EU regulation exocet presentation May 2013


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EU regulation exocet presentation May 2013

  1. 1. FIXNETIXThe ultimate trading advantage
  2. 2. FIXNETIXThe ultimate trading advantage Partner Jefferson Young The EU Regulation Exocet How to avoid it – and maximise ROE Matthew Argent
  3. 3. FIXNETIXThe ultimate trading advantage Editor FT trading Room Financial Times The EU Regulation Exocet How to avoid it – and maximise ROE Philip Stafford
  4. 4. FIXNETIXThe ultimate trading advantage Chief Administration Officer Fixnetix Limited Major changes in EU trading regulation & how it might affect you Bob Fuller
  5. 5. Where is the London market now? Five Stages of Grief • Denial – This can’t be happening to me. • Anger – Why me? • Bargaining – Attempting to make deals. • Depression – Feelings of hopelessness. • Acceptance – Getting on with life.
  6. 6. EU Regulations, where are we? • EMIR – passed Mar 2012 • OTC Derivatives – passed Jun 2012 • MAD 2 Directive – scheduled to be passed early 2013 – in Trilog • MAD 2 Regulation – scheduled to be passed early 2013 – in Trilog • MiFID 2 – scheduled to be passed late 2013 - October • MiFIR – scheduled to be passed late 2013 - October Latest versions of MiFID 2 and MiFIR released on the 15th April 2013
  7. 7. Regulatory Enforcement Timing • EMIR – ESMA details Sept 2012 - starts Jan 2013? • OTC Derivatives – ESMA details Sept 2012 - starts Jan 2013? • MAD 2 Directive – mid 2014 • MAD 2 Regulation – mid 2014 • MiFID 2 – Q1 2015 • MiFIR – Q1 2015 (may be 2016 but the need for US recognition may force 2015)
  8. 8. Under EU law Directives • must be transposed into each Member State’s national law by secondary legislation • ample scope for incorrect/incomplete porting Regulations • ‘binding in their entirety & directly applicable in all Member States’ What is the difference between a Directive and a Regulation?
  9. 9. Where are we in the MiFID 2 process? Final wording not finalised BUT!!
  10. 10. What do we know? Various ‘Themes’ are apparent and are very, very unlikely to change, in fact the last few versions have shown no appetite to move away from these. Some of these are:
  11. 11. • MiFID 1 is NOT repealed but a lot of the definitions are changed i.e. It’s not just about Equities, but about everything except FX. • No mixing of the prop book with customer orders unless you are an Systematic Internaliser. The end of Broker Crossing Networks as we know them. • Much more transparency, with increased restrictions on trading ‘in the Dark’. • The Equity model is to be used as the base model for ALL instrument types. Consistent ‘Themes’ 1
  12. 12. • This will inevitably move ALL instrument types to electronic trading (the demise of voice trading) which will require more connectivity. • Greater emphasis on Best Execution so more historic proof of what you did and why. • Clearing of new instruments. • Controls and constraints on High Frequency Trading. • Both firms and individuals will be subject to fines and/or other sanctions given any ‘ignoring of the rules’. Consistent ‘Themes’ 2
  13. 13. What is still under debate? Everything in theory but the one big item still outstanding is: Access of clearers to exchanges and exchanges to clearers. (MiFIR Articles 28 to 30)
  14. 14. MiFID II’s sanction regime characterises the significantly altered risk/reward balance. A big change from the much lighter touch framework that has been in place since competition in equities trading was first opened up five years ago by MiFID What is the main structural difference between MiFID and MiFID 2?
  15. 15. Financial Transaction Tax Being proposed by 11 EU countries with Equities being set at 0.1% and Derivatives at 0.01%. Due Jan 2013 • Extra Territoriality • Definition of when it is due • Competitiveness of EU institutions What other EU rules may affect Trading?
