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NASDAQ OMX
MIFID II – STATUS: ÄR BOLAGEN REDO? VAD SAKNAS
OCH VAD ÄR DOM STÖRSTA UTMANINGARNA?
Jimmy Kvarnström
Vice President, Head of Nordic/Baltic Legal
NASDAQ OMX
Nasdaq Commodities Product offering
2or US participants2
EXISTING PRODUCTSEXISTING PRODUCTS
POWER• Nordic • German• UK• Dutch• El‐Cert
POWER• Nordic • German• UK• Dutch• El‐Cert
EMISSIONS• EUA • EUAA• CER
EMISSIONS• EUA • EUAA• CER
GAS• UK Gas• Spark spreads
GAS• UK Gas• Spark spreads
FUTURE DEVELOPMENTSFUTURE DEVELOPMENTS
• Coal• Continental energy markets• Renewables• Steel• Oil‐ NFX
• Coal• Continental energy markets• Renewables• Steel• Oil‐ NFX
FREIGHT• Dry• Tankers • Fuel Oil• LPG• Iron ore
FREIGHT• Dry• Tankers • Fuel Oil• LPG• Iron ore
SEAFOOD• SalmonSEAFOOD
• Salmon
NASDAQ OMX
STRATEGY AND GROWTH APPROACH
GTMS Strategy ‐ 2015 3
Nasdaq Commodities’ strategy is to expand into a global unit
Be a leading Global Commodity exchange and clearing house
Our geographical extension include NFX (Nasdaq Futures, Inc.) in the US, Asian Strategy for Freight and Steel, the German Power initiative and soon other European Power markets
Continue to build a global product portfolio
Advantage of Nasdaq’s global brand
Increase distribution through GCMs / FCMs
A REVOLUTION FOR COMMODITIES TRADING?
• Many energy and commodity trading business will be brought intothe mainstream of financial regulation
• Or several curtail their market activities• Including possibly market activities• Significant liquidity impact, especially in energy
• Consequential extension of other regiemes, especially EMIR
• New position controls on them and existing regulated firms
• New Transparancy requirements
MIFID II FOCUS AREAS FOR COMMODITIES
DEFINITION OF FINANCIAL INSTRUMENT
EXEMPTIONS ANCILLARY SERVICES
POSITION LIMITS / POSITION REPORTING
OPEN ACCESS
DETAILS STILL BEING DISCUSSED!!
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What is changing?
• Narrower exemption from auhorization
• Broader range of commoditiestransactions in scope
• Knock-on effects on scope of EMIR and MAR
• Position limits, management, reporting and disclosure
• New trading venue category: Orginized Trading Facility (OTF)
• Systematic internaliser categoryextended to non-equities, including commodities
• Mandatory trading of liquid, clearable derivatives on orginazed venues
• New rules for venues and CCPs, recognition of non-EU venues
• Harmonized EU regime for access to trading venues, CCPsand indexes
• Controls on algoritmic/highfrequency trading
• New transparancy requirementsfor non-equities, includingcommodities
• Increased equity market transparancy requirements
• Consolidated tape for equitiesand – from 2019 – non-equities
• Extension of Transaction reporting
Commodities TransparancyMarket Structure
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…and what else?
