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The regulatory impact of the G20 on CEE – A game changer?

The regulatory impact of the G20 on CEE – A game changer?. 4th Annual Derivatives World Central and Eastern Europe 2011 Tuesday, November 8, 2011 Rafael Plata Head of Derivatives and Post-trading Federation of European Securities Exchanges, FESE.

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The regulatory impact of the G20 on CEE – A game changer?

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  1. The regulatory impact of the G20 on CEE – A game changer? 4th Annual Derivatives World Central and Eastern Europe 2011 Tuesday, November 8, 2011 Rafael Plata Head of Derivatives and Post-trading Federation of European Securities Exchanges, FESE

  2. 39 Securities Exchanges through 20 Full Members from 30 countries About FESE FESE represents in total 39 Securities Exchanges (in equities, bonds, and derivatives) through 20 Full Members from all EU Member States and Iceland, Norway and Switzerland as well as 7 Observer Members from European emerging markets. 7 Observer Members from 4 countries)

  3. The origin - G20 commitment - 2009 • As a result, the G20 leaders agreed that “All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end 2012 at latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements”. Trading CCP Clearing Settlement/Trade Repository

  4. Objectives of regulation Safety Efficiency Transparency

  5. On-exchange and OTC markets - estimates DERIVATIVES SHARES FIXED INCOME 40% 60% 5%On-Ex 20% On-Ex OTC* On Ex OTC* OTC** 80% 95% *Shares and Fixed Income: OTC trading of shares/bonds admitted to trading on a RM. No estimates available for shares/bonds not admitted to trading on a RM. **Derivatives: OTC trading of derivatives not admitted to trading on a RM. Also corresponds to privately issued derivatives.

  6. EU legislative proposals in the pipeline: trading and post-trading Scope Ds Eq. FI Eq. FI Ds Ds Eq. OTC Ds MiFID CRD IV MarketAbuse Short Selling/CDS Trading Overall review + G20 commitments on derivatives Extension of MAD regime to OTCDerivatives + Use of CCPs Arrangements for naked CDS trading • Legislative framework forCSDs- Harmonisation - holding and disposition of securities- Investors’ rights • Cut settlement costs- Harmonisation • Financial stability- Competition - Sounder CCPs - Trade repositories Post-trading EMIR CSD Leg. SLD T2S Ds Ds Ds Eq. FI Eq. FI Eq. FI Eq. FI Eq. = Equity; FI = Fixed Income; Ds = Derivatives

  7. European Market Infrastructure RegulationEMIR

  8. Market share of OTC Derivatives contracts +- US$ 600 trillion market

  9. Scope EMIR Derivatives Fixed Income Equity EMIR - Provisions 1.- CCP clearing obligation 2.- CCPs rules and relationship with members 3.- Reporting to trade repositories obligation + Safety + Efficiency + Transparency

  10. CCP clearing - Eligibility Criteria • Liquidity of contracts • Availability of pricinginformation • Degree of standardisationof the contract • Reduction of systemic risk in the financial system (inc. lack of transparency on positions). YES NO CCP CCP + BUT • Capital requirements (CRD IV) • Information requirements • Information requirements

  11. Information requirements • What will be reported to a trade repository? • To report to a what? Trade repository: an entity that centrally collects and maintains the records of OTC derivatives

  12. Trade Repositories for EU derivatives Some months ago CDS • Notes: • 1.- Only some CDS, Equity and IRS were sent to trade repositories. • 2.- Derivatives products not sent to a Trade repository: • FX derivatives • Commodity derivatives US DTCC CDS* Equity IRS IRS TRIOPTIMA REGIST-TR DTCC DTCC EU Luxembourg London London Stockholm * Copy of the US original CDS: Credit Default Swap IRS: Interest Rate Swap

  13. Trade Repositories for EU derivatives Today CDS IRS Commodity FX US DTCC DTCC DTCC DTCC Others Access to data by EU supervisors CDS* Equity ALL DTCC REGIST-TR DTCC EU London London Luxembourg * Copy of the US original

  14. Expected timing 2011 2012 Level 1 Main text Level 2 Some technical details Entry into force

  15. Market in Financial Instruments Directive MiFID

  16. What is new for derivatives? • Market Structure • Transparency • Position limits

  17. Venues competing for order flow Bilateral trading Multilateral trading OTFs OTC RMs MTFs Trading obligation 1.- Subject to the clearing obligation 2.- ESMA OK based on 2.1 Average frequency of trades 2.2 Average size of trades 2.3 Number and type of active market participants

  18. Link MiFID – EMIR - II Trading obligation 2.- ESMA OK based on 2.1 Average frequency of trades OTFs RMs MTFs 2.2 Average size of trades 2.3 Number and type of active market participants + 1.- Subject to the clearing obligation Clearing obligation • 1.- Degree of standardisation of the contract 2.- Reduction of systemic risk in the financial system (inc. lack of transparency on positions) CCP • 2.1 Liquidity of contracts • 2.2 Availability of pricing information

  19. Post-MiFID landscape ? Bilateral trading Multilateral trading MARKET RULES *The term ‘non-discretionary rules’ means that these rules leave the investment firm operating an MTF with no discretion as to how interests may interact; require that interests be brought together in such a way as to result in a contract, meaning that execution takes place under the system's rules or by means of the system's protocols or internal operating procedures.

  20. Link MiFID – EMIR – IAccess to trading venues, CCPs and benchmarks Trading Venue 1 Trading Venue 2 Trading Venue 3 Trading Venue 4 Trading Venue 5 Trading Venue 6 CCP A CCP B CCP C CCP D CCP E CCP F CCP 2

  21. Transparency of positions Position reporting • Harmonised position information by type of regulated entity: • To regulators (in detail) • To the public (in aggregate) • Categorisation of traders by regulated entity • To be applied to: • All commodity derivatives (listed and OTC)

  22. What is new? - Position limits I • Regulators to be given the powers to adopt hard position limits for some or all types of derivative contracts whether they are traded on exchange or OTC? • Objectives set for position limits: • to combat market manipulation; • to reduce systemic risk • to prevent disorderly markets and developments detrimental to investors • to safeguard the stability and delivery and settlement arrangements of physical commodity markets. • The Commission also asks whether there are some types of derivatives more prone to market manipulation.

  23. What is new? - Position limits II • To certain categories of market participants (e.g. some or all types of financial participants or investment vehicles) • To some types of activities (e.g. hedging versus non-hedging) • To the aggregate open interest/notional amount of a market

  24. Expected timing 2012 2013 2014 Level 1 Main text Level 2 Technical details Entry into force

  25. In summary – Likely impact of proposals Safety Safety Safety Higher cost of instruments ? Cost of instruments ? Transparency On exchange activity Cost of trading Reporting requirements Capital requirements Safety Choice Activity (indirect) Activity Systemic Risk Capital requirements Stability Stability Activity

  26. Thank you!

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