Capitol Tech U Doctoral Presentation - April 2024.pptx
Erasmus college
1. Rotterdam – 30 May 2014
www.ing.com
H. R. Verbeek
Head of Trading ING Financial Markets NL
Fixed Income Trading
2. 27-mei-14
Agenda
• ING Financial Markets
• Fixed Income Products
• Trade Flow
• Primary Dealership
• The Financial Crisis
• The Debt Crisis
• The future
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3. Global Presence Financial Markets,
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
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5. Overview FM and underlying'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
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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
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7. Fixed Income Products
7
FIXED INCOME
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.
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8. STIR:
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• Short-Term Interest Rate Options & Futures
• Curve specific set-up
• Hedging efficient
• Liquid money Market Futures
• Up to 3 year
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9. Trading/ Hedging:
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• Balanced flow
• WareHousing
• Bonds vs. Bonds
• Bonds vs. Swaps
• Bonds vs. Listed Derivatives
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10. Asset classes
10
• Government Bonds
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.
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11. Asset classes
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• OTC IR 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.
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12. Trade Flow
12
Sales/ Voice
Electronic Trading
Platform: TradeWeb,
BloomBerg
Trader /Market maker
Inter Dealer Broker Inter Bank Platform
Trade
Hedge
Exchange Listed
Products
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13. Trade Flow
13
Voice Electronic Trading Platform:
Trader /Market maker
RFQ for Trade
Hedge
Pricing Engine
Market data
Trade
Repo/Financing
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14. Repo:
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• 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
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15. Trader the spider in the web…
Trader
Facilitates market
participants
Provides
balance sheet
Provides market
knowledge
Manages
aggregated risk
15
Gives liquidity Joins Sales
WareHousing Funnel
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16. VAR Risk
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TOTAL IR FX 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
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17. Primary Dealership (PD’s)
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A primary 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.
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21. The Financial Crisis
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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
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22. The Financial Crisis: Libor Spread
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23. Impact Crisis: Flight to Quality
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• 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
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25. The Debt Crisis
25
2009:Greece budget 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
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26. The Debt Crisis
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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”
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30. Changing market
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• National buying 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
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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
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Profile of trader is changing: From grey hair to
Nintendo jockey
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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
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33. • The future trader is more sales
• The future trader is more IT specialist
• The future trader is more information broker
The Future
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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 – 30 May 2014
www.ing.com
H. R. Verbeek
Head of Trading ING Financial Markets NL
Fixed Income Trading