Level 2 for bonds: a view from the AFM Hans Wolters ICMA MiFID II conference Amsterdam, 10 November 2015 10 November 2015Pagina 1

Level 2 for bonds: a view from the AFM

Hans Wolters

ICMA MiFID II conference Amsterdam, 10 November 2015

10 November 2015Pagina 1

1. Regulatory process

- Where are we- Next steps- ESMA process

2. Transparency for bonds

- Level 1 - MiFIR- Key points RTS non-equity- Liquid market for bonds (IBIA versus COFIA)- Size specific and large in scale determination- Post-trade deferrals non-equity

Agenda


• Level 1 - Publication in Official Journal June 2014

• Level 2- Technical Advice ESMA to Commission, December 2014- Publication RTS ESMA, September 2015- Delegated acts, end 2015?- ITS, deadline publication ESMA January 2016- Endorsement RTS Commission, (non) objection EP and Council, publication in Official Journal Q1/Q2 2016

• Level 3- ESMA Guidelines, Q and A’s, opinions, supervisory convergence: 2016

1. Regulatory process - Timeline


Recap: Regulatory measures in the Lamfalussy process

Level 1•Framework legislation, proposed by the Commission and adopted by the Council and Parliament:•Regulation (applies directly)•Directive (needs to be implemented by Member States)

Level 2

• More detailed technical rules to supplement the Level 1 framework:

• - Delegated acts (drafted by the Commission with advice from ESMA)

• - Technical standards (prepared by ESMA and adopted by the Commission)

• Regulatory technical standards (RTS): legal obligations

• Implementing technical standards (ITS): forms etc.

Level 3• Implementation and convergence:• Q&As• Opinions• Guidelines


ESMA process- Preparation of drafts by Task Forces ESMA- Discussion of drafts in Standing Committees ESMA- Decision making Board of Supervisors ESMA (June and September 2015)- Early legal review Commission Legal Services (summer 2015)

Stakeholder input- Discussion paper May 2014- Consultation paper December 2014- Consultation responses, open hearings, bilateral meetings, position papers,

data provided by market participants

“Lobbying” in final stage- Letter negotiating team EP- Letter Treasuries UK, DE, FR

How did ESMA develop the RTS?


Board of Supervisors (BoS)

Standing Committees (SC)

Task Forces (TF)e.g. Transparency and trading obligation for derivatives

•SMSC: Secondary Markets Standing Committee (relevant SC for bonds)

Others:•IPISC: Investor Protection and Intermediaries Standing Committee•CDTF: Commodities Derivatives TF (position limits, position reporting, ancillary activity)•MDRWG: Markets Data Reporting Working Group (transaction reporting)

Organisation ESMA preparation Level 2

Drafting of L2 work is collaborative effort of ESMA Staff and NCA representatives


2. TRANSPARENCY FOR BONDS


• Policy objective: to increase transparency

• Extension of scope: from shares to equity-like and non-equity

• Four waivers pre-trade (equity) have remained, ESMA to provide further detail at Level 2

• Introduction double volume cap for dark pool trading equity, max 4% per venue, 8% for all venues, 6 months suspension if breached

• Introduction trading obligation for derivatives and shares

Transparency: recap key points level 1


• Art. 8 MiFIR pre-trade transparency requirements for trading venues in respect of bonds, structured finance products, emission allowances and derivatives- make public current bid and offer prices and the depth of trading interests, also applies to actionable indications of interest- make public on a continuous basis during normal trading hours- calibration for different types of trading systems

• Art. 9 waivers pre-trade for non-equity- large in scale and orders held in an order management facility- actionable indications of interest in RFQ and voice trading systems that are above a size specific to the financial instrument- derivatives not subject to the trading obligation and other (non-equity) financial instruments for which there is not a liquid market

• Art. 18 obligation for systematic internalisers to make public firm quotes non-equity

Key articles MiFIR: pre-trade bonds


• Art. 10 post-trade transparency requirements for trading venues non-equity- make public price, volume and time- as close to real time as technically possible

• Art. 11 authorisation of deferred publication- large in scale- not a liquid market- above a size specific

