Date post: | 22-May-2015 |
Category: |
Business |
Upload: | matthew-argent |
View: | 554 times |
Download: | 0 times |
FIXNETIXThe ultimate trading advantage
FIXNETIXThe ultimate trading advantage
Chief Administration OfficerFixnetix Limited
The MiFID II ExocetHow to avoid it – and maximise ROE
Introduction
Bob Fuller
EU Regulations
• EMIR – passed Mar 2012
• OTC Derivatives – passed Jun 2012
• MAD 2 Directive – scheduled to be passed early 2013
• MAD 2 Regulation – scheduled to be passed early 2013
• MiFID 2 – scheduled to be passed late 2012 or early 2013
• MiFIR – scheduled to be passed late 2012 or early 2013
Latest versions of MiFID 2 and MiFIR passed by MEP’s on the 26th September
Regulatory Timing
• EMIR – ESMA details Sept 2012 - starts Jan 2013?
• OTC Derivatives – ESMA details Sept 2012 - starts Jan 2013?
• MAD 2 Directive – mid 2014
• MAD 2 Regulation – mid 2014
• MiFID 2 – potentially 2014 or maybe delayed to 2015
• MiFIR – potentially 2014 or maybe delayed to 2015
Five Stages of Grief
• Denial – This can’t be happening to me.
• Anger – Why me?
• Bargaining – Attempting to make deals.
• Depression – Feelings of hopelessness.
• Acceptance – Getting on with life.
Where are we in the process?
Final wording not finalised
BUT!!
What do we know?
Various ‘Themes’ are apparent and are very, very unlikely to change, some of these are:
•MiFID 1 is NOT repealed but a lot of the definitions are changed i.e. It’s not just about Equities.•No mixing of the prop book with customer orders unless you are an SI.•More transparency.•The Equity model is to be used as the base model for ALL instrument types.•Moving ALL instrument types to electronic trading (the demise of voice trading).•More connectivity.•More historic proof of what you did and why.•More clearing of other/new instruments.•Both firms and individuals will be subject to fines and/or other sanctions given any ‘ignoring of the rules’.
Plus others
Still under debate
Everything in theory but mostly:
•3rd Country recognition• Potentially a big issue for non EU institutions
•Controls on HFT – will there be any?
•Open access of clearers for non equities
Be Mindful of Changes
• Reduction/removal of margin income on customer flow• Reduction in voice trading• Potential reduction in liquidity for some instruments• More electronic trading – smaller trading rooms?• Increased costs / reduction in revenues
This is very likely to lead to:
• More specialisation within an entity, only concentrate on what you are good at (need to look at that urgently)
• Increased IT spend and increased IT risk.• More outsourcing or use of utilities
Immediate Preparations for you
• Speak with your compliance departments
• Read all the regulations
• Attend conferences and events on regulations
• Discuss with peer group and industry associations
Immediate Preparations for your Company
• Engage with your compliance officer at Board level
• Look at what this is likely to do to your revenue for
each area
• Look at your costs for each area
• Look at how you might reduce costs to make it still
profitable e.g. outsourcing/industry utility
• Decide either to reduce costs or leave that business
stream
Cushioning the Magnitude of Change
Don’t! Think it will all go away i.e. getting stuck in the first four stages of Grief.
Do! Analyse your business NOW!!!!
Remember!The longer you leave it the more it is likely to cost you, just remember Y2K and the Euro. IT consultants rates became ever higher!
