Global Regulations

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MiFID2 Pre and Post Trade Transparency

The upgrade to the trading transparency regime is one of the largest components of MiFID2.  MiFID1 was very equity focused while MiFID2 has a vast scope across financial markets.  The regime focuses on three areas;

  1. Pre-Trade – When should orders be public?
  2. Pre-Trade – When should quotes and expressions of interest be public?
  3. Post-Trade – When should executed trade details be made public?

Financial instruments are divided into asset classes, sub asset classes and sub classes and their liquidity assessed.  Asset classes include bonds, interest rate derivatives while the sub classes cover areas like the maturity and underlyings of derivatives.  The liquidity assessment uses several methods and some of the levels are initially more relaxed being tightened over the next few years.

More liquid products (like equity shares) will be required to make more activity public while illiquid products will have waivers to allow participants to disclose less pre trade information and to defer publication of trades executed.  Generally, the rules are split between those for equity like instruments (shares, depositary receipts, ETFs, certificates) and non-equity-like (bonds, structured finance products, emission  allowances and derivatives).  Equity publication may be deferred one or two hours or until the end of day while non-equity-like publication may be deferred for two business days.  There are also provisions for regulators to effectively suspend the whole non-equity regime for months where a liquidity crisis occurs (MiFID2 is peppered with special rules covering government debt markets).

The detailed analysis can be found here.  These rules should also be viewed with the new requirements over the provision of best execution and the evidence that investment firms will need to keep to prove their compliance.

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An Overview of IFRS 9, Accounting for Financial Assets and Liabilities

IFRS 9 is a major upgrade to the accounting rules for financial instruments coming into force in 2018.  It has four main areas described in more detail here

  • There are new rules covering the classification and recognition of revenue/losses from financial instruments.
  • Impairment is to be measured on an Expected Credit Loss rather than the previous incurred loss method.
  • Own Credit Adjustments are to shown only through Other Comprehensive Income.
  • Hedge Accounting is to allow broader types of hedges and instruments to be hedges better following commercial practice.

Most of the excitement is on the second bullet above as this is requiring a major re-engineering of banks’ financial assessment of their expected credit risk losses.  Banks that already use their internal models to estimate expected losses for their regulatory  capital are better placed than those who have just used Standard Rules calculations.

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Banking Interviewers’ Guide

I think most of us at some time or other end up rushing to an interview, not having reviewed the candidate’s CV properly and with no real idea of what appropriate questions to ask.  Well I can only advise, do read the CV before the interview but in terms of the questions here’s a little app for those on Android phones to help you out on the questions.  If you’ve got some good questions of your own you’d like to donate please email me.

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FRTB Model Approval and P&L Attribution

The FRTB has much tougher criteria a firm must meet for it to gain internal model approval to use its models to compute its market risk capital requirement.  One very significant component of the new rules are tests on the firm’s official market risk figures.  The tests use the risk figures to compute a “Theoretical P&L” at a trading desk level which then gets tested for accuracy using two statistical measures.  Daily data is tested monthly and if the firm fails either of the tests in four months out of the previous twelve months the desk in question has to use the standardised approach which could at the very least double its capital requirement.  A more detailed explanation of the tests may be found here.

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EU adds EONIA to its Critical Benchmarks List

The EU published Regulation 2017/1147 last week amending 2016/1368 to add EONIA to EURIBOR on its list of critical benchmarks.  Both are published by EMMI in Brussels and should be viewed in the context of efforts to control and move all EUR activity to inside the EU.  Supervising benchmarks is a natural part of the new world regulatory order but I do wonder just how territorial this needs to be when one considers the vast amount of USD activity traded and cleared outside the US with little obvious harm done to the US by this.

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FRTB Banking Book / Trading Book Boundary

Previously banks had considerable discretion is designating positions as “held for trading” to gain Trading Book treatment for market risk capital.  This changes under the FRTB where certain activities and products are automatically deemed trading while others are automatically deemed banking and certain products are presumed trading but firms can apply to their regulator for permission to deviate from this.  Anything not covered above is banking under the new rules.  Here’s a diagram describing the new designations.

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Margin for uncleared OTC derivatives

In response to industry pressure BIS/ IOSCO with the major regulators have agreed to delay the implementation of initial and variation margin for uncleared OTC derivatives.  The first phase will now come into effect in 2016 and the whole process will be live by the end of 2020.  Here is a short paper describing the rules and the revised dates.