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.
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.
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.
Final MiFID2 Implementing Technical Standards published in Lex
The last two of the eight implementing technical standards for MiFID2 have been published in Lex bringing them into EU Law. They are 2017/1110 which covers templates for the authorisation of Data Reporting Services and 2017/1111 which covers the reporting to ESMA of sanctions (both criminal and administrative) and measures as well as an annual report on this and investigations undertaken. The full list is here. There are now only six of the eight standards covering authorisation, passporting and acquisitions left to complete.
Three More MiFID2 sub regulations finalised in Lex
Three more minor regulations have been published in Lex in the last few days;
2017/1005 on the format for communication that a financial instrument and its derivatives have been suspended or removed from a trading venue.
2017/1018 on the format for communication that an investment firm will be providing financial services in another EU state.
2017/ 1093 on the format for the daily and weekly reports that trading venues and investment firms must provide on commodity derivative, emission allowances and their derivatives positions and activity.
All are included in my regulations guide here
MiFID2 Progresses on the final subsidiary rules
Very roughly there are about ten more rules still to be published in Lex to bring MiFID2 to conclusion from an EU legal perspective and another one, 2017/081 was published a few days ago. It covers the rules for templates which will assist regulatory cooperation in the authorisation of investment firms. I’ve included it in the regulatory analysis and will try to clarify the status of the remaining rules and the details of the Q
MiFID2 Updates
A lot of site updates relating to MiFID2 added, a consolidated list of all the defined terms in the regulations and delegated regulations here.
Diagrams showing the product and market scope of the regulations as well as the thresholds that Systematic Internalisers need to meet. Finally an analysis of the Third Country Financial Institutions which will lead to further consideration of access into the EU for third countries, particularly as the UK will be joining them in a few years.
Is trader fraud dead, or has it just been automated?
The newswires have been quiet for a few years now on rogue traders, with more comment on market collusion and rigging, so perhaps the new controls, regulations and culture are really minimising this threat. Or perhaps as the trading job is increasingly automated the problem has morphed. Here’s some thoughts on rogue trading history and control evolution.
A quick outline of the market structure under MiFID 2
MiFID 2 is now less than eight months away. Here’s a quick summary of the New Market Structure. The regulatory text doesn’t have too much to distinguish MTFs from RMs but I think we will see the big established exchanges stay as RMs while the newer, lower volume more bespoke trading venues for bonds et cetera will be MTFs.
Systematic Internalisers – Trading Activity Thresholds
Systematic internalisers need to trade a financial instrument on a frequent, systemic and substantial basis to be classified as such. MiFID 2 sets trade frequency and turnover Thresholds for firms