II: Nordic instruments defined as liquid according to ESMA in December 2014 – This will change, but not necessarily too much… Nordic instruments defined as liquid (in some tenors) by ESMA in Dec-2014 Interest Rate Derivatives FX Derivatives Bonds EUR- USD- NOK- Most SEK NOK SEK SEK Govern- Swap Forward Forward FRA SEK ment IRS bonds EUR- USD- USD- Many DKK DKK SEK Mort- USD- Forward Swap Forward gage NOK bonds Swap DKK A few IRS NOK Corpo- USD- IRS EUR- EUR- rate SEK NOK SEK bonds Swap Forward Forward Most EUR and USD interest rate and FC derivatives were defined as liquid 9
MiFID II: ESMA’s Final RTS on 28 September gave some answers, but much of the important information comes in 2016 Some major updates in ESMA’s final RTS Additional information (28 September 2015) expected mid- to late 2016 • FX derivatives defined as not liquid • (until better data is available) Liquid instrument definitions • Bonds defined as liquid based on • Size threshold values number of trading days and total trades • • Interest Rate Derivatives defined as Post-trade transparency liquid only if traded 10 times per day deferral timings • • Size thresholds for transparency as Systematic Internaliser percentiles: 60 th for most derivatives and threshold values bonds, 40 th for mortgage bonds 10
We must all make an effort to create and adapt to the new world Balance financial stability, transparency and market liquidity; engage in active dialogue and inform market participants Politicians/ Regulators The Banks End-users Nordic market Establish connectivity and prepare Establish connectivity and prepare for changes in trading approaches for changes in trading approaches Infrastructure providers Launch fit for purpose trading venues and other infrastructure 11
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+) 12
Appendix: List of abbreviations Abbreviation Explanation Abbreviation Explanation LR Alternative Investment Fund Managers Leverage Ratio AIFMD Directive MAD Market Abuse Directive CRD IV Capital Requirements Directive IV MAR Market Abuse Regulation CRR Capital Requirements Regulation MiFID II Markets in Financial Instruments Directive BRRD Bank Resolution & Recovery Directive MiFIR Markets in Financial Instruments Regulation BSR Bank Structural Reform MTF Multilateral Trading Facility CCP Central Counterparty (Clearing House) NSFR Net Stable Funding Ratio CDS Credit Default Swap OIS Overnight Indexed Swaps CSA Credit Support Annex OTC Over The Counter CSD-R Central Securities Repository Regulation OTF Organised Trading Facility EMIR European Market Infrastructure Regulation Packaged Retail Investment and Insurance-based PRIIPs Investment Products FRA Forward Rate Agreement SFT Securities Financing Transactions FSA Financial Supervisory Authority SI Systematic Internaliser FTT Financial Transaction Tax SME Small and Medium Enterprise HQLA High Quality Liquid Assets SRM Singe Resolution Mechanism IORP II Occupational Retirement Provision Directive IRS Interest Rate Swap SSM Singe Supervisory Mechanism LCR Liquidity Coverage Ratio SSTI Size Specific To the Instrument LEI Legal Entity Identifier TLAC Total Loss Absorbing Capital LIS Large In Scale 13
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