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Erasmus college
H.R. Verbeek gave a presentation on ING Financial Markets and fixed income trading. He discussed ING's global presence and trading operations. He then covered various fixed income products traded including government bonds, corporate bonds, interest rate derivatives, and repos. Verbeek also discussed ING's role as a primary dealer, the financial crisis and its impact on markets, the European debt crisis, and challenges for the future of fixed income trading.
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Erasmus college
- 1. Rotterdam – 30May 2014 www.ing.com H. R. Verbeek Head of Trading ING Financial Markets NL Fixed Income Trading
- 2. 27-mei-14 Agenda • ING FinancialMarkets • Fixed Income Products • Trade Flow • Primary Dealership • The Financial Crisis • The Debt Crisis • The future 2Banking - Investments - Life Insurance - Retirement Services
- 3. Global Presence FinancialMarkets, Sales and Trading locations New York Sao Paulo Tokyo Hong Kong Manila Seoul Singapore Jakarta London Madrid Milan Paris Moscow Budapest Bucharest Sofia Brussels Amsterdam Luxembourg Frankfurt Prague Warsaw Bratislava Geneva Mumbai Ankara Sydney Taipei Shanghai 3Banking - Investments - Life Insurance - Retirement Services
- 4. Dealingroom set-up • BankTreasury & Financial Markets 1 Dealingroom • Unique set-up rings instead of rows • 70 traders, 3 groups Equities, Fixed income, (bonds, derivatives) Currencies. • 70 Sales • FM community: Dealers Real money Clients Trading/ leveraged Clients 4Banking - Investments - Life Insurance - Retirement Services
- 5. Overview FM andunderlying's Research Trading / Treasury DCMSales Corporate Issuer The United States 07/09 General Electric EUR 2bn 4.750% Fixed Rate Notes due 2014 Joint Bookrunner Provide analyses on rates, FX, credit, macro economic developments, etc. Manage the market risk on transactions closed by Sales with clients Maintain relationships with clients in the field of hedging and investments and close transactions Issue bonds for clients 5Banking - Investments - Life Insurance - Retirement Services
- 6. About Financial Markets(FM) Emerging Markets Developed Markets, Debt Capital Markets ING Financial Markets is managed across four main business lines: Global Equity Products Equity Deriv. Commodity FX Rates, Credits IssuanceFX Rates, Credits 6 GSF Banking - Investments - Life Insurance - Retirement Services
- 7. Fixed Income Products 7 FIXEDINCOME Rates & credits STIR Primary dealerships Repo Market Making Government bonds, Credits, Supra’s & Agencies Asset Swaps > 3 years < 3 years Market Making Government bonds, Supra’s & Agencies, Derivatives. Securities Financing Government bonds, Credits, Supra’s & Agencies, ABS etc. Banking - Investments - Life Insurance - Retirement Services
- 8. STIR: 8 • Short-Term InterestRate Options & Futures • Curve specific set-up • Hedging efficient • Liquid money Market Futures • Up to 3 year Banking - Investments - Life Insurance - Retirement Services
- 9. Trading/ Hedging: 9 • Balancedflow • WareHousing • Bonds vs. Bonds • Bonds vs. Swaps • Bonds vs. Listed Derivatives Banking - Investments - Life Insurance - Retirement Services
- 10. Asset classes 10 • GovernmentBonds Debt security issued by government to finance Government borrowing. These bonds are most often issued in domestic currency. • SSA’s Bonds (Sovereign, supranational & Agencies) Sovereign bond: debt issued by national government but denominated in foreign currency Supranational bonds: debt issued by international organization such as World Bank etc. Agency Bonds: debt issued by government-sponsored agency. The agencies are backed by government but not guaranteed since the agencies are private entities. Example is Fannie Mae. • Corporate bonds Debt security issued by corporation. The backing of the bond is the company cashflow. Banking - Investments - Life Insurance - Retirement Services
- 11. Asset classes 11 • OTCIR Swaps (interest rate) This is a highly liquid financial derivative instrument in which 2 parties agree to exchange interest rate cash flows based on a specific notional amount from a fixed rate to a floating rate (and vice versa) • Listed Derivatives A derivative is a risk transfer agreement, the value of which is derived from the value of an underlying asset. The underlying asset could be an interest rate, a currency etc. Listed derivatives are exchange traded derivatives also known as futures.These derivatives are executed over a centralized trading venue (exchange) and then booked with a central counterparty known as the clearing house. Examples: Euribor Futures, Bund, BOBL, Schatz Futures, OAT future etc. • Asset swap Fixed investment such as a bond with a guaranteed coupon payments is being swapped for a floating investment such as an index. Banking - Investments - Life Insurance - Retirement Services
