European Market Liquidity Conference – thoughts and comments

Last week I attended the Association for Financial Markets in Europe (AFME) 9th annual European Market Liquidity Conference.

As always with AFME, there had some thoughtful speakers and topical panel discussions, as well as providing good forum for networking opportunities (including providing for the conference iPad’s pre-loaded with delegate names allowing you to reach out to them and make contact).

This year’s agenda focused on the new emerging market structures

  • Liquidity in the new regulated market – the changing market structure
  • Keynote address -Verena Ross, Exec Dir, ESMA
  • Foreign Exchange:
    The renminbi and other Asian currencies
    Impact of regulation on development of the FX market place
  • Fixed Income:
    Development of exchange capabilities
    Liquidity issue, what liquidity issue?
  • Funding European economic growth: the obstacles and opportunities

Below are my notes and some comments from the sessions that I attended:

Keynote address Verena Ross, Exec Dir, ESMA
Very impressive speech, talking about what’s been achieved by ESMA. It’s now been 5 years since the G20 agreement in Pittsburgh. Results becoming tangible now. Mifid 2 / defining liquidity. Significant project for ESMA. Big addition to rulebook. Esma to provide advise or technical standards/ implementing rules. Esma appears 445 times in MiFid. Over 100 technical standards and advice items. Mifid is about how capital enters into the markets, and it affects everyone. Mifid will increase more instruments and will affect market structure and pre and post trade transparency will be increased as a result. Endless debate seen on tradeoff between transparency and liquidity. Mifid wants to increase transparency without affecting liquidity. Mifid defines liquidity as “the ability to trade at price close to last traded price”. Other regions have different definitions of liquidity. Different trade characteristics for fixed income bonds depending on whether they are on or off the run bonds. Implication may be changes in pre and post trade transparency calibrated for each type of bond. Systematic internalisers must publish firm prices and show data. Full speech available here.

Liquidity in the new regulated market
Dodd Frank not had any effect yet on liquidity. Emir clearing also no impact yet on liquidity, although under EMIR both sides of trades must report, which is extra burden which isn’t the case under Dodd-Frank. The UK DMO hasn’t seen a negative impact of regulation on liquidity (yet). But they continue to keep an eye on the market and would voice concern with anything that might undermine ability for future debt issuance, ie debt funding. Some discussion about what exactly is liquidity, is it immediate access of liquidity provision to clients, or under Basle ability to exit and unwind positions. Whilst you can measure turnover, it’s not easy to agree on the right metric to measure liquidity. Perhaps transparency is a first step to liquidity – if managed carefully and degree of transparency continually re-calibrated?

Foreign Exchange:
(now 10th largest traded currency):
Huge political commitment for London to be major renminbi trading centre (similar to Eur and USD). 60% of trading outside China now in London. Launch of Renminbi Clearing Bank in London would be major development. Need to expand swap market (as currently swap vols similar to spot vols,) and encourage top Chinese names to renminbi offshore renminbi bonds. Recent volatility and large drop shows it’s still a one way trade, and not deep enough to enable easy trade liquidation. Over time on and off shore will converge. Buy & hold is play on China. look for renminbi to become a component of the SDR by 2020 review.

Impact of regulation
It started with reporting, than moved to clearing and now we have MAT trading. So far, Bloomberg sees to be grabbing the largest share of multi-asset class SEF trading. SEFs have the obligation to provide the legal confirmation of trades, but causing some challenges at moment as parties get to grips with legal identifiers and UTI reporting protocols. We are seeing the all to all SEF model leading to the introduction of sponsored access to SEF trading.

Bifurcation of liquidity as pricing for the same product in the same size can be for instance 30/32 on SEF and 30/32 off-SEF, but the products are not fungible and so cannot easily be used for risk offsetting. Basle treatment of cleared and non cleared risk and capital costs and portfolio margining big driver to where trades are placed. The new market infrastructure providers for connectivity to SEFs and Clearing houses and trade repositories are helping to solve these challenges. No central clearing is cited as a cause for the fragmentation, whilst regional picture important, and many products trade in Asia. Regional differences in reporting will only prolong fragmentation and may result in customers retreating into their jurisdictional regions until clearer.

Exchanges were not seen as competing for OTC volume, rather (according to one exchange), seen as complementary to OTC flows and that they bring new liquidity into the market, rather than migrate existing volumes from OTC onto exchange – citing one large multinational who calculated that they could be fully hedged with around 17 OTC contracts, whereas it would take over 100,000 exchange contracts to achieve same hedge cover).

The full AFME 2014 program here.

(see here for our comments on last year’s conference).

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