1. FIXNETIXThe ultimate trading advantage

2. FIXNETIXThe ultimate trading advantage
Partner
Jefferson Young
The EU Regulation Exocet
How to avoid it – and maximise ROE
Matthew Argent

3. FIXNETIXThe ultimate trading advantage
Editor FT trading Room
Financial Times
The EU Regulation Exocet
How to avoid it – and maximise ROE
Philip Stafford

4. FIXNETIXThe ultimate trading advantage
Chief Administration Officer
Fixnetix Limited
bob.fuller@fixnetix.com
Major changes in EU
trading regulation & how it
might affect you
Bob Fuller

5. Where is the London market now?
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.

6. EU Regulations, where are we?
• EMIR – passed Mar 2012
• OTC Derivatives – passed Jun 2012
• MAD 2 Directive – scheduled to be passed early 2013 – in Trilog
• MAD 2 Regulation – scheduled to be passed early 2013 – in Trilog
• MiFID 2 – scheduled to be passed late 2013 - October
• MiFIR – scheduled to be passed late 2013 - October
Latest versions of MiFID 2 and MiFIR released on the 15th April 2013

7. Regulatory Enforcement 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 – Q1 2015
• MiFIR – Q1 2015 (may be 2016 but the need for US
recognition may force 2015)

8. 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’
What is the difference between a
Directive and a Regulation?

9. Where are we in the MiFID 2 process?
Final wording not finalised
BUT!!

10. What do we know?
Various ‘Themes’ are apparent and are very, very unlikely to change, in
fact the last few versions have shown no appetite to move away from
these.
Some of these are:

11. • MiFID 1 is NOT repealed but a lot of the definitions
are changed i.e. It’s not just about Equities, but
about everything except FX.
• No mixing of the prop book with customer orders
unless you are an Systematic Internaliser. The end
of Broker Crossing Networks as we know them.
• Much more transparency, with increased restrictions
on trading ‘in the Dark’.
• The Equity model is to be used as the base model
for ALL instrument types.
Consistent ‘Themes’ 1

12. • This will inevitably move ALL instrument types to
electronic trading (the demise of voice trading)
which will require more connectivity.
• Greater emphasis on Best Execution so more
historic proof of what you did and why.
• Clearing of new instruments.
• Controls and constraints on High Frequency
Trading.
• Both firms and individuals will be subject to fines
and/or other sanctions given any ‘ignoring of the
rules’.
Consistent ‘Themes’ 2

13. What is still under debate?
Everything in theory but the one big item
still outstanding is:
Access of clearers to exchanges
and exchanges to clearers.
(MiFIR Articles 28 to 30)

14. 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
What is the main structural difference
between MiFID and MiFID 2?

15. Financial Transaction Tax
Being proposed by 11 EU countries with Equities
being set at 0.1% and Derivatives at 0.01%. Due
Jan 2013
• Extra Territoriality
• Definition of when it is due
• Competitiveness of EU institutions
What other EU rules may affect Trading?

16. German HFT rules
Due July 2013
• Need to be in Germany or passported within the
EU to Algo/HFT trade
• May move flow to London
Local EU laws

17. What Structural Changes may this cause?
• Reduction/removal of margin income on customer flow
• Dramatic reduction in voice trading, more electronic
trading – smaller trading rooms?
• Potential reduction in liquidity for some instruments
• Increased IT costs / reduction in revenues
This is very likely to lead to:
• More specialisation within an entity, only concentrate on
what you are good at.
• Increased IT spend and increased IT risk.
• More outsourcing or use of utilities

18. Any Other Structural Changes?
All of these changes are moving formally Back Office End of Day functions
to be more Front Office Real-Time ones.
For example there will be a need to move collateral in real-time, due to:
• More transactions being cleared requiring more initial margin.
• As the CCP’s will be more regulated they will not be able to offer so
much intra day credit so to carry out the next trade they will need to
have control of the collateral.
• This will lead to:
• The need to settle transactions quicker to enable the proceeds to be
used as collateral.
• The lack of available collateral putting a stop to trading activity!
All of which will require major changes to systems and communications
infrastructure for these current Back Office functions.