• Some big changes, many small changes
• Conflicts of interest, includinginducements and remuneration
• Best execution
• Safe guarding client assets
• Product governance: manufacture and distribution
• Information for and reporting toclients
• Suitability, appropriateness and independent advice
• New trading venue category: Orginized Trading Facility (OTF)
• Systematic internaliser categoryextended to non-equities, including commodities
• Mandatory trading of liquid, clearable derivatives on orginazed venues
• New rules for venues and CCPs, recognition of non-EU venues
• Harmonized EU regime for access to trading venues, CCPsand indexes
• Controls on algoritmic/highfrequency trading
• Some harmonization of MemberState access requirements
• Retail and profesional clients: MS may require branch or applyexisting national rules
• Per se profesional clients and ECPs: harmonized third country equivalence regime for cross border services
• Register + TC equivalence + TC reciprocity + TC MoU
Conduct Third country firms’ accessSupervision and Enforcement
MIFID II TIMELINE
First Consultation Paper and
Discussion Paper released by ESMA
22 May 2014
Final text of MiFID II and MiFIR published in the Official Journal (in force
20 days later)
ESMA publishes technical advice on delegated acts and CP with draft technical
standards
ESMA to publish CP with draft technical standards
on derivatives transparency
Deadline for responding to ESMA
CP
European Commission to adopt Delegated Acts by this date (not
yet finalised)
MiFID II, MiFIR and delegated acts will apply within Member States from 3 January 2017 (30 months after entry into
force)
12 June 2014 19 December 2014
Early 2015 2 March 2015 December 2015
3 January 2017
Delegated Acts must be finalised by this date – EC can object
until now
Final technical standards expected to be delivered to the EC for adoption by this
time
July 2015
We are here
Swedish Energy Days
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Project scope and approachThe purpose of the initial phase is to perform a MiFID II impact assessment, identify gaps and help set up the implementation program
1 MiFID II catalogue
• MiFID II outline, including timelines and interpretations of selected areas of uncertainty
• Long-list of MiFID II implications mapped to current Nasdaq structure and processes
2 Gap analysis
• Documentation of impact assessment and change requirements by BU
• Documentation of identified gaps to Nasdaq structure / processes
• Presentation for communication with senior management
3 Implementation roadmap
• High-level implementation roadmap outlining initiatives required to close identified gaps. The roadmap will outline proposed prioritisation and timings of initiatives
Project deliverablesProject scope and objectives
• Nasdaq is currently preparing for MiFID II implementation across its European footprint
• The objective of the initial assessment is to understand the relative magnitude of regulatory impact and the associated compliance requirements across Nasdaq’s European footprint
• The work also includes support in structuring an overall implementation program to address these requirements
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Most gaps identified have simultaneous business, operations and control function implications hence stretching across the value chain (1/2)
MiFID II / MiFIR themes: Impact assessment
A. Fixed Income
B. Equity Derivatives
C. Commodities
D. Cash equities
E. Global Data Products / Index
F. Surveillance
G. Broker Services
H. Clearing
I. CCG Listing services
J. Regulatory compliance
K. Market Operations
L. Governance
Legend (impacted business units)
High impact; urgent action required
Medium impact; some action required
Minimal impact; no direct action required
Indirect impact; Stakeholder in process
High involvement in discussion required (natural owner) To be included in discussion for information
# Themes A B C D E F G H I J K L
1 Dark pool volume limits
2 Pre-trade and post trade transparency requirements for trading venues for equity instruments
3 Pre-trade and post-trade transparency requirements for non-equities
4 Obligation to make pre-trade and post-trade data available separately
5 Uphold market integrity and maintain records
6 Obligation to supply financial instrument reference data
7 Derivative trading obligation
8 Clearing Obligation for derivatives on regulated markets
9 Non-discriminatory access to a CCP
10 Non-discriminatory access to a trading venue
11 Non-discriminatory access to and obligation to licence benchmarks
12 Portfolio compression
13 Synchronisation of business clocks
14 Application for data service authorisation
15 Data reporting services organisational requirements (APA & CTP)
16 Data reporting services organisational requirements (ARM)
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MiFID II / MiFIR themes: Impact assessment Legend (impacted business units)
High impact; urgent action required
Medium impact; some action required
Minimal impact; no direct action required
Indirect impact; Stakeholder in process
High involvement in discussion required (natural owner) To be included in discussion for information
