MiFID II Exocet presentation Q4 2012
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MiFID II Exocet presentation Q4 2012

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Networking events and a constantly updated micro-site giving Industry-leading analysis, insight and clarity into EU Regulation and its effects on business; what it is, what it means and what you can ...

Networking events and a constantly updated micro-site giving Industry-leading analysis, insight and clarity into EU Regulation and its effects on business; what it is, what it means and what you can do to take advantage of these inevitable and fundamental changes.

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    MiFID II Exocet presentation Q4 2012 MiFID II Exocet presentation Q4 2012 Presentation Transcript

    • The MiFID II ExocetHow to avoid it – and maximise ROE Introduction Bob Fuller Chief Administration Officer Fixnetix Limited
    • EU Regulations• EMIR – passed Mar 2012• OTC Derivatives – passed Jun 2012• MAD 2 Directive – scheduled to be passed early 2013• MAD 2 Regulation – scheduled to be passed early 2013• MiFID 2 – scheduled to be passed late 2012 or early 2013• MiFIR – scheduled to be passed late 2012 or early 2013Latest versions of MiFID 2 and MiFIR passed by MEP’s on the 26th September
    • Regulatory 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 – potentially 2014 or maybe delayed to 2015• MiFIR – potentially 2014 or maybe delayed to 2015
    • 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.
    • Where are we in the process? Final wording not finalised BUT!!
    • What do we know? Various ‘Themes’ are apparent and are very, very unlikely to change, some of these are:•MiFID 1 is NOT repealed but a lot of the definitions are changed i.e. It’snot just about Equities.•No mixing of the prop book with customer orders unless you are an SI.•More transparency.•The Equity model is to be used as the base model for ALL instrumenttypes.•Moving ALL instrument types to electronic trading (the demise of voicetrading).•More connectivity.•More historic proof of what you did and why.•More clearing of other/new instruments.•Both firms and individuals will be subject to fines and/or other sanctionsgiven any ‘ignoring of the rules’. Plus others
    • Still under debateEverything in theory but mostly:•3rd Country recognition • Potentially a big issue for non EU institutions•Controls on HFT – will there be any?•Open access of clearers for non equities
    • Be Mindful of Changes• Reduction/removal of margin income on customer flow• Reduction in voice trading• Potential reduction in liquidity for some instruments• More electronic trading – smaller trading rooms?• Increased costs / reduction in revenues This is very likely to lead to:• More specialisation within an entity, only concentrate on what you are good at (need to look at that urgently)• Increased IT spend and increased IT risk.• More outsourcing or use of utilities
    • 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
    • Immediate Preparations for your Company• Engage with your compliance officer at Board level• Look at what this is likely to do to your revenue for each area• Look at your costs for each area• Look at how you might reduce costs to make it still profitable e.g. outsourcing/industry utility• Decide either to reduce costs or leave that business stream
    • Cushioning the Magnitude of ChangeDon’t!Think it will all go away i.e. getting stuck in the firstfour stages of Grief.Do!Analyse your business NOW!!!!Remember!The longer you leave it the more it is likely to cost you,just remember Y2K and the Euro. IT consultants ratesbecame ever higher!