19. Where is the market?
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.

20. 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

21. 21
Developments on the EU
Financial Services Legislative
agenda
London, 22nd May 2013
Dr. David P. Doyle
Policy Adviser – EU Financial
Services Legislation

22. 22
Heavy ongoing EU Agenda in Financial Services
Legislation
Cultural shift in regulatory reform:
• Regulating capital
markets and market
actors
• ‘Safety first’ approach
• Filling in the gaps
between European
and national
regulation
• Fast track model:
Less directives –
more regulations
• More elevated and
Pan-EU centralised
supervision
• Assertive powers
vested with the EU
Parliament
 Capital Requirements
Directive IV
 Remuneration and
bonuses
 Single Supervisory
Mechanism
 EU bank Resolution &
Recovery Hedge Funds
and Private Equity
 EMIR: OTC derivatives,
CCPs,
 Short-selling
 Deposit Guarantee Scheme
 Solvency II – insurance
 Packaged Retail
Investment Products
 UCITs IV
 Credit rating agencies
 Investor Compensation
Scheme
 Shadow Banking
 MiFID II
 Market Abuse Directive
 EU Mortgage Credit
Directive
 Pensions
 Corporate governance
reform within financial
institutions
 Insurance Mediation
Directive
 Liikanen Bank
restructuring

23. 23
Regardless of costs, regulatory reform is here to stay
All that is of
systemic importance
should be regulated
and supervised
To restore trust,
investors
and consumers
should encounter
clearer,
more coherent
and more effective
safeguards
Supervisory bodies
should have the
right tools to grasp
the complex,
interconnected and
globalised financial
nature of activities
There is a need for a
better capitalised
finance industry
with less leverage
Perverse incentives
in the financial
sector should be
tackled and reduced

24. 24
Irish EU presidency – Tackling the priorities
 Key legislative texts prioritised before
the end of June 2013 …
• Consensus between EU
Parliament and Council on CRD IV
– reached
• Banking Union package especially
the EBA and ECB regulations –
done
• Harmonised EU Bank Recovery &
Resolution regime – almost there
• Unified EU-wide Deposit
Guarantee Scheme – as soon as
possible!
 Other ‘priority files’
• Progress on Markets in Financial
Instruments Directive
(MiFID/MiFIR) – ‘political
agreement’ at least?
• EU mortgage credit directive

25. 25
The European Central Bank – the new sheriff in town
The Single Supervisory Mechanism –
what powers will it have?
 Monitors capital, liquidity and leverage
requirements
 Authorises and revokes bank licences
 Enforces recovery plans
 Conducts stress tests
 Approves bank mergers & acquisitions
(domestic and cross-border)
 Supervises early intervention in case of
breaches of prudential rules (recovery
plans, intra-group financial support
arrangements, etc.)
 Empowered to request information
directly from banks, conduct office
visits, investigate
 Conducting 1st ‘Asset Quality
Review” of eurozone banks…soon
•Banks with assets in excess of €30bn
(£28bn)
•Banks total assets exceed 20% of
country’s GDP
•Banks receiving support under the
European Stability Mechanism (ESM)
bail-out fund
•Exemptions for small banks with assets
less than €5bn (£4bn) – Remain under
national supervision
•Fully operational by March 2014

26. 26
Cyprus – catalyst for speeding up the Banking Union
• Approval of the ECB direct supervisory role over Euro-
zone banks
• Cypriot response provided ‘no template’. However…
– A revised bail-in pecking order envisaged:
shareholders, senior secured bondholders,
junior bondholders, insured depositors and
uninsured depositors
– “Depositors preference” under €100 000
(£85,000) safeguarded.
– Deposit-guaranteed funds not bailed-in all but
the worse cases at discretion of national
regulators
– Broad scope of bail-in, with few defined
exclusions: insured depositors, secured
liabilities, wages, tax liabilities and secured
borrowing.
– Possible delay to EU Deposit Guarantee Scheme:
complex legal, financial and unresolved
questions (e.g., depositor preference, and
untested ‘bail-in’ mechanism)
– EU bank recovery & resolution regime to be in
place by 2015 … not 2018 (but recognition that
national BRR schemes may not be operational by
2015)
– EU and non-EU deposit-taking branches:
adequacy of capital and home-state
supervision?
Bail-in rather, than bail-out – direction of the
EU debate:
“We have to be able to resolve banks without
using taxpayer’s money and without disrupting
the payment system …”
Mario Draghi, ECB President, during the
Cypriot crisis

