Is it Crunch Time for Derivatives Trading in Asia?
Q&A with Jennifer Keser, Director of Regulation and Market Structure and Kelly McKenney, Head of Distribution for Asia at Tradeweb
After nearly two months since MiFID II went live in Europe, any industry concerns that market liquidity would drop and derivatives trading would slow to a halt may have been laid to rest. In fact, in the days following January 3rd, Tradeweb experienced a surge in average daily trading volume in European interest rate swaps.
For those operating outside of the European Economic Area, the news should come as some relief that the global derivatives marketplace is indeed still globally accessible. However, the various new reporting requirements and changes to pre- and post-trade transparency still raise significant questions about the mechanics of trading in Europe for firms based in regions such as Asia, which has not been subject to the same level of derivatives reform that we’ve seen in Europe and the U.S.
To help offer some insight on the key challenges confronting Asia-based market participants trading in Europe, Jennifer Keser, Director of Regulation and Market Structure and Kelly McKenney, Head of Distribution for Asia at Tradeweb recently engaged in a webinar discussion on the impact of MiFID II on trading workflows, and the lessons learned from helping clients successfully navigate the transition to regulated derivatives trading in Europe and the U.S. Following is a recap of that conversation.
Kelly McKenney: How will investors, traders, and financial firms sitting outside Europe be affected by the MiFID II legislation; what are some of the biggest issues they’ll need to confront?
Jennifer Keser: There are four key issues market participants residing outside of Europe will want to focus on when thinking about their trading strategies in a MiFID II world. One of the biggest changes will be pre- and post-trade transparency obligations in fixed income and derivatives, which requires publication of pre and post-trade data, some real-time and some delayed. Another big shift will be the liquidity determinations of asset classes and financial instruments, which will impact their real-time publication (transparency). Next is the impact on market structure, namely that certain instruments will now need to be traded on regulated venues as opposed to over-the-counter (OTC). And last but not least, all the new data which, in addition to transparency around financial instruments trading, also includes identifying market participants.
KM: Could you explain a bit about the reporting obligations under MiFID II, specifically what are the differences between trade reporting and transaction reporting, and who’s responsible for what?
JK: Transaction reporting mandates reporting of the market participants that are parties to a trade. This information will automatically be reported, but it is non-public. For Asian firms, it only applies when they are trading on a multilateral trading facility (MTF), such as Tradeweb.
Trade reporting is a near real-time broadcast of trade data, which provides detailed transparency around a financial instrument, and must be made available for public consumption.
For market participants trading on an MTF, this reporting will automatically be built into the trading process.
JK: Now, a question for you: What aspects of MiFID II do you find are of most interest to market participants in Asia right now?
KM: Our experience so far is that Asia Pacific clients who are trading in mandated OTC derivatives have felt the biggest impact of the new regulations. They are typically trading with global counterparties – many of whom are European banks. Some, who were not set up to trade on a regulated venue, have experienced reduction in liquidity. The vast majority of our clients in this region, however, were already trading with U.S. and European banks, and were already set up for this transition.
KM: Many of the requirements for MiFID II, such as the derivatives trading obligation (DTO) sound similar to the Dodd Frank legislation that was rolled out in the U.S. several years ago. What are the similarities and differences between the two?
JK: There is some reasonable alignment in scope (instrument-level), but the U.S. does appear to have been a bit more hard-hitting. Europe is a bit more flexible in the types of trading venues that can be used to satisfy the DTO. For example, in the U.S. all trading has to occur on a Swap Execution Facility (SEF), whereas MiFID II allows use of “regulated markets”, which include exchanges, MTFs and a new category called Organized Trading Facilities, or OTF. In line with this increased flexibility in Europe, there is no minimum amount of counterparties that need to be approached in an RFQ, and the trading venue does not need to offer an order book. Block trades are also not exempt from this requirement because of the flexibility in trading protocols that can be used.
JK: Based on what you’re hearing in the market, what do you think Asian clients’ readiness is to trade swaps on venue?
KM: We actually saw many Asian clients onboard the Tradeweb MTF before the end of 2017. These included firms that were located in Asia but trading in the name of an EU parent, and local Asia-based institutions that wanted to be prepared just in case access to liquidity would become problematic after the roll-out of MiFID II. We are now seeing requests from firms in countries that do not have an MTF requirement that are onboarding simply to be a part of the marketplace.
JK: That’s a really interesting trend. One of the things we saw in the U.S. was that not only did the on-SEF trading of swaps drive a tenfold increase in trading volumes of U.S. dollar swaps, but also trading electronically became infectious. In fact, more than 45% of volume on SEF today is in instruments that are not even required to be traded on SEF.
What’s happened is that even when clients are not required to trade on a regulated venue, they are often choosing to do so because of liquidity reasons or straight-through processing benefits.
KM: Suppose a firm that is not currently subject to MiFID would like to register on the Tradeweb MTF; can you take us through the process?
JK: The easiest and most secure way to onboard – particularly for larger firms representing a number of clients - is to access our online eDocs portal, whereby an authorized administrator from the client can input company level information and any underling client information we need for transaction reporting purposes, directly into our system. In addition, our sales team stands ready to ensure a quick and smooth registration process for all our clients.
KM: What else do you see coming down the pipe that could be an issue for Asian firms as they confront MiFID II compliance?
JK: One thing to highlight here is that just because we got past January 3rd, it does not mean that MiFID II is done. It is a living breathing regulatory framework, and there are still some milestones we’re going to hit that are of note. One of the biggest items is the widening of the scope of instruments considered liquid and the related adjustments to the transparency thresholds. There will also be a rolling calendar of best execution reporting requirements that become effective over the course of spring and summer of 2018.
The other major concern is Brexit. We are reaching the one-year deadline to negotiate the exit. Some clients have raised concerns with regard to liquidity access, given the fact that our MTF is located in the UK. To address that concern, Tradeweb has already applied for authorization of an MTF in Amsterdam, which ensures that we will have a European regulated entity regardless of what happens as a result of Brexit.