Market making agreements and schemes at WBAG RTS 8: Specifying the requirements on market making agreements and schemes

Transcription

1 Market making agreements and schemes at WBAG RTS 8: Specifying the requirements on market making agreements and schemes

2 Existing Market Maker regimes and MiFID II Today, market making programs are already in place on WBAG to secure liquidity Design of market making depends on market segment and liquidity (Specialist & Market Maker in Prime Market, Market Maker in Standard Continuous, etc.) Role of Market Maker is voluntary, includes official registration, performance measurement and an incentive scheme Market makers are required to flag order and quotes which are submitted to WBAG with a liquidity provision flag in order to distinguish them from other order flows 2

3 New Market Maker requirements under MiFID II With effect of January 3, 2018 MiFID II requires that investment firms that pursue a market making strategy have to sign a market making requirement and are obliged to meet requirements as defined by the trading venue The requirements apply for liquid instruments traded in continuous auction order book Also MiFID-Market makers are required to flag order and quotes which are submitted to WBAG with a liquidity provision flag in order to distinguish them from other order flows 3

4 RTS 8 Article 5: Obligation for trading venues to have market making schemes in place 1. Trading venues shall not be required to have market making scheme as referred to in Article 48(2)(b) of Directive 2014/65/EU in place except for any of the following classes of financial instruments traded through a continuous auction order book trading system: (a) shares and exchange traded funds for which there is a liquid market as defined in accordance with Article 2(1)(17) of Regulation (EU) No 600/2014 and as specified in [reference to Commission Delegated Regulation under MIFIR articles 1 and 3 determining liquid markets for the above instruments]; (b) options and futures directly related to the financial instruments set out in point (a); (c) equity index futures and equity index options for which there is a liquid market as specified in accordance with point (c) of Article 9(1) and point (c) of Article 11(1) of Regulation (EU) No 600/2014 and [reference to Commission Delegated Regulation on transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives]. 2. For the purposes of paragraph 1, a continuous auction order book trading system means a system that by means of an order book and a trading algorithm operated without human intervention matches sell orders with buy orders on the basis of the best available price on a continuous basis Relevance for WBAG YES (liquid shares as defined in the ESMA-database) NO NO YES Continuous auction order book trading (= continuous trading in WBAG terminology) 4

5 RTS 8 Article 1: Obligation for investment firms to enter into a market making agreement Investment firms shall enter into a market making agreement regarding the financial instrument or instruments in which they pursue a market making strategy with the trading venue or venues at which this strategy takes place where, during half of the trading days over a one month period, in execution of the market making strategy (a) post firm, simultaneous two-way quotes of comparable size and competitive prices (b) deal on their own account in at least one financial instrument on one trading venue for at least 50% of the daily trading hours of continuous trading at the respective trading venue, excluding opening and closing auctions. For market makers that have to sign an agreement due to their market activity, but are not willing to take more risk as quoted, MiFID Market Maker scheme will apply It is the investment firm s duty to notify the venue if it intends to pursue a market making strategy in any of the tradeable financial instruments WBAG will not permanently monitor potential market making activities of members 5

6 Market Maker regime in MiFID II under special conditions Under MiFID II there are two special conditions which have to be considered: Stressed market conditions (SMC) RTS 8 Art. 5 Only affect liquid instruments and liquid ETFs & ETPs as defined in accordance with MiFIR Art. 2(1)(17) Exceptional circumstances RTS 8 Art. 3 and 4 Affect Market Making in all financial products traded at WBAG 6

7 Stressed Market Conditions (SMC) for Liquid Instruments RTS 8 Art 6 (2): Trading venues shall set out the parameters to identify stressed market conditions in terms of significant short-term changes of price and volume. Trading venues shall consider the resumption of trading after volatility interruptions as stressed market conditions. Stressed market phase will only affect liquid equities and liquid ETFs & ETPs as defined in accordance with MiFIR Article 2(1)(17) that are tradable on Xetra markets in trading system Continuous Trading with Intra-Day Auctions Instrument list can be loaded from the ESMA webpage Initially WBAG will identify liquid equities and ETFs Further, once a year (by each end of March) WBAG will make a review based on new data provided by ESMA 7

8 RTS 8 Article 6: Identification of Stressed Market Conditions (1/2) Short-term changes in price Stressed market condition Condition 1 Condition 2 Short-term changes in volume WBAGs concept to determine SMCs starts in the case of an extended volatility interruption occurs WBAG calculates deviation of indicative price from the current reference price If theoretical price is outside double extended corridor -> short-term change of price (condition 1) Next WBAG will take into consideration average volume of last year in respective instrument If quantity of potential trade is at least 5 times as high as average volume -> short term change of volume (condition 2) If both conditions are true stressed market conditions! WBAG informs market 8

9 RTS 8 Article 6: Identification of Stressed Market Conditions (2/2) WBAG follows the concept of narrow volatility corridors in order to prevent potential erroneous trades at an early stage already Normal volatility interruption are assumed not to be significant short-term changes in price and will therefor not trigger a stressed market condition Determination of condition 1 and 2 (based on info of volatility monitor) should take place after each end of an extended volatility interruption If both conditions are fulfilled, alert is shown in volatility monitor Market Operations set the phase to Trade with the additional flag SMC to true Information of stressed market condition is distributed in the Xetra trading system accordingly Stressed Market Condition will last for one hour If within that hour again stressed market condition is determined, time of one hour starts again at trigger-point 9