# Themes A B C D E F G H I J K L
17 MTF and OTF operating requirements1
18 Possible introduction of an organised trading facility (OTF)
19 Admission and suspension rules for financial instruments on a regulated market
20 Admission of access to regulated markets
21 Investment firms, algorithmic trading
22 SME Growth market
23 Systems resilience , market maker agreements, circuit breakers, etc.
24 Tick sizes
25 Commodity derivative positions
26 Data requirements on TVs resulting from Best Execution
27 Authorisation of regulated market
28 Organisation of regulated markets
29 Reporting of infringements
30 Increased requirements for investment firms (implications on Broker Services)
A. Fixed Income
B. Equity Derivatives
C. Commodities
D. Cash equities
E. Global Data Products / Index
F. Surveillance
G. Broker Services
H. Clearing
I. CCG Listing services
J. Regulatory compliance
K. Market Operations
L. Governance
Most gaps identified have simultaneous business, operations and control function implications hence stretching across the value chain (2/2)
1 No additional requirements as part of this theme – impact is covered as part of other themes that apply to RMs
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Low work load(Existing resources to devote part of their time)
Significant Technology, Regulatory compliance and Market Operations resources needed to deliver on Tech, Rules and Ops changes (1/2)
Significant work load(Additional resourcesmight be required)
Medium work load(Existing resources to devotesubstantial amount of time)
MiFID II / MiFIR themes: Workload by Tech, Rules and Ops implications# Themes Tech Rules Ops1 Dark pool volume limits H L L2 Pre-trade and post trade transparency requirements for trading venues for equity instruments L M L3 Pre-trade and post-trade transparency requirements for non-equities H H L4 Obligation to make pre-trade and post-trade data available separately H M H5 Uphold market integrity and maintain records H H M6 Obligation to supply financial instrument reference data H L M7 Derivative trading obligation L L L8 Clearing Obligation for derivatives on regulated markets M H L9 Non-discriminatory access to a CCP H H H10 Non-discriminatory access to a trading venue H H H11 Non-discriminatory access to and obligation to licence benchmarks L M 012 Portfolio compression L M M13 Synchronisation of business clocks L L L14 Application for data service authorisation L H 015 Data reporting services organisational requirements (APA & CTP) M1 H1 M1
16 Data reporting services organisational requirements (ARM) L 02 02
No actions required to achieve reg.compliance
1 Assuming Nasdaq applies for a license as an APA, but not for the license as a CTP2 Assuming authorisation as ARM is sought and handled by Broker Services – impact of no required rule changes will have to be verified
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Low work load(Existing resources to devote part of their time)
Significant Technology, Regulatory compliance and Market Operations resources needed to deliver on Tech, Rules and Ops changes (2/2)
Significant work load(Additional resourcesmight be required)
Medium work load(Existing resources to devotesubstantial amount of time)
MiFID II / MiFIR themes: Workload by Tech, Rules and Ops implications
No actions required to achieve reg.compliance
# Themes Tech Rules Ops17 MTF and OTF operating requirements 01 01 01
18 Possible introduction of an organised trading facility (OTF) M2 H2 H2
19 Admission and suspension rules for financial instruments on a regulated market L M L20 Admission of access to regulated markets M M M21 Investment firms, algorithmic trading H M H22 SME Growth market 03 03 03
23 Systems resilience , market maker agreements, circuit breakers, etc. H H M24 Tick sizes L L L25 Commodity derivative positions H M H26 Data requirements on TVs resulting from Best Execution H 0 L27 Authorisation of regulated market L L 028 Organisation of regulated markets L M L29 Reporting of infringements L L 030 Increased requirements for investment firms (implications on Broker Services) H M 0
1 No additional requirements as part of this theme – impact is covered as part of other themes that apply to RMs2 Assuming Nasdaq introduces an OTF3 No changes required to Tech, Rules, Ops when Nasdaq decides to introduce a SME Growth market segment – impact of no required rule changes will have to be verified