- 12. Trade Flow 12 Sales/ Voice ElectronicTrading Platform: TradeWeb, BloomBerg Trader /Market maker Inter Dealer Broker Inter Bank Platform Trade Hedge Exchange Listed Products Banking - Investments - Life Insurance - Retirement Services
- 13. Trade Flow 13 Voice ElectronicTrading Platform: Trader /Market maker RFQ for Trade Hedge Pricing Engine Market data Trade Repo/Financing Banking - Investments - Life Insurance - Retirement Services
- 14. Repo: 14 • Repurchase Agreement •Seller of a security agrees to buy back from the buyer at a future date against a different price. • Short/ long position need to finance • Crucial to create funding • Trading approx. 300 government bond trades a day Banking - Investments - Life Insurance - Retirement Services
- 15. Trader the spiderin the web… Trader Facilitates market participants Provides balance sheet Provides market knowledge Manages aggregated risk 15 Gives liquidity Joins Sales WareHousing Funnel Banking - Investments - Life Insurance - Retirement Services
- 16. VAR Risk 16 TOTAL IRFX CS TOTAL IR FX CS Limit Utilization Market Making Government Bonds 1.00 1.00 0.00 - 0.78 0.78 0.00 - Portfolio Trading & Finance 2.99 2.83 0.01 0.54 2.70 2.65 0.01 0.57 Market Making Derivatives 1.18 0.77 0.81 - 1.20 0.77 0.81 - Government Bonds & IRD Mgt & Other 0.00 0.00 - - 0.00 0.00 - - Inflation Linked Bonds 0.24 0.24 - - 0.21 0.21 - - RATES AMSTERDAM 4.53 3.89 0.81 0.54 3.93 3.22 0.80 0.57 8.00 57% HVaR Results by Desk (in mio EUR) 19/May 16/May 19/May Banking - Investments - Life Insurance - Retirement Services
- 17. Primary Dealership (PD’s) 17 Aprimary dealer is a pre –approved firm that buys government securities directly from the government with the intention of reselling them to others. • Primary Dealers are appointed by governments • The State uses services of PD’s for: Trading, Promotion Distribution of State loans. Advise • PD’s have an exclusive right to particpate in auctions. • Auctions are used as a price discovery mechanism in the process of covering funding need. • To Ensure the liquidity on the secondary market they are obliged to act as a Market Maker by providing continously bid and offer prices, the quotation obligation on Internet market • They provide monthly reports on their activities in the secondary market. Banking - Investments - Life Insurance - Retirement Services
- 18. Primary Dealership: Outstanding 18 29.3 309.6 TreasuryBills OLOs Belgium: Outstanding in Bln 0.65 320.75 5.30 22.95 0.08 3.65 0.76 Cash DSL DSL foreign currency DTC ECP Private Loans Private Loans foreign currency* Netherland: Outstanding in 1,142 39 Bonds Bills Germany: Outstanding in Bln 1,723 347 Bonds Loans Italy : Outsanding in Bln Banking - Investments - Life Insurance - Retirement Services
- 19. Primary Dealership: Supply 19 2.98 30 3 TreasuryBills OLOs EMTN Belgium: Supply 2014 50 37.7 DSL Money Market (DTC+ECP) The Netherlands: Supply 2014 161 44 Capital Markets Money Market Germany: Supply 267 203 Bonds Bills Italy: Supply 2014 (ING Estimate) Banking - Investments - Life Insurance - Retirement Services
- 20. The Financial Crisis 20Banking- Investments - Life Insurance - Retirement Services
- 21. The Financial Crisis 21 2007:Start of financial crisis • Housing buble starts to burst • Subprime meltdown • Credit crunch loss of confidence by US investors in the value of sub-prime mortgage. • Liquidity crisis • August 2007: BNP Paribas announced ceasing of activities in 3 hedge funds that specialised in US mortgage debt. • Seizure of banking system due to trust evaporating overnight. 2008: • Collapse of Lehman Brothers kicked the Global Financial crisis into high gear • No longer held true that all banks were “too big to fail” • Domino effect/ Panic mode • Unwinding of derivates trades in market • Unwinding of repo trades in market • Market into flight to quality mode Libor Spreads , credit spreads Banking - Investments - Life Insurance - Retirement Services
- 22. The Financial Crisis:Libor Spread 22Banking - Investments - Life Insurance - Retirement Services
- 23. Impact Crisis: Flightto Quality 23 • Outperformance Germany across the curve (Strong buy side Schatz, Bund, BOBL) • Libor Spreads wider • Risk off Market • Default market flattening periphery curve cash invested more relevant than duration. • Debt crisis • Only Sellers • Illiquidity • Artificial markets through central banks • Rate cuts • Balance sheet contrains Banking - Investments - Life Insurance - Retirement Services
- 24. The Debt Crisis 24Banking- Investments - Life Insurance - Retirement Services
