CLEARING OF OTC TRADES IN LISTED EQUITY DERIVATIVES SERVICE DESCRIPTION

Transcription

1 CLEARING OF OTC TRADES IN LISTED EQUITY DERIVATIVES SERVICE DESCRIPTION INTRODUCTION As a response to the changes in market structure brought about by the MiFID2/R Nasdaq is extending the current OTC clearing of equity derivatives offering (today limited to flexible derivatives) with the possibility to clear off-exchange (OTC) transactions (sometimes called look-alikes) on standardised contracts that are economically equivalent to the equity derivatives contracts listed at Nasdaq Stockholm AB and cleared at Nasdaq Clearing AB. Such OTC transaction on standardized contracts will after having been accepted for clearing and having been registered (novated) be fully fungible with the listed contracts. Technically the registration of such OTC transaction on listed contracts shall be conducted by using the existing interfaces available in the trading and clearing infrastructure for registering on-exchange transactions (front-ends and API messages). In order to reach fungibility between the economically equivalent Exchange Traded Derivatives (ETD) and OTC transactions, the OTC transaction shall be registered by selecting the existing instruments (i.e. instrument series) available in the Clearing system and by identifying such trades with dedicated new OTC trade types: OTC, OFF and SI. The changes in systems will be implemented in Genium INET November 2017 Release. The service will be available to Members from January Detailed release schedule and testing facilities will be published according to the standard practice for changes in Genium INET and related systems. Picture 1 shows an overview of the present and future offering. THE BENEFITS OF NASDAQ CLEARED OTC TRADES SERVICE By clearing the full lookalike OTC Trades with Nasdaq you and your customers will: Achieve full fungibility with Exchange traded derivatives (ETD) positions Have OTC Trades reported through same interface as ETD (but other Trade report type) Enjoy the full benefits of CCP clearing Have same margin parameters as ETD Get OTC Trades processed under Nasdaq Clearing Rulebook Have Corporate Actions adjusted in accordance with existing procedures Get Transaction reporting under EMIR. PRODUCTS COVERED CLEARING OF OTC TRADES IN LISTED EQUITY DERIVATIVES: SERVICE DESCRIPTION Copyright 2014, Nasdaq, Inc. All Rights Reserved. Q14-NUMBER. DATE 1

2 The new Trade Types for clearing of OTC trades in listed Exchange Traded Derivatives (ETD) will be offered for all the Equity and Index Derivatives Products (EQD) listed in Nasdaq Derivatives Rules Chapters 3 (i) and 3 (ii). PICTURE 1: PRESENT AND FUTURE OFFERING The flexible equity derivatives offering will not be changed. CHARACTERISTICS OF THE NEW TRADE TYPES The new Trade Types and their characteristics are summarised in the New Trade Types -columns of Table 1. For comparison: the columns Orderbook, Reported Trades and Flexibles show the present offering. The column OTC, APA-published shows an OTC Trade that is only published in the Nasdaq APA but not cleared at a CCP and the column OTC shows the pre- MiFID2/R OTC practice. The trades entered with the new Trade Types will be handled in clearing, including novation, in the same manner as automatched trades and thus will be mutually fungible with them. All Members (NCM, DCM and GCM) can use the new Trade Types. The Members are allowed to use this trade type when they want to report for clearing an EQD OTC Trade that exactly equals any listed (=standardized) EQD Series as describer in Rulebook Chapter 3 (i) and 3 (II). Automatic validation of the price and quantity will be performed as required by MiFID2. Table 1 summarizes for the external information for trades that have been reported with this type. The disclosed trade Type SI with the Market Identification Code (MIC) set as SINT is meant for SI use only. The Trade Type OFFwith the MIC set as XOFF will be used for other cases of trades to be disclosed. Trades with the non-disclosed Trade Type OTC will not be published in GCF or APA. The prerequisite for using this Trade Type is that the trade falls under one of the waivers given in MiFIR or that the trade will be published via another APA.

3 ETD Nasdaq Products and Services Cleared-only & OTC-related Derivatives APA OTC OTC TRADE TYPE 1 TRADE TYPE 2 TRADE TYPE 3 OTC/Non- Characteristics Orderbook Reported Trades* Flexibles Fungible OTC nondisclosed Fungible OTC disclosed Fungible OTC disclosed SI Nasdaq ** Cleared APA-published OTC today) (as it is Trade Type Name Several Several Several OTC OFF SI N/A N/A Market Identification Code (MIC) XSTO XSTO N/A N/A XOFF SINT XOFF/SINT N/A Automated Process Yes Yes Yes Yes Yes Yes No No Governed by Nasdaq Trading Rules Yes Yes No No No No No No Governed by Nasdaq Clearing Rules Yes Yes Yes Yes Yes Yes No No Order Book Liquidity Yes No No No No No No No Central Counterparty Yes Yes Yes Yes Yes Yes No No Flexible Terms No No Yes No No No Yes Yes Trade published by Nasdaq APA No No TBD No Yes Yes Yes No Trade published by Nasdaq Stockholm Exchange Yes Yes No No No No No No Open Interest updated Yes Yes No Yes Yes Yes No No High/Low/Last Updated Yes Yes No No No No No No Deferred Publication possible Yes Yes N/A N/A Yes Yes Yes N/A Fungibility Yes Yes No Yes Yes Yes No No - joint Open Interest Pool Yes Yes No Yes Yes Yes No No - position netting from off-setting trades Yes Yes No Yes Yes Yes No No - Pin risk vs. ETD Yes Yes No Yes Yes Yes No No FLCN Conversion*** applicable N/A N/A Yes N/A N/A N/A No No * Block Trades and EFP (at present Standard Trade (type ST) ** OTC Trades published via Nasdaq APA but not cleared at Nasdaq Clearing N/A = Not applicable Explanations: *** FLCN = Flexible Conversion, one of the existing Trade Types TABLE 1: THE NEW TRADE TYPES 1&2&3 COMPARED TO PRESENT NASDAQ OFFERING AND NON-CLEARED OTC HOW TO USE THE SERVICE? DESCRIPTION OF THE DETAILS Entering a trade for clearing The service will be available during the opening hours of Electronic Marketplace and Clearing Operations. Including both ETD and OTC in one Average Price Trade (APT) is not allowed. An APT that only includes OTC Trades is acceptable. Clearing and settlement The trades sent in with the new Trade Types will be novated, cleared and settled as any other trade. Give-ups will be allowed for the cleared OTC trades. The OTC Trades will be distinguishable from the ETD Trades as required for EMIR reporting. Fungibility of the ETD and OTC Trades means among others that: There will be one pool of Open Interest for the ETD and OTC positions in the same series. The positions originating from OTC Trades can be netted by an offsetting trade in the ETD in the same series and vice versa. The positions originating from OTC Trades can become object for an early exercise arising from a position originally matched in the Trading System and vice versa (Pin Risk) Process for OTC trades in listed Equity Derivatives in Genium INET