    • 21 November 2012The MiFID II ExocetMiFID II’s sharp teethrichard.kemp@kemplittle.com
    • Structure of the Packages EMIR - European Markets Infrastructure Regulation MAD II – Market Abuse Directive and Regulation CRD IV – Capital Requirements Directive and Regulation MiFID II – Markets in Financial Instruments Directive and Regulation 14
    • Directives and Regulations Each of EMIR, MAD II, CRD IV, MiFID II is/has its Regulation 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’ 15
    • MiFID II’s sharp teeth Article 71: •broad powers for competent authorities (regulators) •enhances regulators’ powers from earlier drafts by: •extending information access powers and •including an express power to ‘require the freezing and/or sequestration of assets’ 16
    • MiFID II’s sharp teeth Article 72 •requires regulators to be given the supervisory remedies necessary to exercise their functions •powerful, targeted remedies: • ‘requiring the suspension of trading in a financial instrument’ • ‘limiting the ability of any person … from entering into a commodity derivative’ 5.10.12 draft goes further through proposed new express powers: • to award compensation or other remedial action: • ‘to correct any financial loss or other damage suffered by an investor as a result of any conduct or practice [contrary to MiFID II or MiFIR]’ • ‘to require the removal of [an individual] from the 17 management board of an investment firm or market
    • MiFID II’s sharp teeth Article 75(1) •requires Member States to: •‘ensure that their laws, regulations or administrative provisions provide for sanctions at least’ for •twenty seven listed (from (a) to (za)) breaches of authorisation or recognition requirements or other rule book breaches 18
    • MiFID II’s sharp teeth Article 75(2) tough sanctions, including: • for a firm or company, fines up to 15% [was 10%] of the ‘total annual turnover in the preceding business year’ (turnover concerned is that ‘resulting from the consolidated account of the ultimate parent undertaking’) • for an individual, fines up to €10m (was €5m) • fines up to 10 x ‘the amount of the benefit derived from the violation where that benefit can be determined’ • ‘temporary ban on the investment firm being a member of or participant in regulated markets, MTFs or OTFs’ 19
    • MiFID II’s sharp teeth 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 20
    • Kemp Little LLPSolicitorsCheapside House138 CheapsideLondon EC2V 6BJTel: 020 7600 8080Fax: 020 7600 7878www.kemplittle.comKemp Little LLP is a limited liability partnership.Registered number OC300242 England. Registered office as shown
    • IBM/EAX Multi-asset Class Execution SharedService/UtilityMiFID 2 – Exocet or opportunity? John Mattingley - EAX jmattingley@exchange-axis.eu Ian Bentinck - IBM Ian.bentick@uk.ibm.com
    • Disclaimer  All the information, representations, opinions and statements in this document are accurate and correct to the best of our present knowledge. The contents of this document do not constitute a formal estimate or any proposal for commercial agreement. These rough order of magnitude figures are only based upon information provided and our experience of performing similar services for other clients. They are not intended (and should not be taken) to be contractually binding unless and until they become the subject of a separate agreement between the parties. The figures are based on our current level of understanding of the project and will be subject to revision and adjustment as necessary once more precise requirements are understood They are subject to contract and as such nothing in this document should be construed as an offer capable of acceptance.  This document and any supporting documentation contains information which is confidential to IBM and is submitted to you on the basis that it must not be used in any way nor disclosed to any other party, either whole or in part, except to employees or professional advisors of EAX for the purpose of considering its contents.  This document contains information which is confidential to IBM and EAX and is submitted to you on the basis that it must not be used in any way nor disclosed to any other party, either whole or in part except that the information may be disclosed to your employees or professional advisors where such disclosure is on a need to know basis, and is for the purpose of considering its contents. Otherwise disclosures may not take place without the prior written consent of IBM.  IBM is a registered trademark of International Business Machines Corporation. All other trademarks are acknowledged.23 IBM and EAX confidential. No part of this may be circulated outside IBM and EAX without permission by IBM and EAX © 2012 IBM Corporation
    • Background & ConceptsWhat is the industry doing about it?John Mattingley, EAX & Ian Bentinck, IBM Global Business Services
