FESE workshop with upcoming Greek Presidency. Athens 8 th November 2013

Transcription

1 FESE workshop with upcoming Greek Presidency Athens 8 th November 2013

2 The Federation of European Securities Exchanges FESE represents in total 46 Securities Exchanges (in equities, bonds, and derivatives) through 21 Full Members from all EU Member States and Iceland, Norway and Switzerland as well as 3 Observer Members from European emerging markets. 46 Securities Exchanges through 21 Full Members from 30 countries 3 Observer Members from 4 countries 2

3 Impact of the implementation of MiFID I Positive impact of MiFID Increase of Competition Reduction of costs Increase efficiency for Blue Chips Stocks Negative impact of MiFID Increase of fragmentation and complexity of markets More darkness Development of a two-tiered market between liquid shares and Midcaps and SMEs Unfair competition from broker-run trading venues Overall impact Commercial opportunities for the few, but limited benefits for investors & issuers! Main losers: SME stocks

4 Settlement Clearing Trading European equity landscape before MiFID I LSE BIT NYSE Euronext SWX DB BME Nasdaq OMX 2 CC&G LCH SIS x-clear Eurex Link Up Markets NCSD VP SS M. Tit. Euroclear SIS Sega Clearstream Iberclear ISD EE CSD LT CSD LV CSD

5 Settlement Clearing Trading European equity landscape after MiFID I LSE Group NYSE Euronext NYX Arca 1 Turquoise 3 LSE BIT SIX BB Nasdaq Group Equiduct Chi-x 2 OMX 4 BATS 2 DB BME Euro CCP EMCF Eurex LCH 1 CC&G SIS x-clear Citi BATS & Chi-x Link Up Markets M. Tit. SIX SIS VP Euroclear FI & SE ISD EECSD LT CSD LV CSD Clearstream Iberclear European CSDs 1 In May 2009 announced competitive clearing agreements 2 In July 2011 announced intention to offer a choice of four clearers 3 In September 2011 announced intention to offer a choice of three clearers 4 In October 2011 announced intention to offer a choice of three clearers Note: In green the interoperability agreements in place, orange those on hold due to review by the regulators or to discussions between the parties, in blue other arrangements.

6 Settlement Clearing Trading After MiFID II? More complexity? OTF OTF OTF OTF OTF OTF OTF OTF OTF OTF OTF OTF OTF OTF OTF OTF NYSE Euronext NYX Arca 1 Turquoise 3 LSE BIT SIX BB Nasdaq Group Equiduct Chi-x 2 OMX 4 BATS 2 DB BME Euro CCP EMCF Eurex LCH 1 CC&G SIS x-clear Citi BATS & Chi-x Link Up Markets M. Tit. SIX SIS VP Euroclear FI & SE ISD EECSD LT CSD LV CSD Clearstream Iberclear European CSDs 1 In May 2009 announced competitive clearing agreements 2 In July 2011 announced intention to offer a choice of four clearers 3 In September 2011 announced intention to offer a choice of three clearers 4 In October 2011 announced intention to offer a choice of three clearers Note: In green the interoperability agreements in place, orange those on hold due 6 to review by the regulators or to discussions between the parties, in blue other arrangements.

7 Impact of MiFID on equity trading costs in Europe: Cost per transaction (EUR) % lower costs in 3 years Source: EU Commission study Monitoring prices, costs and volumes of trading and post-trading services, 2009 &

8 Key FESE views Market structure No need for Equity OTFs BCNs trading should be captured by RM, MTFs (if multilateral) and SI (if bilateral) Equity OTFs are: Treat clients unfairly Undermine price formation Make pre-transparency meaningless Undermine best execution Increase risk at CCP level Transparency MiFID II should increase transparency compared to MiFID I Equity Support for LIS, NDW and OMW RPW not needed as MTFs matured Non-equity Increased transparency is a key objective of MiFID II Increased transparency needed in line with G20 mandate Increased transparency will benefit all investors 8 Trading mandate Derivatives Trading mandate needed to increase safety and efficiency of derivatives markets Support for G20 derivatives trading mandate OTFs to be used as a second-best Equity Trading mandate crucial to close the MiFID I loophole Fixed Income Trading mandate would improve transparency Commodities Position limits Applied by exchanges (in collaboration with competent authority) For physically settled contracts to avoid squeezes at delivery. Reporting in line with CFTC commitment of traders report