10 MiFID II compliant Market Making Concept of WBAG for liquid shares & ETFs in continuous trading For providing liquidity in stressed markets, investment firms shall be rewarded for the additional risk they undergo through the market maker scheme Current incentive model remains as is (or will be adjusted in terms of concept and/or pricing) and is extended by stressed market incentives Normal Market Phase Specialist Market Maker MiFID Market Maker Stressed Market Phase Specialist Market Maker MiFID Market Maker Continuous Trading 80% 80% 50% 80% 80% 50% Spread Y - committed spread Y Y (Y - committed spread)*2 Y * 2 Y * 2 Size A + committed size A A (A + committed size) / 2 A / 2 A / 2 Incentive No Trading Fees & Kick Back 1 bp 3 bp (Prime Market Fee) No Trading Fees & Kick Back 1 bp 1 bp 10

11 No Market Maker obligation in Exceptional Circumstances (1/3) The obligation to provide liquidity (MM) does not apply in exceptional circumstances RTS 8 Art. 3 lists all potential Exceptional Circumstances All circumstance from RTS Art. 3 (b) to (e) will be managed manually by WBAG WBAG implements a process to announce decisions of the board via news messages including: Start of exceptional circumstances Time of resumption of normal trading (RTS 8 Art. 4 (2)) 11

12 No Market Maker obligation in Exceptional Circumstances (2/3) Situation of extreme volatility (RTS 8 Art. 3 (a) Trigger for EMC if > 50 % of shares and ETFs tradeable in Continuous Trading with Market Making are in a volatility interruption at the same time Volatility interruptions (regular and extended) Volatility interruptions in scheduled auctions (e.g.: opening and closing auctions) will be considered Potential volatility interruptions will not be considered An automated news board message in Xetra (based on a predefined template) will be triggered in case of extreme volatility The end of the EMC and the resumtion of the market maker observation shall be triggered manually via the existing market maker supervision mechanism Fast Market Rule for Market Making in Austrian shares remains 11 Obligations in Continuous Trading of Trading Rules for the Automated Trading System (3) In the case of a significant deviation of the ATX level during a trading day versus the closing level of the ATX of the preceding trading day, the market maker (specialist) quotation commitment is suspended for the respective current trading day. The size of a significant deviation is defined by the exchange operating company and promulgated separately. 12

13 No Market Maker obligation in Exceptional Circumstances (3/3) Exceptional Circumstances (RTS 8 Article 3) Trigger Communication a) Extreme Volatility If > 50 % of shares and ETFs tradeable in Continuous Trading with market making are in a volatility interruption b) War, industrial action, civil unrest, cyber sabotage c) Disorderly trading conditions Significant delay performance of trading system Multiple erroneous orders/transactions d) Member has problems to maintain prudent risk management practices Technological issues Problems risk management Short selling restrictions e) For non-equity instruments, if FMA temporarily suspends the pre-trade transparency requirements (MiFIR Art. 9(4)) Start/End: Board of Management decision Start/End: Board of Management decision Start/End: Member detects problem Start/End: FMA informs WBAG Xetra News Message START Xetra News Message END Xetra News Message START Xetra News Message END Xetra News Message START Xetra News Messge END Bilateral communication member firm with WBAG (START, END) No public information required Xetra News Message START Xetra News Messge END 13

14 RTS 8 Article 7: Fair and non-discriminatory market making schemes Check Article 7 WBAG Fulfilled already Fulfilled already Fulfilled already Fulfilled already Fulfilled already Work in progress Publication on Webpage: terms of the market making schemes names of the firms that have signed market making agreements communicate any changes to the terms of the market making schemes to the participants in at least one month prior to their application Trading venues shall provide the same incentives to all participants who perform equally in terms of presence, size and spread Trading venues shall not limit the number of participants Trading venues shall continuously monitor the effective compliance of the participants with the market making schemes. Trading venues shall establish procedures to communicate the existence of stressed market conditions on its trading venue to all participants in a market making scheme through readily accessible channels. WBAG provides following on webpage: Specialist and Market Maker Model, MM announcements Schedule of Fees List of market makers WBAG always informs in Trader Group ahead of changes In any case WBAG will inform 1 month ahead All market makers / Specialists are treated equal No limitation Monthly performance measurement -> see Stressed Market Concept 14

15 RTS 8 Article 2: Minimum Content of Market Making Agreement Minimum required content (Article 2) Currently in place Comment a) Financial instrument Yes No action required b) Minimum obligations Size & spread 50% trading time Yes No action required c) Terms of market making scheme Yes No action required d) Obligation to resume quoting after volatility interruptions e) surveillance, compliance and audit obligations for MM company No No To be added in the overall terms and conditions To be added in the overall terms and conditions f) Obligation to flag firm quotes Yes New: liquidity provision flag g) Obligation to maintain records of firm quotes & transactions related to market making activities No To be added in the overall terms and conditions 15