TIME FOR CHANGE?
At CurveGlobal, we’re feeling energised. In the past few weeks, we’ve had some great conversations with many of the major banks but just as interestingly we’re starting to see buy-side institutions engaging too. The ability to cross blocks at mid-point in short sterling and Euribor allows better and more efficient risk transfer between market participants – a small but useful addition to the market evolution.
While we are in business to build a profitable enterprise, there is a higher calling. As you know fixed income futures is one of the only major sectors of the financial markets to have successfully resisted true competition. Indeed, the increasing dominance of a handful of derivatives venues has not only allowed them to steadily increase user fees but more importantly, has enabled them to continue to bundle key risk management and data services.
We realise that this dates back decades, to a time when venues were formed as domestic utilities, but in a global marketplace, it’s simply wrong that there is not open access across the industry.
In a few weeks, on 3rd July, we’ll be having a conference to discuss this and other topics, so I very much hope you’ll join me and the CurveGlobal team. If that’s not enough of an inducement, London Stock Exchange Group CEO, Xavier Rolet, will be our keynote speaker, so it promises to be a lively debate. And after that, cocktails and a chance to catch-up.
If you’d like to reserve a place, CLICK HERE.
BEST EXECUTION. WHAT NOW?
Best execution will be one of the areas we discuss at our conference on July 3rd. For those of you less familiar with this subject, here is a primer.
MiFID II sets a higher standard for best execution than MiFID I, requiring “all sufficient steps” be taken to ensure the best possible result for clients not just “all reasonable steps” as in MiFID I. Best execution must also focus on the best possible overall results on a consistent basis, and not the best price for an individual trade.
Implicit versus External Costs
Best execution is not just best price. Speed, likelihood of execution, market impact and other collateral/capital costs are to be factored in. Article 27 of MiFID II addresses these factors under obligations to execute under terms most favourable to clients, where investment firms must consider “price, costs, speed, likelihood of execution and settlement, size, nature or any other relevant consideration”. Derivatives are complex instruments, with settlement terms measured in years and in some cases decades. The impact of post-trade collateralisation and capitalisation are factors influencing the lifetime costs of the trade.
Best Execution Obligations
All investment firms are required to comply with best execution obligations when executing orders for a client, noting as above that the standard has now changed from one judged to be “reasonable” to a standard deemed “sufficient”.
Specific Client Instructions
Should a client provide specific instructions to an investment firm that influences the ability to achieve best execution then the investment must provide a clear and prominent written warning that these specific instructions may prevent the firm from providing best execution.
Disclosure of Top Five Execution Venues
Another key change brought about by MiFID II is the requirement for “investment firms who execute client orders to summarise and make public on an annual basis, for each class of financial instruments, the top five execution venues in terms of trading volumes where they executed client orders in the preceding year and information on the quality of execution obtained”.
Best Execution Arrangements
MiFID II Article 27 requires firms to “establish and implement effective arrangements” for complying with and monitoring best execution. MiFID II goes further than the original MiFID I obligations in this regard. Under MiFID II, the execution policy must detail clearly, “in sufficient detail and in a way that can be easily understood by clients”, how the investment firm will execute on behalf of the client. ESMA’s technical advice provides, amongst other things, the following detail on what must be provided to clients:
- The information must be customised dependent on each class of financial instrument and type of service provided
- A list of factors used to select an execution venue or other entity for execution and the relative importance of each factor must be disclosed
- Investment firms shall also provide information addressing how the best execution factors are considered as part of all sufficient steps
- Such information shall also summarise: how venue selection occurs, specific execution strategies employed, the procedures and processes used to analyse the quality of execution obtained and how the firm monitors and verifies that the best possible results were obtained for their clients.
Significant amendments to existing policies will be needed. MiFID II requires order execution policies to be clear, easily comprehensible and sufficiently detailed so that clients can easily understand how firms will execute their orders.
On July 3rd, come and hear these issues and more debated by industry experts.
MARGIN ILLUSTRATION: Swap vs Futures strip
WEEKLY / MONTHLY OPEN INTEREST: Broke through 100,000 lots in the past month
Ralph Bird, Head of Product Development
Ralph Bird is responsible for new contract specifications and listings, as well as the definition of enhancements to system functionality to meet the market's requirements. Ralph joined CurveGlobal in April 2015, having previously worked as the Head of Special Projects at NYSE Euronext where he was heavily involved in the transition of the listed markets from the NYSE Euronext UTP trading platform to the ICE Trading Platform following the merger with ICE. Before that, Ralph was the Head of Business Analysis and Test at NYSE Euronext having joined LIFFE as Technology Development Manager. Ralph has a BSC (hons) in Computing Science with Economics and started his career in listed derivatives when he joined the London Commodity Exchange as a Senior Systems Engineer working on one of the industry’s first electronic trading platforms (FAST) in 1990. He lives in Radlett with wife Sue, sons James, Matthew and Charlie and daughter Isobel.
To find out more about CurveGlobal or to offer suggestions on improving this newsletter, contact us at +44 20 7797 1055 or firstname.lastname@example.org.