  16. 16. German HFT rules Due July 2013 • Need to be in Germany or passported within the EU to Algo/HFT trade • May move flow to London Local EU laws
  17. 17. What Structural Changes may this cause? • Reduction/removal of margin income on customer flow • Dramatic reduction in voice trading, more electronic trading – smaller trading rooms? • Potential reduction in liquidity for some instruments • Increased IT costs / reduction in revenues This is very likely to lead to: • More specialisation within an entity, only concentrate on what you are good at. • Increased IT spend and increased IT risk. • More outsourcing or use of utilities
  18. 18. Any Other Structural Changes? All of these changes are moving formally Back Office End of Day functions to be more Front Office Real-Time ones. For example there will be a need to move collateral in real-time, due to: • More transactions being cleared requiring more initial margin. • As the CCP’s will be more regulated they will not be able to offer so much intra day credit so to carry out the next trade they will need to have control of the collateral. • This will lead to: • The need to settle transactions quicker to enable the proceeds to be used as collateral. • The lack of available collateral putting a stop to trading activity! All of which will require major changes to systems and communications infrastructure for these current Back Office functions.
  19. 19. Where is the market? Five Stages of Grief • Denial – This can’t be happening to me. • Anger – Why me? • Bargaining – Attempting to make deals. • Depression – Feelings of hopelessness. • Acceptance – Getting on with life.
  20. 20. Immediate Preparations for you • Speak with your compliance departments • Read all the regulations • Attend conferences and events on regulations • Discuss with peer group and industry associations
  21. 21. 21 Developments on the EU Financial Services Legislative agenda London, 22nd May 2013 Dr. David P. Doyle Policy Adviser – EU Financial Services Legislation
  22. 22. 22 Heavy ongoing EU Agenda in Financial Services Legislation Cultural shift in regulatory reform: • Regulating capital markets and market actors • ‘Safety first’ approach • Filling in the gaps between European and national regulation • Fast track model: Less directives – more regulations • More elevated and Pan-EU centralised supervision • Assertive powers vested with the EU Parliament  Capital Requirements Directive IV  Remuneration and bonuses  Single Supervisory Mechanism  EU bank Resolution & Recovery Hedge Funds and Private Equity  EMIR: OTC derivatives, CCPs,  Short-selling  Deposit Guarantee Scheme  Solvency II – insurance  Packaged Retail Investment Products  UCITs IV  Credit rating agencies  Investor Compensation Scheme  Shadow Banking  MiFID II  Market Abuse Directive  EU Mortgage Credit Directive  Pensions  Corporate governance reform within financial institutions  Insurance Mediation Directive  Liikanen Bank restructuring
  23. 23. 23 Regardless of costs, regulatory reform is here to stay All that is of systemic importance should be regulated and supervised To restore trust, investors and consumers should encounter clearer, more coherent and more effective safeguards Supervisory bodies should have the right tools to grasp the complex, interconnected and globalised financial nature of activities There is a need for a better capitalised finance industry with less leverage Perverse incentives in the financial sector should be tackled and reduced
  24. 24. 24 Irish EU presidency – Tackling the priorities  Key legislative texts prioritised before the end of June 2013 … • Consensus between EU Parliament and Council on CRD IV – reached • Banking Union package especially the EBA and ECB regulations – done • Harmonised EU Bank Recovery & Resolution regime – almost there • Unified EU-wide Deposit Guarantee Scheme – as soon as possible!  Other ‘priority files’ • Progress on Markets in Financial Instruments Directive (MiFID/MiFIR) – ‘political agreement’ at least? • EU mortgage credit directive
  25. 25. 25 The European Central Bank – the new sheriff in town The Single Supervisory Mechanism – what powers will it have?  Monitors capital, liquidity and leverage requirements  Authorises and revokes bank licences  Enforces recovery plans  Conducts stress tests  Approves bank mergers & acquisitions (domestic and cross-border)  Supervises early intervention in case of breaches of prudential rules (recovery plans, intra-group financial support arrangements, etc.)  Empowered to request information directly from banks, conduct office visits, investigate  Conducting 1st ‘Asset Quality Review” of eurozone banks…soon •Banks with assets in excess of €30bn (£28bn) •Banks total assets exceed 20% of country’s GDP •Banks receiving support under the European Stability Mechanism (ESM) bail-out fund •Exemptions for small banks with assets less than €5bn (£4bn) – Remain under national supervision •Fully operational by March 2014