4 1. The deal: The participants conclude a deal outside the exchange rules. It can be an OTC trade or an SI trade. 2. The reporting: a) If the trade is a dealer-to-client transaction then the broker-dealer (member) submits a two-sided trade report to Nasdaq. b) If the trade is an interbank transaction, then either the inter-dealer broker (member) submits a two-sided trade report to Nasdaq, or each dealer (member) submits its side as a one-sided trade report. Trades must be reported for CCP clearing within 30 minutes and for APA publication within 15 minutes after execution through a Nasdaq supported interface; Trading Workstation, Q Port, OMNet API or FIX. All mandatory fields must be entered in correct format before the transaction can be submitted. 3. The validation: When the sender submits the transaction Genium INET shall validate that all mandatory fields have been filled in, that the format is correct and that the price and quantity is are within the allowed range. If the price or quantity is outside the allowed range for the ETD the transaction shall be rejected. 4. Approval: If the transaction is approved then a message (BD6) is sent back to the participants in the deal saying that the transaction was approved. The transaction shall contain a unique identification code (Nasdaq assigned trade id). An approved OTC transaction goes into the clearing system. It will not update high, low, last or turnover statistics but in case of the Fungible OTC Disclosed Trade Types it will be published in the trade ticker (important that the user can see that it is an APA transaction i.e. labelled with XOFF, SINT ) and contribute to the Open Interest statistics. 5. Publication: Once the transaction is approved it will automatically be published if a disclosed Trade Type has been selected. The transaction is sent to GCF/TIP and OMNet and FIX which will make the transaction public through the Nasdaq feeds. Rules Details of the changes in Nasdaq Derivatives Markets and Nasdaq Clearing Rules will be published separately. Risk management, margining and collaterals If ETD and OTC contracts have the same risk characteristics there is a possibility to use the same risk and margining methodology. Nasdaq will use the same risk and margining methodology for the cleared OTC contracts as for the equivalent ETDs. Market information The trades for the Fungible OTC Disclosed Trade Types will be sent out as OTC Trades as given in Table 1. Trades with the disclosed Trade Types will be published in the Genium Consolidated Feed (GCF) and the Nasdaq Authorized Publication Arrangement (APA). Nasdaq will not automatically send the OTC Trades to a Trade Repository or to an Approved Reporting Mechanism. This can be done as an add-on service provided by Nasdaq Broker Services If the Member wishes so. For more information on that service please contact regulatoryreporting@nasdaq.com. Deferred publication Deferred publication will be possible according to the principles valid for the ETD, Fees for the service The applicable fee model for the cleared OTC contracts is given in Table 2.

5 1) % of premium value. Min DKK/NOK/SEK 1 or EUR 0.10 per contract. Max DKK/NOK/SEK 14 or EUR 1.50 per contract 2) % of notional amount 3) Per contract 4) Low premium options free of charge 5) Close-out transactions of stock futures are free of charge Notes: OTC transactions will not contribute to aggregated traded volumes for the purpose of determining: Volume discounts for End-clients Volume discounts for Market Makers on the Exchange Minimum required volumes in OMXS30 derivatives for Market Makers on the Exchange Exercise, assignment and expiration fees: Same fee as on-exchange transactions for the respective account type (client, prop, MM) TABLE 2: FEES APPLICABLE TO THE SERVICE Technical information There will be no compulsory systems or API changes. Additional technical details are provided in Table 3. Trade Report Id OFF SI OTC Systematic OTC, Internaliser, OTC, Nondisclosed Description Disclosed Disclosed Asset Class Equity & Index Equity & Index Equity & Index On/Off Exchange Off Off Off Omnet API Trade Report Code Omnet ext_t_state_c FIX Trade Report Code FIX Inbound OffBookType (20200) Exchange Statistics No No No TABLE 3: TECHNICAL INFORMATION Nasdaq will inform the certified Independent Software Vendors (ISVs) about the new Trade Types but we cannot guarantee the conformance of all the ISVs. Therefore Nasdaq encourages all the clearing Members to speak directly to the preferred ISVs.

6 FURTHER INFORMATION For further information please contact your Key Account Manager (KAM) and follow the Clearing and IT Notices sent out from time to time.