9 Market structure

10 Venues competing for order flow as required by MiFID I 10

11 MARKET RULES OTF = differential treatment for the same business Trading Venue Multilateral trading MiFID 2 Bilateral trading Regulated Markets MTF Organised Trading Facility Systematic Internalisers OTC Pre-trade transparency Post-trade transparency Non-discretionary execution* Fair/Open/ Nondiscriminatory Access Market Abuse Monitoring? Conflicts of Interest * Non-discretionary execution means that the orders are executed in a predictable way. 11

12 RM/MTF vs OTF: Two Key Differences 12

13 OTF Discretion: What does it do? 1. Unfair treatment of clients: some better, some worse 2. Undermines interaction of demand & supply, undermining price formation of assets 3. Makes pre-trade transparency meaningless 4. Undermines the best execution rule for investors 5. Makes it difficult for a CCP to manage its risks based on the price information from the trading venue If discretion is to stay, it should be adequately framed to ensure fair and orderly markets 13

14 Local markets need to maintain local ecosystems to help companies access funding Analysts who can cover local stocks Enough liquidity to allow price formation and allow investors to exit positions Regulated markets and SME MTFs Banks and brokers able to act as underwriter and market makers Private equity that bring companies to the market Advisors Accountants Auditors 14 Companies willing and able to list Investors willing and able to take risks

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17 Equity Pre-trade Transparency

18 State of play of waiver discussion 2007 Oct Oct May 2013 Commission MiFID I Commission MiFID II Parliament Council FESE LIS LIS LIS LIS LIS RPW RPW RPW* Negotiated Trades Negotiated Trades Negotiated Trades Order Management Order Management * Various options considered to restrict usage 18

19 EUR billion 8,000 What is the future of OTC with the waivers? Multilateral trading Bilateral trading 7,000 47% 6,000 5,000 LSE Group? 37.8% 36% Crossing Networks 1.2% 4,000 NYSE Euronext 3,000 2,000 1,000 0 DBAG BME SIX Nasdaq OMX 9% Chi-x Turquoise BATS Europe Liquidnet Pipeline, etc RMs (Lit) MTFs (Lit) Dark Pool MTFs Systematic Internalisers Note: End 2009 data. FESE estimations reinforced with CESR CP figures on Dark trading Dark Pool MTFs figures refer to trading under pre-trade waivers according to MiFID. Analysis based on different sources: 19 FESE EEMR, Markit Boat, Thomson Reuters, and CESR consultation paper on Equity Markets (CESR/10-394) 6% Trading mandate Trading mandate 2% OTC OTC

20 Reference price waiver: will volume cap work? Each venue can only offer dark trading via the reference price waiver up to 4% of total volume of trading of that share across all European venues 4% 4% 4% 4% 4% 8% Total use of the reference price waiver must not exceed 8% of total volume of trading of that share across all European venues 20

21 What are the alternatives to a volume cap? Price improvement at the midpoint only (i.e. in the middle of the spread) Limiting trading in the dark to the midpoint only would ensure that there are no directional pricing signals occurring in the dark and that counterparties to a trade are treated fairly and receive the same price improvement (contrary to some of the proposals made lately arguing in favour of a price improvement at least equal to a tick). An order size threshold based on a percentage of the Large in Scale (LIS) size This would ensure a use of the RPW for orders which are not LIS, but which are of a certain size that might generate market impact if they were to be conducted on lit venues. We would suggest that this could be achieved by using a divider of LIS as this figure would be based on average daily turnover, i.e. the liquidity of the instrument concerned. A per trade size threshold would ensure that only orders of certain significant size would avoid pre-trade transparency requirements, in line with the fundamental purpose of the waiver regime. IMPORTANT: BOTH ELEMENTS MIUST BE IMPLMENTED TOGETHER TO FIRMLY RESTRICT DARK TRADING 21

