Title of Session: Exploring Trends and the Enabling Environment for Electronic Trading Platforms Speakers: Baudouin Richard and Olga Akcadag
Objective of the Presentation To determine: 1. The prerequisites which should be met prior to putting an ETP in place. 2. Which type of ETP is often the easiest to put in place initially. 3. Current trends with respect to: trading via ETPs market architecture of ETPs The objective is not: To review the advantages and constraints in the use of ETPs. To make an in-depth analysis of different ETP models and practices.
Plan I. ETP definition as used in the framework of this presentation. II. Enabling environment: review of prerequisites General Specific III. IV. Features of a market model often the easiest to put in place initially. Trends: general In advanced markets In emerging markets
I. ETP Definition As used in the framework of this presentation. E-trading system (ETS): facility which provides all or some of: Quote/order routing (from computer to computer) Quote/order execution (click and trade) Automatic trade settlement (STP), etc. ETP in general: MTF with at least one of the following distinctive features: Anonymous quotation board ranking orders / including a matching engine RFQ system allowing customers to put market makers in competition ETP in this presentation MTF which imposes a price quotation obligation on at least some of its members, possibly in the framework of a hybrid system (COB + MM)
ETP Definition As used in the framework of this presentation. ETP as defined in this presentation has two important limitations: It excludes: Systems which only quote indicative prices. Pure order driven systems which enable to trade only if and when there is a matching order. It includes only ETPs which have a compulsory market making component. = Consistent with the specificity of bonds vs. equities (bonds are intrinsically less liquid than equities). = Link with the PD system in this presentation.
II. Enabling Environment Three kinds of prerequisites: General: required for any liquid market. Specific: required for efficient functioning of an ETP: Strategic: without them, an ETP will not work. Technical: with them, an ETP will work better.
General Prerequisites Numerous and diverse. Prerequisites most relevant to ETPs: Adequate legal and regulatory framework. Efficient infrastructure (depositary facilities and settlement system). Diversified investor base. Regular and predictable issuance policy.
Specific Prerequisites: Strategic = prerequisites required for implementing market making obligation: quotation of firm two-way prices ( Price quotation obligation, PQO) Market making options: Security: - Instrument: bond (conventional, linked), bill, other - Type: benchmark, liquid, other - Number - Selection: imposed, chosen, both Quotation: - Min. spread - Max. quantity - Continuous, semi-continuous, on request ETP: Designated, one or several Volume: Minimum volume required or not Market makers: Only PDs or not
Specific Prerequisites: Strategic Usual market making compliance checks Per market maker Number of securities quoted / minimum number required. Per quoted security Compliant time effectively quoted / minimum time required. Quantity effectively quoted / minimum quantity required. Maximum spread authorized / spread effectively quoted. Ratios are time-weighted.
Specific Prerequisites: Strategic Requirement: Market making - quotation of firm two-way prices. ( Price quotation obligation, PQO) Prerequisites: 1. Benchmark issuance policy. 2. Repo market (MRA). 3. Authorization of short selling. 4. Securities lending facility. 5. PD incentives to perform, for example: Exclusive direct access to auctions (sale, exchange, buy back) Post-auction non-competitive bids DMO s privileged counterparty for active debt management operations League tables of best performing PDs Once these prerequisites are met, then PQO can be negotiated.
Specific Prerequisites: Technical PDs involved in and supportive of a project. DMO involved in or at least approving of ETP market rules. ETP able to provide DMO with activity statistics required to: Check compliance by market makers with their quoting obligation. Appraise the quality of PDs performance.