  26. 26. 26 Cyprus – catalyst for speeding up the Banking Union • Approval of the ECB direct supervisory role over Euro- zone banks • Cypriot response provided ‘no template’. However… – A revised bail-in pecking order envisaged: shareholders, senior secured bondholders, junior bondholders, insured depositors and uninsured depositors – “Depositors preference” under €100 000 (£85,000) safeguarded. – Deposit-guaranteed funds not bailed-in all but the worse cases at discretion of national regulators – Broad scope of bail-in, with few defined exclusions: insured depositors, secured liabilities, wages, tax liabilities and secured borrowing. – Possible delay to EU Deposit Guarantee Scheme: complex legal, financial and unresolved questions (e.g., depositor preference, and untested ‘bail-in’ mechanism) – EU bank recovery & resolution regime to be in place by 2015 … not 2018 (but recognition that national BRR schemes may not be operational by 2015) – EU and non-EU deposit-taking branches: adequacy of capital and home-state supervision? Bail-in rather, than bail-out – direction of the EU debate: “We have to be able to resolve banks without using taxpayer’s money and without disrupting the payment system …” Mario Draghi, ECB President, during the Cypriot crisis
  27. 27. 27 EU Bank Restructuring Plan – to ring-fence important institutions Liikanen Report (October 2012) Strengthen capital levels, especially model for measuring risks in trading book assets and real estate related loans. ■ Separation of activities based on an assessment of a firm’s recovery & resolution plans or a mandatory separation of proprietary trading and other high risk activities. ■ Scope: All bank’s with assets held for trading and available for sale exceeding : (i) a relative examination threshold of 15-25% of the bank’s total assets or (ii) an absolute examination threshold of EUR 100bn (US$ 129bn, £80.7bn). ► Supervisors would determine the need for separation based on the share of assets to which the separation requirement would apply ► Arlene McCarthy MEP “own initiative” report goes further: Separate balance sheets, Independent decision-making and governance for each entity, separate capital, leverage and liquidity rules EC (May 2013): Which of the four definitions is the best indicator to identify systemically risky trading activities (in order to determine The scope of the institutions subject to a separation requirement:  Using the Liikanen definition (assets held for trading and available for sale)  Excluding available for sale assets, as mostly composed of securities held for liquidity purposes  Focusing on the gross volume of trading activity - likely to focus on proprietary traders and market-makers  Focusing on net volumes - likely to only capture those institutions that have a higher share of unbalanced risk trading (proprietary traders). ►Separate capital, leverage and liquidity rules
  28. 28. 28 CRD IV – Peace agreement between the EU Parliament and Council …at last! • Minimum of 8% of high-quality capital + 4.5% Tier-1 • Liquidity coverage requirement: phased in at 60% of difference starting in 2015, rising to 100% in 2018 • Net stable funding requirement (NSFR), requires that banks hold liquid assets equal to at least 25% of outflows • National Flexibility for national regulators to raise capital charges > 3% – in response to economic conditions or rising risks. The EC can challenge national actions • G-SIFI’s buffer of Tier 1 capital equal to between 1% and 3.5% of bank’s total exposure: from 1 January 2016 • O-SIFI’s buffer of Tier 1 capital equal to 2%: from 2016 • Bankers’ remuneration: 1:1 (bonus/salary) ratio, but can be raised to 1:2 subject to 66% shareholders’ owning half of the shares represented/75% of votes if no quorum • From 2014 banks required to report profits, taxes, subsidies to Commission; potentially from 2015 to the public CRD IV entry into force: January 2014, published in OJ by 30 June 2013, otherwise from 1 July 2014
  29. 29. 29 Agenda in the retail investment space  Insurance Mediation Directive (IMD)  Packaged Retail Investment Products (PRIPS)  Reform of the EU Pensions Regime  Markets in Financial Instruments Directive (MiFID) “European consumers deserve better. They need reassurance that their savings, investments or insurance policies are protected no matter where in Europe they are based “ (Commissioner Barnier, 2010)
  30. 30. 30 Markets in Financial Instruments Directive (MiFID) – review and update What has changed?  ►Escalation of Scope of MiFID I to include fixed income, OTC derivatives and commodities  ► Introduction of maximum harmonisation’ framework with little or no scope for derogations, gaps, re-interpretations, or Member State gold- plating.  ► Investor Protection is taken to a new level of authorisation, supervision and enforcement under MiFID II. Key characteristics ■ Scope: all banks, investment firms, certain non-financial institutions, intermediaries, tied-agents, independent financial advisers, etc ■ Conduct of business obligations ■ Investment advice ■ Informing clients on complex products ■ Client classification: - eligible counterparty - professional client - retail client  ■ Execution quality & best execution  ■ Fit and proper criteria  EC abolishing national options and discretions in MiFID I: A “Single Rule Book” applicable to all market players.
