Regulatory Impacts on the Nordic Secondary Bonds and Derivatives Market ICMA Copenhagen, 27 October 2015 Fredrik Jenestrand, Head of Regulatory Strategy and Implementation, Markets FICC
EU s regulatory express trains continue at high speed, but the EU growth agenda may slow things down EU bank and capital markets regulation has mainly focused on financial stability and control but must now co-exist with EU s growth agenda Financial Benchmarks CSD-R PRIIPs Initial margin for MiFID II / MiFIR OTC derivatives EMIR LEI Bank Structural Reform (Liikanen) Basel III / CRD IV / CRR TLAC Capital Markets Union Dodd-Frank Act Banking Union SRM SSM Volcker BRRD & our customers LCR NSFR Leverage Ratio Fundamental Review of the Trading Book VS. Review of EU regulatory reform CRR review Cross-border harmonisation Financial Transaction Tax (FTT) UCITS V Solvency II MAD/ MAR SFT Transparency IORP II Shadow Banking AIFMD Recovery and Resolution for FMIs Securities Law Legislation Other growth initiatives *Institutions only regulation 2
The combination of market structure and banking prudential regulations has and will put pressure on many market models Transparent, electronified, centralised, market micro structure MiFID II, EMIR, CSDR (2016-2018) Uncertain execution + High cost of balance sheet = Powerful driver of change Key considerations: Transparency vs liquidity? Stability vs liquidity? More, better, costlier capital and controls CRR/CRD IV, FRTB, Leverage ratio, MiFID II (2014-2018) More, longer, costlier funding and liquidity for banks NSFR, LCR, Bank Structural Reform (2015-2018?) 3
How has the market responded so far to the regulatory developments? Significant risk shift from dealers to investors Volatility spikes and liquidity droughts are at least not less likely with less risk taking capacity for dealers Source: Citi Source: FT.com 4
The Nordic markets are similar to other EU markets, but has also evolved to work well in the local context Defining characteristics of the Nordic markets The Nordic challenge Resulting (main) Nordic market model Small markets Own currencies Large transactions Infrequent trading Limited number of liquidity providers Limited number of end-clients Limited natural market liquidity Dealer to Client (off trading platform) Request For Quote The role of the dealer: Find buyer/seller Bridge time and size Transform risk Manage counterparty risk Take and hold risk Provide financing 5
The Nordic market model is under regulatory pressure, which will drive changes in some areas Relative market model impact from regulatory requirements Orders (Agency Trading) Request For Quote (Balance Sheet) Trading Venues?? Dealer to Client (Nordic market model)? Capital requirements Funding requirements Pre-trade firm quoting Post-trade transparency Bilateral margining Mandatory buy-in We should embrace the positive changes, but remember that the direct dealer to client relationship is necessary for many products and end-user segments 6
EMIR: Half way there, but the CCP clearing obligation and Margin requirements for non-cleared derivatives are yet to come 2013-2014 2016-2018 Sep 2016-Sep 2020 Trade reporting & Risk mitigation techniques CCP Clearing Obligation Margin requirements for non-cleared OTC derivatives Corporates & Financial Institutions (FC) All OTC derivatives Financial Institutions (FC) Some OTC derivatives: In: G4-IRS, Index CDS Out: FX forwards/swaps Maybe: Scandi IRS? FX Options? Financial Institutions (FC) Non-CCP cleared OTC derivatives Variation Margin: All FC (March 2017) Initial Margin: Only a few very large FC 7
MiFID II (MiFIR): Very broad scope, but greatest impact will come from non-equities trading and transparency obligations MiFID II bonds and derivatives trading and transparency Main requirements Liquid instrument transactions below SSTI (if traded on a trading venue) Liquid instrument transactions above SSTI Illiquid instrument transactions A. Derivatives platform trading obligation (FC only) B. Pre-trade transparency (Firm quoting by Systematic Internaliser) C. Post-trade transparency (15 minutes) Mandatory Not determined Exempt Mandatory Exempt Exempt Mandatory 48h + deferral 48h + deferral MiFID II is in effect from 3 January 2017 8
MiFID II: Nordic instruments defined as liquid according to ESMA in December 2014 This will change, but not necessarily too much Nordic instruments defined as liquid (in some tenors) by ESMA in Dec-2014 Interest Rate Derivatives FX Derivatives Bonds SEK FRA DKK IRS SEK IRS NOK IRS EUR- SEK Swap USD- DKK Swap USD- SEK Swap USD- NOK Forward USD- NOK Swap USD- SEK Forward EUR- NOK Forward NOK- SEK Forward EUR- DKK Forward EUR- SEK Forward Most Government bonds A few Corporate bonds Many Mortgage bonds Most EUR and USD interest rate and FC derivatives were defined as liquid 9
MiFID II: ESMA s Final RTS on 28 September gave some answers, but much of the important information comes in 2016 Some major updates in ESMA s final RTS (28 September 2015) Additional information expected mid- to late 2016 FX derivatives defined as not liquid (until better data is available) Bonds defined as liquid based on number of trading days and total trades Interest Rate Derivatives defined as liquid only if traded 10 times per day Size thresholds for transparency as percentiles: 60 th for most derivatives and bonds, 40 th for mortgage bonds Liquid instrument definitions Size threshold values Post-trade transparency deferral timings Systematic Internaliser threshold values 10
We must all make an effort to create and adapt to the new world Balance financial stability, transparency and market liquidity; engage in active dialogue and inform market participants Politicians/ Regulators Banks Establish connectivity and prepare for changes in trading approaches The Nordic market End-users Establish connectivity and prepare for changes in trading approaches Infrastructure providers Launch fit for purpose trading venues and other infrastructure 11
The road map ahead Finalisation of Rules (2015 2016) Clearing and Platform Trading (2016-18) Transparency, Capital and Funding (2016-18) A healthy secondary market? (2019+) 12
Appendix: List of abbreviations Abbreviation Explanation Abbreviation Explanation AIFMD CRD IV CRR BRRD BSR CCP CDS CSA CSD-R EMIR FRA Alternative Investment Fund Managers Directive Capital Requirements Directive IV Capital Requirements Regulation Bank Resolution & Recovery Directive Bank Structural Reform Central Counterparty (Clearing House) Credit Default Swap Credit Support Annex Central Securities Repository Regulation European Market Infrastructure Regulation Forward Rate Agreement LR MAD MAR MiFID II MiFIR MTF NSFR OIS OTC OTF PRIIPs Leverage Ratio Market Abuse Directive Market Abuse Regulation Markets in Financial Instruments Directive Markets in Financial Instruments Regulation Multilateral Trading Facility Net Stable Funding Ratio Overnight Indexed Swaps Over The Counter Organised Trading Facility Packaged Retail Investment and Insurance-based Investment Products FSA Financial Supervisory Authority SFT Securities Financing Transactions FTT Financial Transaction Tax SI Systematic Internaliser HQLA High Quality Liquid Assets SME Small and Medium Enterprise IORP II Occupational Retirement Provision Directive SRM Singe Resolution Mechanism IRS Interest Rate Swap SSM Singe Supervisory Mechanism LCR Liquidity Coverage Ratio SSTI Size Specific To the Instrument LEI Legal Entity Identifier TLAC Total Loss Absorbing Capital LIS Large In Scale 13
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Learn more about Nordea Markets www.nordeamarkets.com Follow our Regulatory updates www.nordeamarkets.com/regulations Follow our Research nexus.nordea.com Contacts: Fredrik Jenestrand fredrik.jenestrand@nordea.com