27. 27
EU Bank Restructuring Plan – to ring-fence important institutions
Liikanen Report (October 2012)
Strengthen capital levels, especially model for measuring risks
in trading book assets and real estate related loans.
■ Separation of activities based on an assessment of a firm’s
recovery & resolution plans or a mandatory separation of
proprietary trading and other high risk activities.
■ Scope: All bank’s with assets held for trading and available for
sale exceeding :
(i) a relative examination threshold of 15-25% of the bank’s total
assets or
(ii) an absolute examination threshold of EUR 100bn (US$ 129bn,
£80.7bn).
► Supervisors would determine the need for separation based on
the share of assets to which the separation requirement would
apply
► Arlene McCarthy MEP “own initiative” report goes further:
Separate balance sheets, Independent decision-making and
governance for each entity, separate capital, leverage and liquidity
rules
EC (May 2013): Which of the four definitions
is the best indicator to identify systemically
risky trading activities (in order to determine
The scope of the institutions subject to a
separation requirement:
 Using the Liikanen definition (assets held for
trading and available for sale)
 Excluding available for sale assets, as mostly
composed of securities held for liquidity
purposes
 Focusing on the gross volume of trading activity
- likely to focus on proprietary traders and
market-makers
 Focusing on net volumes - likely to only capture
those institutions that have a higher share of
unbalanced risk trading (proprietary traders).
►Separate capital, leverage and
liquidity rules

28. 28
CRD IV – Peace agreement between the EU Parliament and Council …at last!
• Minimum of 8% of high-quality capital + 4.5%
Tier-1
• Liquidity coverage requirement: phased in at
60% of difference starting in 2015, rising to 100%
in 2018
• Net stable funding requirement (NSFR), requires
that banks hold liquid assets equal to at least
25% of outflows
• National Flexibility for national regulators to
raise capital charges > 3% – in response to
economic conditions or rising risks. The EC can
challenge national actions
• G-SIFI’s buffer of Tier 1 capital equal to between
1% and 3.5% of bank’s total exposure: from 1
January 2016
• O-SIFI’s buffer of Tier 1 capital equal to 2%: from
2016
• Bankers’ remuneration: 1:1 (bonus/salary) ratio,
but can be raised to 1:2 subject to 66%
shareholders’ owning half of the shares
represented/75% of votes if no quorum
• From 2014 banks required to report profits,
taxes, subsidies to Commission; potentially
from 2015 to the public
CRD IV entry into force:
January 2014, published in OJ
by 30 June 2013, otherwise from
1 July 2014

29. 29
Agenda in the retail investment space
 Insurance Mediation Directive (IMD)
 Packaged Retail Investment Products (PRIPS)
 Reform of the EU Pensions Regime
 Markets in Financial Instruments Directive (MiFID)
“European consumers deserve better. They need reassurance that their savings, investments
or insurance policies are protected no matter where in Europe they are based “ (Commissioner
Barnier, 2010)

30. 30
Markets in Financial Instruments Directive (MiFID) – review and
update
What has changed?
 ►Escalation of Scope of
MiFID I to include fixed
income, OTC derivatives
and commodities
 ► Introduction of
maximum harmonisation’
framework with little or no
scope for derogations,
gaps, re-interpretations, or
Member State gold-
plating.
 ► Investor Protection is
taken to a new level of
authorisation, supervision
and enforcement under
MiFID II.
Key characteristics
■ Scope: all banks, investment firms,
certain non-financial institutions,
intermediaries, tied-agents,
independent financial advisers, etc
■ Conduct of business obligations
■ Investment advice
■ Informing clients on complex products
■ Client classification:
- eligible counterparty
- professional client
- retail client
 ■ Execution quality & best execution
 ■ Fit and proper criteria
 EC abolishing national options and discretions in
MiFID I: A “Single Rule Book” applicable to all
market players.