  31. 31. 31 MiFID review – and outcome…”less betting, more investment”  Latest developments • Retention of OTF category limited to non-equity trades (bonds and derivatives) and professional investors. • Further restrictions on investment firms and operators of OTFs to use another investment firm to carry out market-making on “independent basis” - allowed only if no close links exist between firm and OTF. • HFTs: checks, reporting and filters on orders introduced; ‘Minimum resting periods’ being proposed to prevent traders from ‘flashing bids’ but Council disagrees. • HFT players pursuing a market- making strategy to provide appropriate liquidity on a regular and predictable basis to the trading venue. • Commodity derivatives – position reporting by type of trader and positions limits, except where there is a proven economic interest in the underlying asset.  … still a few stumbling blocks …  Non-discriminatory clearing access between CCPs and trading venues: opposed by Germany + Poland  Pre-transaction transparency waivers for equities: not eligible if volume cap per equity per venue exceeds 5% of total trading + limit of 10% of overall trading across the EU in an equity over 12 months  Inducements: to ban or not to ban…
  32. 32. 32 Packaged Retail Investment Products (PRIPS)  Pre-contractual product disclosure  Sales practices KID Key Information Document: must provide:  What is this investment?  What is it for?  Could I lose money?  What are the risks and what might I get back?  What are the costs?  How has it done in the past?  What might I get when I retire? SCOPE  :Structured term deposits  Retail Investment (or mutual) funds  Closed and open-ended funds  Investments packaged as life insurance policies  Retail structured security products  Unit-linked insurance contracts … …and the EU Parliament wants to add:  Shares  Bonds  Sovereign bonds  Bank products, i.e., term deposits, euro-denominated life insurance, not limited to unit-linked products.  Other savings products  Investment products with yield linked to interest rates
  33. 33. 33 Market Abuse Directive  Extending the scope to include ‘organised markets’ (i.e., multilateral trading facilities or ‘MTFs’, systematic internalisers, dealer-brokers crossing networks and other venues such as OTC trading)  Extending scope to a greater variety of financial instruments, including financial, energy and commodity derivatives plus spot commodity contracts, CDSs, and emission allowances  Introduction of prohibition on manipulation of benchmarks and market indices (reaction to LIBOR) rate fixing scandal) • Transforming MAD into a Regulation – less risk of divergent interpretation, gold plating and late transposition • Combating market manipulation through algorithmic and high frequency trading (HFT) • Sanctioning cases where there is a failed insider dealing attempt to manipulate the market • Informing regulators of delay in the disclosure of inside information • Eliminating national differences to enable regulators to obtain Insiders’ Lists from issuers • Strengthening the effectiveness of the enforcement powers of the national competent authorities, and introducing a more robust sanctions regime to be applied to market abuse across the EU. EC noted financial institutions tempted to engage in regulatory arbitrage when deciding place of business/location of branches. • Reporting manager’s transactions • Protection and incentives of whistleblowers
  34. 34. 34 Thank you!   Mobile: +33 628 69 40 40  Published material: - Cost Control - A Strategic Guide (CIMA/Elsevier: London, 1994/2002) - EU chapter to The Future of Finance after SEPA (Wiley: London, 2008) - EU chapter to A Practical Guide to Corporate Governance (Sweet & Maxwell: London, 2010).
  35. 35. Panel Q&A Moderator Rebecca Healey TABB Group • Dr. David P Doyle – EU Policy Advisor, Financial Markets • Philip Stafford – Editor of FT Trading Room • Bob Fuller – CAO, Fixnetix • Richard Kemp – Senior Partner, Kemp Little LLP
  36. 36. FIXNETIXThe ultimate trading advantage