- 25. The Debt Crisis 25 2009:Greecebudget deficit revealed 12,7% of GDP. Twice what is was expected to be and 4 times higher than targeted. 2010: Crisis spreads to Periphery countries. • Spain budget defecit totaled 11,2% of GDP • Portugal government announced plans to cut the budget defecit • Greece requests loan of 45 bil. from eurozone countries • ECB (May 2010) announced beginning of Securities Markets Program. Central bank would buy sovereign debt to ensure depth and liquidity. SMP • EFSF created as special- purpose vehicle to provide loans to cash strapped countries. • Ireland takes a bailout of 85 bil euro • European banks perform poorly in stress test, revealing major weakness. (7 out of 91 fail) 2011: Crisis deepens. Potugal, Hungary request bailout, Greek bond holders requested to take 50% haircut, ECB cut rates to 1% etc. • ECB buys Italian and Spanish bonds after Italian bond yields jump Banking - Investments - Life Insurance - Retirement Services
- 26. The Debt Crisis Banking- Investments - Life Insurance - Retirement Services 26 October 2011 : • MF Global (formerly known as Man Financial) files for chapter 11 bankruptcy • Jon Corzino Ceo / Commodities brokerage firm • MF Global made a $ 6.3 bln investment on own behalf in Government Bonds: Italy, Spain, Portugal & Ireland • Large number of complex repo agreements for funding and for leverage profit • Liquidity crisis due to Margin & Capital requirements • Improper transfer of over $891 mln from customer accounts to MF broker-dealer account to cover losses created by trading losses. • $ 200 mln surplus reported to commodities commission but no back-up documentation • Shortfall in customer segregated funds. Not able to repay filed for chapter 11 • December 2011: ECB announces LTRO credit support measures to support bank lending & liquidity in euro area money markets. Maturity 3 years
- 27. The Debt Crisis 27 2012:Containing the crisis • ESM affective or operational • Spain requests bailout for banks • Cyprus requests for bail out • ECB cuts interest further • Moody downgrade France • September 2012: Draghi annnouces the OMT program ( Outright Monetary Transaction) which allows for unlimited ECB purchases of sovereign bonds on the secondary market. • OMT focus on bonds with a 3 years period or less Speech by Mario Draghi, President of the European Central Bank at the Global Investment Conference in London 26 July 2012 “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough” Banking - Investments - Life Insurance - Retirement Services
- 28. The Debt Crisis 28Banking- Investments - Life Insurance - Retirement Services
- 29. The Debt Crisis 29 Eurexdata Banking - Investments - Life Insurance - Retirement Services
- 30. Changing market 30 • Nationalbuying Italian Investor buying Italian paper • Volatility risk profile is changing • Less Market Makers due to risk appetite • Primary Dealerships life line to liquidity • Issuer limits decrease • Balance Sheet restrictions on leverage (Basel II/III) • Best price execution more electronic trading/ OTC in the past • Less Relationship driven • Due to regulations market participants are forced into Central Clearing Banking - Investments - Life Insurance - Retirement Services
- 31. The modern trader •Macro developments • All via the electronic gate way, electronic distribution vs. Voice • Trades via automatic trading systems DTD • Clients via automatic trading systems DTC • Latency crucial, Pricing engines crucial • Brokers give background info, so more transparency • One click trading • “Electronic competition”, velocity of information up • Prices on screen, pricing engines crucial 31 Profile of trader is changing: From grey hair to Nintendo jockey Banking - Investments - Life Insurance - Retirement Services
- 32. • Regulatory constrains FATCA MiFid 2 EMIR • It / information / trading skills / distribution • Risk charges • Transaction Tax • Prices in Competition • Market is commoditized • The future is client centric • Regulators force market- Participants into Central Clearing Future challenges 32Banking - Investments - Life Insurance - Retirement Services
- 33. • The futuretrader is more sales • The future trader is more IT specialist • The future trader is more information broker The Future 33Banking - Investments - Life Insurance - Retirement Services
- 34. Banking - Investments- Life Insurance - Retirement Services 34 Certain of the statements contained in this release are statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING’s core markets, (ii) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, and (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forward- looking information contained in this document. www.ing.com
- 35. Rotterdam – 30May 2014 www.ing.com H. R. Verbeek Head of Trading ING Financial Markets NL Fixed Income Trading