    • Investment market: Situation Growth rates in Europe are poor compared to Far East: The questions to ask are: – Better opportunity in Emerging Markets – Resource needs to be allocated in line with profit •Is the current market solution (multiple It is becoming less affordable to handle European instances of in-house) a sensible one? trading flow in-house for banks and brokers due to: •It was once, but conditions now suggest – Democratization of I-bank technologies: Leveling of otherwise? perceived technological advantages •Is there a solution? – Accelerating tech-refresh cycles – Narrow spread/thinner margins on unpredictable volumes IBM EAX: – Increasing development spend due to regulation – Little or no differentiation among I-bank competitors •Is the IBM EAX tech. platform the at the tech/ops level sensible alternative? Yes – Excessive vendor platform dependence •Can it be done practically? Yes – Less volume •Does it make economic sense? Yes Pressure to move from fixed to variable cost Regulation: Basel III, Dodd-Frank, MiFID/R 2 – Dodd-Frank & Basel III capital adequacy lower Cash Equities business ROE from 25% to 7% – MiFID/R 2 will further lower ROE to ≈ 0% – Requirement to build infrastructure for “equities-like” instruments add further cost – Urgent mitigating actions required to stay in business.25 IBM and EAX confidential. No part of this may be circulated outside IBM and EAX without permission by IBM and EAX © 2012 IBM Corporation
    • What should the industry do about it?Build a definitively-neutral, end to end, order management, order execution, smart orderrouting and best execution utility performance with performance equal to or better thanthat of the top Tier 1 banks, and recruit sell-side clients on a bps/transaction basisBase it on best-in-class, proven technologies, design it to be infinitely scalable and capableof handling other asset classes, and site it alongside major exchanges to deliver lowestavailable latencyCreate an order/execution management front-office to the SOR software which movesthe industry away from over-dependence on one vendor enables any bank/broker of anysize to offer the same enhanced services as the Tier 1sDevelop a data warehouse capable of providing full audit capability and a consolidatedtape service, and let the Regulator have access to itMaintain competitive lead/continue to develop customer relationships and revenues viadevelopment of data products and services and by the introduction of other asset classesas specified by the Regulator © 2012 IBM Corporation
    • Suggested Governance Model Consortium – 8-10 Sell-side IBM Institutions Builds and operates the shared 100% ownership of NewCo service, including new product/service Sets policies, objectives and budgets development as specified by NewCo for NewCo, . Initial owner of EAX Concept and IPR NewCo: Executes Consortium policies. Develops strategic plans to meet 3PMC objectives and manages budgets. Owns the shared service, outsources Strategic development and design of build and operations to IBM. the service, Commercialisation/management commercialisation/market outsourced to 3PMC until steady state development and management of the achieved utility to steady state Ownership Operation/Management27 IBM and EAX confidential. No partIBM Confidential of this may be circulated outside IBM and EAX without permission by IBM and EAX © 2012 IBM Corporation
    • Overall Timeline 1 Jan 13 31 Mar 31 May 13 1 Oct 13 1 Feb 14 30 May 14 1 Aug 14 13 Mobilise Operate and Plan Requirements & Design Build Test Test Phase 1 Phase 2 FSA Service Framework28 April 2012 IBM & EAX Confidential © 2012 IBM Corporation
    • Shared Service for Global Settlement System Operational Capacity, Resilience & Flexibility CLS Group was founded in 1997 to create the first global settlement system, eliminating settlement risk Support for new currencies and FX related products / services in the foreign exchange market. CLS Settlement is Flexibility to be able to meet changes in market and regulatory the market standard for FX settlement and is the environment rapidly industry’s response to increased and continuing Build capacity to support expect future market growth whilst regulatory concern about settlement and systemic preserving the resilience of the core system to physically settle risk associated with the growth in FX trading. during times of market stress CLS Settlement is offered by CLS Bank International (‘CLS Bank’). Owned by the foreign exchange community, CLS Bank operates the largest multi-currency cash settlement system to eliminate settlement risk in the foreign exchange market. Based on information in the settlement service and recent central bank and market surveys,  Net profit Non-Profit org CLS estimates that in terms of the market for which  # employees 200 CLS, 200 IBM, 50 it provides settlement risk elimination services, its Other 3rd Party market share is 68% as at April 2010. This  Shareholders 70 emphasises how successful the service has become since its launch 2002.  Member Banks 59• Seventeen currencies are currently eligible for CLS Settlement. They are: US Dollar, Euro, UK Pound, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish Krona, Danish Krone, Norwegian Krone, the Singapore Dollar, the Hong Kong Dollar, the New Zealand Dollar, the Korean Won, the South African Rand, the Israeli Shekel and the Mexican Peso. © 2012 IBM Corporation
    • Next Steps• Call John Mattingley, Karen Knight or Ian Bentinck for further information
    • 31 2012 IBM & EAX Confidential © 2012 IBM Corporation
    • The MiFID II ExocetHow to avoid it – and maximise ROE Philip Stafford Editor FT trading Room Financial Times
    • There is an Exec overview on the potential effect of these new EU Regulations.Written by Richard Kemp of Kemp Little LLP, the leading City IT law firm. Copies available tonight or download from our website: http://www.marketchange-mifid2.com
    • Please feel free to contact any or all of us:Jefferson Young, Consultancy & Technology - matthew@jeffersonyoung.comJefferson Young, Financial Institutions - james@jeffersonyoung.comFixnetix - bob.fuller@fixnetix.comKemp Little - richard.kemp@kemplittle.comExchange Axis - jmattingley@exchange-axis.comIBM - karenkni@uk.ibm.com