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Business requirements
Tasks Owner Tech: BAOrequired
Rules / Agreements
Ops: Policies / Process
Current compliance / Next steps
Impact on Members
Trading venues are obliged or have right to:1. Monitor
interest positions
2. Access information regarding size and purpose of position, beneficial etc.
3. Require persons to terminate/reduce positions, put liquidity into market etc.
4. Publish aggregate positions on a weekly basis
5. Provide regulator at least daily with complete positions held by all persons
Evaluate business opportunity to develop a technical solution for reporting of commodity positions
MarketTech
• No • No • No Next steps:• Market Technology to
assess whether this seen as a strategic opportunity
• High• Negative
impact for members due to extensivereporting requirements both to TV and CA
• Members will need to report positions to Alien Competent Authorities
Set up procedures in order to produce and make public weekly reports on aggregate positions held (ITS 31)
• Yes • Yes• Update
General terms for Commodities 10/11
• Yes. • Processes
that secure reporting is made duly
Next steps:• Evaluate whether to build
or buy solution for this. Baseline is to build as this should be relatively straightforward.
Set up procedures in order to produce and communicate to the FSAs and ESMA complete daily breakdown of the positions held by all members and participants (incl. their clients) (ITS 31)
• Yes • Yes• Update
General terms for Commodities 10/11
• Yes. • Processes
that secure reporting is made duly.
Next steps:• Evaluate whether to build
or buy solution for this. • Challenge in reporting
requested (time horizon spot month vs. future) not in line with Product structure
Set up a system to receive reports (incl. additionally required data) from participants or members
• Yes • Yes• Obliged to
ensure that CA required information is forwarded
• Yes• Processes
that secure reporting is made duly.
Next steps:• Evaluate whether to build
or buy solution for this. • Key challenge is that
Clearing does not have information on beneficiaryfor trades – need to be requested from members
Implementation complexity
3 monthsLow (<1 month) High (>6 months)
Input from business areas Business Support Control
Example: Commodity derivative positions (MiFID II – 57, 58, 69)25
Commodities
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Business requirements
Tasks Owner Tech: BAO required Rules / Agreements Ops: Policies / Process
Current compliance / Next steps
See previous page Implement classification system of persons holding positions
• Yes• Changes to
Genium INET: CDB/CL
• Yes• Requirements on
members to maintain and share information on beneficiaries with TV and regulator (General terms 10/11)
Next Steps• BAO in process,
dependency on RTS/ESMA guidance on Beneficial Onwer
• Assess which functionalities from US system solutions could be leveraged
Position management controls to be applied in connection to applicable position limits that are introduced, in line with RTS 29 (e.g. access information about size and purpose of a position, or reduce or liquidate positions)
• Yes• Changes to
Genium INET: CDB, CL
• Yes• Monitoring rules,
powers etc. have to be established
Comments:• Meeting held with
NO FSA 07/May/15
• Concern about definition of deliverable supply, challenge for cash settled contracts
Next steps• Further action
requires guidancefrom NOFSA/ESMA
Commodity derivative positions (MiFID II – 57, 58, 69)25
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Initiative overviewPosition limits and reporting & Credit limits
6C
Business unit impact heatmap Tech Rules
Trading venues
- Cash equities INet NMR
- Equity derivatives
- Fixed income
- Commodities
- NLX
- Iceland
- Baltics
Clearing
CCG – Listing Services
Broker services Wizer
Global Data Products GCF
Index
Support impact heatmap
Global Access Serv Mgmt
Market Operations
Governance
Control impact heatmap
Regulatory compliance
Surveillance Smarts
H High impact; urgent action required M Medium impact;
some action required L Minimal impact; no direct action required I Indirect impact;
Cooperation required
Description
• The operational side of position reporting and limits is very unclear, because it covers also the OTC market
Position limits:• Position management controls to be applied by market operators in connection to
applicable position limits that are introduced, in line with RTS 29 (e.g. access information about size and purpose of a position, or reduce or liquidate positions)
Position Reporting: • Trading venues need to make public weekly reports and report daily to the FSAs, which
poses larger reporting requirements on the venue and on its members
Process requirements to be clarified
• Definition of financial instruments to be included• What type of products to be considered as part of regulation • Need to clarify regulatory requirements of how implementation of position limits is