22 Genuine price improvement only achieved at midpoint Best Bid RPW used to match order at 12 RPW used to match order at 15 RPW used to match order at 18 Best Offer Buyer Buyer wins 8 Seller loses 8 Seller Buyer Buyer loses 8 Seller wins 8 Seller Buyer Matching the order at midpoint ensures that both buyer and seller are treated fairly i.e. both gain 5 22 Seller

23 Trading Mandate

24 FESE views on trading mandates for all asset classes Asset Class Should there be a trading obligation in place? What should be covered? What should be the exemptions? Equity YES All equities admitted to trading on a regulated market or MTF Only large-in-scale or non-price forming trades Bonds YES All bonds admitted to trading on a regulated market or MTF Only illiquid bonds that cannot be traded on multilateral platforms Derivatives YES All standardised and sufficiently liquid instruments Non-standardised and illiquid instruments 24

25 G20 G20 commitment and MiFID OTC Derivatives Clearing obligation CRD IV EMIR* Capital Requirements Clearing in CCPs Trading obligation ESMA approval based on Standardisation of the contract Reduction of systemic risk in the financial system (inc. lack of transparency on positions) Liquidity of contracts Availability of pricing information MiFID Traded on RMs/MTFs/OTFs ESMA OK based on CCP clearing obligation Liquidity based on: Average frequency of trades Average size of trades Number and type of active market participants Liquidity Backward looking + Forward looking 25 * EMIR also includes a requirement for derivatives to be reported to Trade Repositories

26 Implementation of the G20 mandate Eligibility of derivative contract Clearing + Trading obligation (backward + forward liquidity criteria) Where should it be traded? RM MTF OTF OTC X X Clearing obligation only X X X Not subject to clearing or trading obligation X X X 26

27 Commodities

28 Commodities are diverse and have different characteristics Coffee Cocoa Sugar Milling Wheat Rapeseed Corn Feed Wheat Electricity Oil Natural Gas Coal Aluminum Copper Zinc Lead Nickel Tin Aluminium alloy

29 What can and cannot be done Combat market manipulation Safeguard stability and delivery and settlement Reduce systemic risk Reduce price volatility Curb financial speculation Position limits Listed derivatives contracts OTC/physical contracts Regulated markets can manage

30 4 persons cannot receive 3 lots EU position limits regimes Regime 1: Position management Regime 2: Delivery limits Duration of the contract Deliver y date Regime 3: Lending Guidance

31 Potential compromises for equities Equity OTF 1 No OTF Trading mandate Council Transparency waivers LIS RPW NDW OMW In line with principles of MiFID and ensures fair and orderly markets Yes No Yes (with restrictions) - Yes A good outcome for MiFID II? 2 No OTF Council Yes Size threshold (%LIS) + Price imp at Midpoint Yes (with restrictions) - Yes Potential outcome scenario based on current negotiations risk of unrestricted waivers 3 No OTF Council Yes No size threshold Price imp at Midpoint Yes but without restrictions waiver could become loophole to replace the RPW - No meaningful restriction on use of waivers will prevent a fair and orderly market 4 No OTF Yes Yes 5 OTF Yes Yes 6 High potential for increased dark trading No size threshold No size threshold OTF with restrictions No Yes No size threshold 7 OTF No Yes Price imp. per one tick Price imp. per one tick Price imp. per one tick 31 Yes (but no firm definition) Yes (but no firm definition) Increased dark trading without restrictions (worst than MiFID I) No size threshold Price imp. per one tick Size threshold Size threshold Price imp. per one tick Price imp. per one tick No real improvement compared to MiFID I No real improvement compared to MiFID I Considerably worse than MiFID I Considerabley worse than MiFID I