EMIR - European Markets Infrastructure Regulation
MAD II – Market Abuse Directive and Regulation
CRD IV – Capital Requirements Directive and Regulation
MiFID II – Markets in Financial Instruments Directive and Regulation
Structure of the Packages
14
Each of EMIR, MAD II, CRD IV, MiFID II is/has its Regulation
Under EU law:
Directives
•must be transposed into each Member State’s national law by secondary legislation
•ample scope for incorrect/incomplete porting
Regulations
•‘binding in their entirety & directly applicable in all Member States’
Directives and Regulations
15
Article 71:
•broad powers for competent authorities (regulators)
•enhances regulators’ powers from earlier drafts by:
•extending information access powers and
•including an express power to ‘require the freezing and/or sequestration of assets’
MiFID II’s sharp teeth
16
Article 72
•requires regulators to be given the supervisory remedies necessary to exercise their functions
•powerful, targeted remedies:
• ‘requiring the suspension of trading in a financial instrument’
• ‘limiting the ability of any person … from entering into a commodity derivative’
5.10.12 draft goes further through proposed new express powers:
• to award compensation or other remedial action:
• ‘to correct any financial loss or other damage suffered by an investor as a result of any conduct or practice [contrary to MiFID II or MiFIR]’
• ‘to require the removal of [an individual] from the management board of an investment firm or market operator’
MiFID II’s sharp teeth
17
Article 75(1)
•requires Member States to:
•‘ensure that their laws, regulations or administrative provisions provide for sanctions at least’ for
•twenty seven listed (from (a) to (za)) breaches of authorisation or recognition requirements or other rule book breaches
MiFID II’s sharp teeth
18
Article 75(2)
tough sanctions, including:
• for a firm or company, fines up to 15% [was 10%] of the ‘total annual turnover in the preceding business year’
(turnover concerned is that ‘resulting from the consolidated account of the ultimate parent undertaking’)
• for an individual, fines up to €10m (was €5m)
• fines up to 10 x ‘the amount of the benefit derived from the violation where that benefit can be determined’
• ‘temporary ban on the investment firm being a member of or participant in regulated markets, MTFs or OTFs’
MiFID II’s sharp teeth
19
MiFID II’s sanction regime characterises the significantly altered risk/reward balance
A big change from the much lighter touch framework that has been in place since competition in equities trading was first opened up five years ago by MiFID
MiFID II’s sharp teeth
20
Kemp Little LLPSolicitors
Cheapside House138 CheapsideLondon EC2V 6BJ
Tel: 020 7600 8080Fax: 020 7600 7878
www.kemplittle.com
Kemp Little LLP is a limited liability partnership. Registered number OC300242 England. Registered office as shown
IBM/EAX Multi-asset Class Execution Shared Service/Utility
MiFID 2 – Exocet or opportunity?
John Mattingley - EAX
Ian Bentinck - IBM
© 2012 IBM Corporation23 IBM and EAX confidential. No part of this may be circulated outside IBM and EAX without permission by IBM and EAX
Disclaimer
All the information, representations, opinions and statements in this document are accurate and correct to the best of our present knowledge. The contents of this document do not constitute a formal estimate or any proposal for commercial agreement. These rough order of magnitude figures are only based upon information provided and our experience of performing similar services for other clients. They are not intended (and should not be taken) to be contractually binding unless and until they become the subject of a separate agreement between the parties. The figures are based on our current level of understanding of the project and will be subject to revision and adjustment as necessary once more precise requirements are understood They are subject to contract and as such nothing in this document should be construed as an offer capable of acceptance.
This document and any supporting documentation contains information which is confidential to IBM and is submitted to you on the basis that it must not be used in any way nor disclosed to any other party, either whole or in part, except to employees or professional advisors of EAX for the purpose of considering its contents.
This document contains information which is confidential to IBM and EAX and is submitted to you on the basis that it must not be used in any way nor disclosed to any other party, either whole or in part except that the information may be disclosed to your employees or professional advisors where such disclosure is on a need to know basis, and is for the purpose of considering its contents. Otherwise disclosures may not take place without the prior written consent of IBM.
IBM is a registered trademark of International Business Machines Corporation. All other trademarks are acknowledged.
Background & Concepts
What is the industry doing about it?
John Mattingley, EAX & Ian Bentinck, IBM Global Business Services
© 2012 IBM Corporation25 IBM and EAX confidential. No part of this may be circulated outside IBM and EAX without permission by IBM and EAX
Growth rates in Europe are poor compared to Far East: – Better opportunity in Emerging Markets– Resource needs to be allocated in line with profit
It is becoming less affordable to handle European trading flow in-house for banks and brokers due to:– Democratization of I-bank technologies: Leveling of
perceived technological advantages– Accelerating tech-refresh cycles– Narrow spread/thinner margins on unpredictable
volumes– Increasing development spend due to regulation– Little or no differentiation among I-bank competitors
at the tech/ops level– Excessive vendor platform dependence– Less volume
Pressure to move from fixed to variable cost
Regulation: Basel III, Dodd-Frank, MiFID/R 2– Dodd-Frank & Basel III capital adequacy lower Cash Equities
business ROE from 25% to 7%– MiFID/R 2 will further lower ROE to ≈ 0%– Requirement to build infrastructure for “equities-like”
instruments add further cost– Urgent mitigating actions required to stay in business.
Investment market: Situation
The questions to ask are:
•Is the current market solution (multiple instances of in-house) a sensible one?•It was once, but conditions now suggest otherwise?•Is there a solution?