envisaged in practice• Unclear how Nasdaq can ensure confidentiality in the reporting chain. Verify whether
Nasdaq has to develop products and services related to position reporting• Some definitions from the Level 1 text still need to be clarified, such as economically
equivalent and deliverable supply
Key challenges
• Ensure alignment and common approach to topic between BUs for changes to systems, rules and processes
• Overall there is large uncertainties around how the requirements should be implemented
• If reporting is required on very small markets with few players, these markets may entirely disappear
• Position limit reporting will be a large operational burden
Work-steam details
• Lead: Stefan Wilhelms• Team: Patrik Westerberg + local general counsel in DK, NO, SWE, FIN• Status: Initial assessment done in connection to Nasdaq reply to the ESMA
Consultations• External dependencies: -
GeniumInet
Deriv. exch.rules/
COM rules
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2015 2016 2017
Implement changes to Genium Inet (CDB, CL etc.), SMARTS and PRM
Change Genium INET, CDB & CLImplement classification system of persons holding positions
Member readiness activitiesCross-BU alignment
NTMS MT decisionStrategic decisionBAO v2.0 completed
Position management controls to be applied in connection to applicable position limits that are Introduced (in line with RTS 29)
Market Technology to assess whether this seen as a strategic opportunity
Build or buy reporting solution
Task
Implement rule changesRequire members to maintain and
share information on beneficiaries with TV and regulator
Evaluate business opportunity to develop a technical solution for reporting of commodity positions
1. Update market model for COM2. Add new section in General terms 3. Establish monitoring rules
Evaluation of changes necessary Ops changes Rules changesTech changes Communication
to members Go Live Market Operations: milestones
Implementation roadmapPosition & Credit & Reporting Limits
3FPotentially running out-of-time in case position management controls can only be started once
classification of members has been fully implemented
Preliminary hypothesis
DEFINITION OF FINANCIAL INSTRUMENTS – REMIT CARVE OUTAnnex I Section C (6) defines commodity derivatives as “Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, a MTF, or an OTF, except for wholesale energy products traded on an OTF that must be physically settled;”
Recital 10 of requires that the limitation of scope should be ‘limited to avoid a loophole which may lead to regulatory arbitrage’
To secure a uniform interpretation across the Union: Requirement to have proportionate arrangements to make or take the delivery of
gas or power, (point 1. i ESMA’s Technical Advice, p 406.) quantitative measurement of the participants’ physical arrangement commodity‐by‐commodity basis accounts with TSOs and possibly also notification to the TSOs Clarify delivery capacity in each area as requirement
MIFID I – GUIDELINES ON THE DEFINITIONS IN ANNEX I SECTIONS C6 AND C7Purpose to ensure a uniform consistent application of these definitions due to EMIR:
reporting obligation for all derivatives
clearing obligation for OTC derivatives
Calculation of clearing threshold on the basis of positions on OTC derivatives
Risk mitigating techniques for OTC derivatives not cleared by a CCP
Higher margin requirements for OTC derivatives than other financial instruments
Clarifies that physical forwards are defined as financial instruments if (C6) they are traded on a regulated market / MTF and (C7) when they are not traded on regulated market / MTF and is not a spot contract or commercial contract but meets one of the following criteria; traded on a third country venue
cleared
standardised
defines “physically settled” for the purpose of MiFID I
MIFID II EXEMPTIONS
MiFID II Article 2 (1) (j) uphold the exception for activity defined as ancillary service, but add thresholds• In our opinion it seems more in line with policy objectives to ensure
a narrow exemption for the MiFID scope of the instruments as such, while allowing for a broader exemption (higher thresholds) from the scope of market participants.
Recital (22) “…exemptions apply cumulatively”. • ESMAs interpretation of Article 2 (1) d) last sentence in the CP page
506 effectively prevents cumulative use of the exemptions for persons that deal in commodity derivatives who are members of a RM of a MTF.
POSITION LIMITS ‐ART 57
Member States shall ensure that competent authorities establish and apply position limits on the size of a net position which a person can hold at all times in commodity derivatives traded on trading venues and economically equivalent OTC contracts in order to: prevent market abuse; support orderly pricing and settlement conditions, including preventing market distorting
positions, and ensuring, in particular, convergence between prices of derivatives in the delivery month and spot prices for the underlying commodity, without prejudice to price discovery on the market for the underlying commodity.