• Art. 21 post-trade disclosure by investment firms including SI’s non-equity: price, volume and time through an APA

• P.M. Art. 28 trading obligation (RM, MTF or OTF) for derivatives

Key articles MiFIR: post-trade bonds


• Pre-trade transparency for trading venues

• Post-trade for trading venues and investment firms trading outside a trading venue

• Provisions common to pre- and post-trade transparency- art. 13: methodology to perform the transparency calculations, e.g. determination of liquid market, size of orders large in scale compared with normal market size, size specific to the instrument

• Annexes with details of content pre- and post-trade, liquidity assessment, LIS and SSTI-thresholds

Overview RTS non-equity (RTS 2)


Definition liquid market in art. 2 MiFIR (17)

Liquid market means:…..a market for a financial instrument or a class of financial instruments, where there are ready and willing buyers and sellers on a continuous basis, and where the market is assessed in accordance with the following criteria….:

(i) the average frequency and size of transactions…..

(ii) the number and type of market participants.…

(iii) the average size of spreads, where available.

Liquid market: IBIA or COFIA for bonds (1)


• Non-equity instruments for which there is not a liquid market: pre-trade transparency may be waived, post-trade publication may be deferred

• Liquidity assessment for individual financial instruments (IBIA) or classes (COFIA). ESMA CP proposal: to use COFIA for bonds

• Empirical exercise shows a clear relation between liquidity and issuance size. ESMA designed the classes of bonds optimising the issuance size (e.g. 2 bln. for sovereign debt)

• Reasons CP preference COFIA: stability and predictability, much less complex, less of an administrative burden for industry and authorities, easier and straightforward for newly issued financial instruments

• Methodology implies there will be some bonds belonging to a liquid class that are illiquid in reality (false positives, i.e. they do not meet the liquidity criteria) and vice versa (false negatives)

Liquid market: IBIA or COFIA for bonds (2)


- Discussion Paper (May 2014): explanation issue and two options

- Consultation Paper (December 2014): ESMA preference for COFIA

- Intensive lobby market participants, buy-side and trading venues generally in favor of COFIA, sell-side prefers IBIA

- EP: preliminary preference for IBIA, also Treasuries UK, DE, FR

- Publication RTS (September 2015): ESMA opts for IBIA, assessment on a quarterly basis

IBIA/COFIA - Decision making process ESMA


- Liquidity criteria: each individual financial instrument shall be determined not to have a liquid market… if it does not meet one or all of the following thresholds of the quantitative liquidity criteria on a cumulative basis:

- Average daily notional amount: EUR 100,000

- Average daily number of trades: 2

- Percentage of days traded over the period considered: 80%

New issues (bonds admitted to trading or first traded during the quarter):specific combination of bond type and issuance size,e.g. threshold sovereign bond 1 bln., corporate bond 500 mln.

Liquid market for bonds in RTS 2


Percentiles to be applied for the calculation of the pre-trade and post-trade SSTI and LIS thresholds for each bond type:

- SSTI pre-trade trade percentile: 60 (covered bonds 40)- LIS pre-trade: 70- SSTI post-trade: 80- LIS post-trade: 90

Size specific and large in scale thresholds


• Without deferral- publication as close to real time as is technically possible and in any case- within 15 minutes after the execution of the transaction- within 5 minutes from January 2020

• Deferred publication possible (NCA may authorise)- 19.00 local time on the second working day after the date of the transaction- thereafter, all details of the transaction on an individual basis shall be published unless extended time period of deferral is granted

• Extended deferral regime at the discretion of the NCA- 4 weeks extended time period of deferral (e.g. for volume omission or weekly publication of several transactions in an aggregated form)- publication of all details of the transactions on an individual basis after 4 weeks (except sovereign debt, NCAs may allow weekly publication in aggregate form for an indefinite period)

Post-trade deferrals non-equity

Pagina 17 10 November 2015

Questions?

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Documents

Level 2 for bonds: a view from the AFM Hans Wolters ICMA MiFID II conference Amsterdam, 10 November 2015 10 November 2015Pagina 1