32 Potential compromises for bonds Trading Mandate Matched Principal Trading (MPT) by the OTF Operator (MiFID Art 20) For corp. bonds For govt bonds Pre-Trade Transparency Exemption and Waivers (MiFIR Art 7 & 8) LIS Liquid Market Liquidity Threshold Voice Trading LIS Post-Trade Transparency Deferred Publication (MiFIR Art 9 & 10) Liquid Market Liquidity Threshold Above a certain size Volume Omission Corp. Govt A good outcome for MiFID II? In line with MiFID II objectives as proposed by the Commission to ensure greater transparency for bonds FESE position Yes For all bonds Yes - EP proposal Yes Only for liquid bonds Ban on all prop trading incl. MPT Council proposal to include MPT Yes No No Yes Within the rules of a trading venue contributing to transparency No Yes Yes Yes Yes Yes Yes Oct 4 trialogue proposal (superficial framing) 32 Yes No No No No No In line with MiFID II objectives High potential outcome scenario based on current negotiations risk of undermined transparency Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Current proposals keep the status quo for OTC bond trading Other scenarios which would broadly preserve the status quo Yes Yes Yes No Yes Yes With better framing Yes No Yes Yes Yes Yes Mixed TM, but bad on post trade & MPT Yes Yes Yes Yes Yes Yes OTC trading characteristics reproduced in pseudoregulated environment

33 Potential compromises for derivatives Scope of the Trading Mandate (TM) Trading hierarchy Trading hierarchy No trading hierarchy Matched Principal Trading (MPT) by the OTF Operator Ban on all prop trading incl. MPT MPT allowed for nonstandardise d derivatives MPT allowed for nonstandardise d derivatives Blanket Exemption No exemptio n No exemptio n Exemptio n for nonfinancials Exemption and Waivers from Pre-Trade Transparency LIS Derivative s outside TM Liquid Market 33 Liquidity Threshold 3 Voice Trading Yes No No No Yes Within the rules of a trading venue contributing to overall transparency Yes Yes No Yes Yes With better framing Yes Yes Yes Yes Yes Oct 4 trialogue proposal (superficial framing) A good outcome for MiFID II? In line with MiFID II objectives Mixed outcome, restricted OTF use but major loopholes on transparency OTC trading characteristics reproduced in pseudoregulated environment

34 Indices & Benchmarks

35 How does the Commission define an index and benchmark? DAX DAX CAC40 BEL20 CAC40 BEL20 INDICES BENCHMARKS FTSE ATHEX 20 FTSE ATHEX 20 OMX30 OMX30 What is an index: - Any published figure; - Calculated with a formula; - Determination based on value of underlying asset/price 35 When does an index become a benchmark: - Any index used to determine the value of financial instrument or financial contract; - Any index that is used to measure the performance of an investment fund;

36 Transaction based Rule based Key differences between types of indices Main Types of indices Data Discretion in data selection Potential conflict of interest Panel based e.g. -IBORs Estimates -> non-verifiable Yes Yes OTC transactions e.g. Oil PRAs Partial OTC data -> largely nonverifiable Yes Yes Transaction based e.g. equity indices Executed trades No discretion No conflict of interest 36

37 Market Rules already in place Why should regulated data be firmly differentiated from critical benchmarks based on submission data? MiFID Transparency Requirements Regulated data benchmarks Critical Union benchmarks Market Abuse Monitoring Non-discretionary & transparent methodology Conflicts of Interest 37