III. ETP Type: Getting Started Type of ETP which is often the easiest to put in place to get started. The system below is not necessarily the best one (= country-specific). Adopt tiered system. Start with B2B with membership limited to PDs + possibly non-pd market makers willing to assume the same obligations as PDs. Minimizes opposition by market makers Obligations are reciprocal Decreases trading risks and costs Enhances market liquidity Enhances price transparency Ensures effectiveness of quoting obligations Adopt internationally used system. Cuts down costs Facilitates internationalization of the market Regulatory framework. Regulated market vs. MTF: country-specific
IV. Trends 1. General Increasing number of markets using ETPs = increasing awareness of benefits But Primary motivation may vary. OTC continues to prevail. No necessary link between: Market share of ETP and Market liquidity measured by turnover ratio
Trends 2. Advanced markets Taking the EU as an illustration: Initially, ETPs primarily DMO engineered and monopolistic. From 2007, switch to a competitive environment. Dominance of internationally used ETPs vs. bespoke ETPs. Limited but growing role of Stock Exchanges. Growing usage of same infrastructure for B2B & B2C.
Trends 3. Developing markets More important role of Stock Exchanges, whether: Own system (Korea, Malaysia, Turkey, Vietnam). Bought system (Poland). Providing operational support to a MTF (Israel).
Country Survey on ETPs Preliminary Results 1 1. Introduction Objectives, Country coverage 2. Quantitative Information on ETPs 3. ETPs Number, Categories, and Ownership 4. Linkages to Primary Dealers (PDs) 5. Business Rules 1/ Consolidated survey results incorporating responses from all participating countries will be available after the Conference.
1. Introduction Objective: Exploring trends and enabling environment for ETPs, The role ETPs in SM architecture, and in its relationship to PDPs Country coverage: GBM Conference Country Questionnaire 9 countries have completed: Brazil, Colombia, Hungary, Indonesia, Morocco, Poland, Thailand, Turkey and Vietnam Preliminary conclusion: Responses confirm the trends we perceived responses are a good illustration of diversity of possible regimes
2. Quantitative Information on ETPs Market share of OTC trading vs. ETP and SE (Trading volume % of total; end-2013 or latest) Breakdown of the ETPs market share between B2B and B2C (%) OTC trading and B2B dominates domestic GS markets
3. ETPs Number, Categories, Ownership In all respondent countries, GS are quoted on one or more ETPs: 5 countries have 1+ ETPs: Brazil, Colombia, Hungary, Indonesia, and Thailand Ownership varies widely across countries: by a SE 6 [Brazil, Colombia, Hungary, Indonesia, Thailand, Turkey] by the CB 2 [Brazil, Colombia] purpose-built 3 [Brazil, Indonesia, Thailand] off-the-shelf 1 [Hungary] Regulatory arrangements vary from country to country: SEC, MoF, or other regulatory institution authorizes ETPs to operate 6 countries consider ETPs as regulated markets [Brazil, Colombia, Hungary, Indonesia, Thailand, Turkey]
4. Linkages to PD Programs All respondent countries have a PD Program; # of PDs ranges btw 6 [Morocco] 19 [Indonesia] w/ an average of 13 PDs 4 impose mandatory quoting obligations to their PDs that are required to provide firm quotes : firm prices to customers [4]; to other PDs only [4] Short-selling of GS is allowed in 6 countries 4 DMOs offer a SLF to its PDs to ensure that they can cover their short positions 4 impose a min SM volume requirement for PDs,e.g. market share/volume in absolute terms Quotes are posted for Tbills and Tbonds in all markets, except for Colombia and Turkey [only for Tbonds] All respondent countries impose maximum spread limits that are calibrated based on different criteria: e.g., the maturity or type of issue, previous closing prices, benchmark or off-the-run issue. 20
5. Business Rules Type of trades Settlement cycles Brazil spot/forward T+1 Colombia Spot, repos T+0 Hungary Spot T+2 Indonesia Spot, forward, repos Usually T+2 Morocco Spot T+0 Poland Spot, sell-buy-back, repo T+2 Thailand Spot T+2 Turkey Spot buy&sell and 1-day forward buy&sell of benchmark securities T+0 Vietnam Spots, repos T+1
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