IBM EAX:
•Is the IBM EAX tech. platform the sensible alternative? Yes•Can it be done practically? Yes•Does it make economic sense? Yes
© 2012 IBM Corporation
Build a definitively-neutral, end to end, order management, order execution, smart order routing and best execution utility performance with performance equal to or better than that of the top Tier 1 banks, and recruit sell-side clients on a bps/transaction basis
Base it on best-in-class, proven technologies, design it to be infinitely scalable and capable of handling other asset classes, and site it alongside major exchanges to deliver lowest available latency Create an order/execution management front-office to the SOR software which moves the industry away from over-dependence on one vendor enables any bank/broker of any size to offer the same enhanced services as the Tier 1sDevelop a data warehouse capable of providing full audit capability and a consolidated tape service, and let the Regulator have access to it
Maintain competitive lead/continue to develop customer relationships and revenues via development of data products and services and by the introduction of other asset classes as specified by the Regulator
What should the industry do about it?
© 2012 IBM Corporation27 IBM and EAX confidential. No part of this may be circulated outside IBM and EAX without permission by IBM and EAX
Operation/ManagementOwnership
IBM Confidential
IBM
Builds and operates the shared service, including new product/service development as specified by NewCo
Initial owner of EAX Concept and IPR
3PMC
Strategic development and design of the service,
commercialisation/market development and management of the
utility to steady state
Consortium – 8-10 Sell-side Institutions
100% ownership of NewCoSets policies, objectives and budgets
for NewCo, .
NewCo:
Executes Consortium policies. Develops strategic plans to meet objectives and manages budgets.
Owns the shared service, outsources build and operations to IBM.
Commercialisation/management outsourced to 3PMC until steady state
achieved
Suggested Governance Model
© 2012 IBM Corporation
Overall Timeline
28 IBM & EAX ConfidentialApril 2012
Operate
1 Jan 13 31 Mar 13
1 Oct 13 1 Aug 1430 May 1431 May 13 1 Feb 14
Mobilise and Plan
Requirements & Design
Build
Test Phase 2
Test Phase 1
FSA Service Framework
© 2012 IBM Corporation
Net profit Non-Profit org
# employees 200 CLS, 200 IBM, 50 Other 3rd Party
Shareholders 70
Member Banks 59
CLS Group was founded in 1997 to create the first global settlement system, eliminating settlement risk in the foreign exchange market. CLS Settlement is the market standard for FX settlement and is the industry’s response to increased and continuing regulatory concern about settlement and systemic risk associated with the growth in FX trading.
CLS Settlement is offered by CLS Bank International (‘CLS Bank’). Owned by the foreign exchange community, CLS Bank operates the largest multi-currency cash settlement system to eliminate settlement risk in the foreign exchange market. Based on information in the settlement service and recent central bank and market surveys, CLS estimates that in terms of the market for which it provides settlement risk elimination services, its market share is 68% as at April 2010. This emphasises how successful the service has become since its launch 2002.
• Seventeen currencies are currently eligible for CLS Settlement. They are: US Dollar, Euro, UK Pound, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish Krona, Danish Krone, Norwegian Krone, the Singapore Dollar, the Hong Kong Dollar, the New Zealand Dollar, the Korean Won, the South African Rand, the Israeli Shekel and the Mexican Peso.
Shared Service for Global Settlement System
Operational Capacity, Resilience & Flexibility
Support for new currencies and FX related products / servicesFlexibility to be able to meet changes in market and regulatory environment rapidly Build capacity to support expect future market growth whilst preserving the resilience of the core system to physically settle during times of market stress
Next Steps• Call John Mattingley, Karen Knight or Ian Bentinck for further information
© 2012 IBM Corporation2012 IBM & EAX Confidential31
FIXNETIXThe ultimate trading advantage
Editor FT trading RoomFinancial Times
The MiFID II ExocetHow to avoid it – and maximise ROE
Philip Stafford
FIXNETIXThe ultimate trading advantage
There is an Exec overview on the potential effect of these new EU Regulations.
Written by Richard Kemp of Kemp Little LLP, the leading City IT law firm.
Copies available tonight or download from our website:
http://www.marketchange-mifid2.com
FIXNETIXThe ultimate trading advantage
Please feel free to contact any or all of us:
Jefferson Young, Consultancy & Technology - [email protected]
Jefferson Young, Financial Institutions - [email protected]
Fixnetix - [email protected]
Kemp Little - [email protected]
Exchange Axis - [email protected]
IBM - [email protected]