Member States shall ensure that IF and TV apply position management controls
Position limit questions still being discussed: “economically equivalent”? “deliverable supply”? ensure consistent application across the EU How will this work in practice?
POSITION REPORTING – ART 58
Member States shall ensure that a market operator operating a trading venue which trades commodity derivatives:make public a weekly report with the aggregate positions held by the different categories of persons for the different commodity derivatives specifying the number of long and short positions by such categories, changes thereto since the previous report, the percentage of the total open interest represented by each category and the number of persons holding a position in each… and communicate that report to the competent authority and to ESMA
Only when number of persons and number of open positions exceed minimum
thresholds
provide the competent authority with a complete breakdown of the positions held by all persons, including the members or participants and the clients thereof, on that trading venue, at least on a daily basis.
Members must report the details of their own positions as well as those of their clients
and the clients of their client until the end client is reached (Art 58 Nr. 3.)
POST‐TRADE/STP Certainty of clearing
• Pre‐trade checks: Member should provide client limits to trading venue, which should perform pre‐trade checks, within 60 seconds of receiving order (ETD), or 10 minutes (other).
– Possible changes in final regulation. Industry has proposed removal for ETD.
Timeframe for submission to the CCP• Trade should be submitted to CCP within 10 seconds of execution (ETD), within 10 minutes (non‐
electronic TV, within 30 minutes (bilateral). – Support different timeframes for different types of transactions.
Timeframe for clearing member acceptance• Member’s RM to review transaction before clearing. CCP should provide member with info on
bilateral transactions, within 60 seconds from CCP receiving info. – OK, already provide info.
Timeframe for CCP acceptance• CCP should accept/reject trades within 10 seconds from submission or from receipt of clearing
member acceptance.– OK for ETD– For OTC, we propose that pre‐novation/”pending” state is allowed– We are preparing for removal of ”pending” state
INDIRECT CLEARING
CCP requirements• Must be able to hold separate accounts for client’s house business vs omnibus accounts for indirect
clients – OK
• If the indirect client selects a gross omnibus account, the CCP must be able to calculate margin requirements separately for each indirect client
– OK• CCP must also be able to hold collateral values for each indirect client
– We are preparing to make changes to provide this
Potential market impact• Indirect clearing is frequent in ETD market, but without MiFIR rules/protection• Will impose a lot of change to current practice• In ETD, there are long chains of indirect clearing, MiFIR in practice only allows 4 levels. Will result in
indirect clients being forced out of current structures.• Unclear how MiFIR would prevail over national insolvency law and assets would not be held up, but
this is primarily of concern for the clearing members• Questions around third country provisions
Position of Nasdaq Clearing• Nasdaq Clearing relatively well positioned to handle indirect clearing• Concern that gross omnibus model will be expensive to implement but is unlikely to be used
Member Indirect clientClientCCP
OPEN ACCESS
33
• CCPs and Trading Venues must allow access to Trading Venues and CCPs demanding access, unless there are special reasons to deny access
Requirements
Nasdaq Exchange
Nasdaq Clearing
xxExchange
xx CCP
xx Exchange demands access toNasdaq Clearing
xx CCP demandsaccess to Nasdaq Exchange products
• CCP to clear financial instruments on a non‐discriminatory basis from any Trading Venue
• Trading venue to provide trade feeds on a non‐discriminatory basis to CCPs
OPEN ACCESS Contents of proposal
• Reasons for CCP to deny access• Reasons for TV to deny access• Competent authority can deny access, in certain cases• Fees charged by TVs and CCPs• Non‐discriminatory treatment of contracts• Transitional provisions
Nasdaq Clearing’s position on Open Access• Nasdaq Group is pro Access• Increased competition will lead to customer value through:
– Technical innovation– Lower costs– Greater choices
• Proposal has some room for denying access