38 Annex Background slides 38

39 Overview of current equity transparency waivers Reference Price Waiver Systems matching orders based on a trading methodology by which the price of the financial instrument referred to in Article 3(1) is derived from the trading venue where the average daily trading volume is a sufficient proportion of the average overall daily trading volume of that financial instrument, where that reference price is widely considered and is regarded by market participants as a reliable price; Negotiated Transaction Waiver Systems that formalise negotiated transactions which: i. are made within the current volume weighted spread reflected on the order book or the quotes of the market makers of the trading venue operating that system, or where the share, depository receipt, ETF, certificate or similar financial instrument is not trade continuously, within a percentage of a suitable reference price, being a percentage and a reference price set in advance by the system operator; or ii. are subject to conditions other than the current market price of that financial instrument; Large In Scale Orders that are large in scale compared with normal market size Order Management Orders held in an order management facility of the trading venue pending disclosure 39

40 Four equity transparency waivers Reference Price Waiver Systems matching orders based on a trading methodology by which the price of the financial instrument referred to in Article 3(1) is derived from the trading venue where the average daily trading volume is a sufficient proportion of the average overall daily trading volume of that financial instrument, where that reference price is widely considered and is regarded by market participants as a reliable price; Negotiated Transaction Waiver Systems that formalise negotiated transactions which: i. are made within the current volume weighted spread reflected on the order book or the quotes of the market makers of the trading venue operating that system, or where the share, depository receipt, ETF, certificate or similar financial instrument is not trade continuously, within a percentage of a suitable reference price, being a percentage and a reference price set in advance by the system operator; or ii. are subject to conditions other than the current market price of that financial instrument; Large In Scale Orders that are large in scale compared with normal market size Order Management Orders held in an order management facility of the trading venue pending disclosure 40

41 Reference Price Waiver: how does it work? How public markets contribute to price formation Buy orders Public Market Transparent Price Formation Sell orders how dark pools free-ride from public prices and do not contribute to price formation Dark market does not operate a continuous trading system but rather takes a reference price and crosses non-displayed orders at price derived from the published prices in the public market Public markets disenfranchised as they are obligated to publish best bid and offer as part of the pre-trade transparency requirement for the ordinary markets therefore, dark markets using the reference price waiver do not contribute to price formation Broker clients Dark Market No price formation Broker clients 41

42 Negotiated transaction waiver Issues with need for continuous liquidity in low liquid markets in wake of financial crisis Public Market Buy orders Spreads too wide to post public prices due to low liquidity Sell orders Resulting transaction is reported on the exchange in real time thus fully contributing to post trade transparency and transaction reporting obligations Brokers negotiate the price directly within the spread on the public market 42

43 Large in scale waiver Orders too large to send to market without avoiding significant market impact Buy/Sell order that is large in scale compared to normal market size Order too large to avoid significant market impact X Public Market Resulting transaction is reported on the exchange thus fully contributing to post trade transparency and transactions reporting obligations Order is not sent to the market but remains hidden if it meets the large in scale (LIS) criteria specified in MiFID The minimum non-displayed order value for an order book is defined based on order book s average daily turnover After partial fill, remaining stubs below the LIS threshold may be submitted on exchange Large in scale order All, or portion, of LIS order is executed off-order book and reported immediately onexchange 43

44 Order management waiver Market participants wishing to execute a large block trade Broker wishing to execute large trade Order too large to avoid significant market impact X Public Market Resulting transaction is reported on the exchange thus fully contributing to post trade transparency and transactions reporting obligations For iceberg orders, broker sends order to an order management system operated by the public market Orders sent to market in predefined tranches, and is continuously updated as orders are executed to ensure that a fixed amount of the order is always on the market Order management system operated by the public market 44 When an open volume on the market is decreased, the open portion of the order is updated with the new volume When an open volume is increased, the open portion of the order is not updated with the new volume until the open portion of the order in the priority queue is filled, and then the next open portion in the priority queue will be shown with the increased volume An increased volume affects the order priority but a decreased volume does not The hidden volume may not be larger that 4000 times the open volume

45 OTFs: How They Make Key Market Rules Optional 45?

46 RM/MTF vs OTF: The Discretion Difference