31. 31
MiFID review – and outcome…”less
betting, more investment”
 Latest developments
• Retention of OTF category
limited to non-equity trades
(bonds and derivatives) and
professional investors.
• Further restrictions on
investment firms and operators
of OTFs to use another
investment firm to carry out
market-making on
“independent basis” - allowed
only if no close links exist
between firm and OTF.
• HFTs: checks, reporting and
filters on orders introduced;
‘Minimum resting periods’ being
proposed to prevent traders
from ‘flashing bids’ but Council
disagrees.
• HFT players pursuing a market-
making strategy to provide
appropriate liquidity on a
regular and predictable basis to
the trading venue.
• Commodity derivatives –
position reporting by type of
trader and positions limits,
except where there is a proven
economic interest in the
underlying asset.
 … still a few
stumbling blocks …
 Non-discriminatory
clearing access
between CCPs and
trading venues:
opposed by Germany
+ Poland
 Pre-transaction
transparency waivers
for equities: not
eligible if volume cap
per equity per venue
exceeds 5% of total
trading + limit of 10%
of overall trading
across the EU in an
equity over 12 months
 Inducements: to ban
or not to ban…

32. 32
Packaged Retail Investment
Products (PRIPS)
 Pre-contractual product disclosure
 Sales practices
KID Key Information Document:
must provide:
 What is this investment?
 What is it for?
 Could I lose money?
 What are the risks and what might I get
back?
 What are the costs?
 How has it done in the past?
 What might I get when I retire?
SCOPE
 :Structured term deposits
 Retail Investment (or mutual) funds
 Closed and open-ended funds
 Investments packaged as life insurance policies
 Retail structured security products
 Unit-linked insurance contracts …
…and the EU Parliament wants to add:
 Shares
 Bonds
 Sovereign bonds
 Bank products, i.e., term deposits, euro-denominated life
insurance, not limited to unit-linked products.
 Other savings products
 Investment products with yield linked to interest rates

33. 33
Market Abuse Directive
 Extending the scope to include ‘organised markets’ (i.e., multilateral trading facilities
or ‘MTFs’, systematic internalisers, dealer-brokers crossing networks and other
venues such as OTC trading)
 Extending scope to a greater variety of financial instruments, including financial,
energy and commodity derivatives plus spot commodity contracts, CDSs, and
emission allowances
 Introduction of prohibition on manipulation of benchmarks and market indices
(reaction to LIBOR) rate fixing scandal)
• Transforming MAD into a Regulation – less risk of divergent interpretation, gold plating and late
transposition
• Combating market manipulation through algorithmic and high frequency trading (HFT)
• Sanctioning cases where there is a failed insider dealing attempt to manipulate the market
• Informing regulators of delay in the disclosure of inside information
• Eliminating national differences to enable regulators to obtain Insiders’ Lists from issuers
• Strengthening the effectiveness of the enforcement powers of the national competent
authorities, and introducing a more robust sanctions regime to be applied to market abuse
across the EU. EC noted financial institutions tempted to engage in regulatory arbitrage when
deciding place of business/location of branches.
• Reporting manager’s transactions
• Protection and incentives of whistleblowers

34. 34
Thank you!
 dpdoyle@free.fr
 Mobile: +33 628 69 40 40
 Published material:
- Cost Control - A Strategic Guide (CIMA/Elsevier: London, 1994/2002)
- EU chapter to The Future of Finance after SEPA (Wiley: London, 2008)
- EU chapter to A Practical Guide to Corporate Governance (Sweet & Maxwell:
London, 2010).

35. Panel Q&A
Moderator
Rebecca Healey
TABB Group
• Dr. David P Doyle – EU Policy Advisor, Financial Markets
• Philip Stafford – Editor of FT Trading Room
• Bob Fuller – CAO, Fixnetix
• Richard Kemp – Senior Partner, Kemp Little LLP

36. FIXNETIXThe ultimate trading advantage