MIFID II and the debt markets

The impact of MiFID II on government bond issuers : MIFID II contains elements that could have adverse effects on the distribution model of government bonds in Europe. It could lead to increased transaction costs, increased market volatility especially in times of market stress and higher borrowing costs 2

MiFID II proposals Multilateral Trading Facility Regulated Market Organised Trading Facility Systematic Internaliser Over-the- Counter Multilateral Trading VenuesBilateral Trading MiFID II extends MiFID to non-equities and introduces: New trading categories Organisational requirements for each type of trading Pre trade transparency Post trade transparency

MiFID II proposals: impact on interdealer broker activities Multilater al Trading Facility Regulated Market Organised Trading Facility Systematic Internaliser Over-the- Counter Multilateral Trading VenuesBilateral Trading Obligation to publish continuous quotes upon which multiple parties can act Voice Interdealer Broking would not be allowed It will be more difficult for market markets to be able to hedge their risks, which will be absorbed in the transaction costs for investors

MiFID II proposals: systematic internaliser Multilateral Trading facility Regulated Market Organised Trading Facility Systematic Internaliser Over-the- Counter Multilateral Trading VenuesBilateral Trading An investment firm, which on an organised, frequent and systematic basis, deals on own account by executing client orders outside a RM, MTF or OTF The ECON MiFID/MiFIR Draft Report proposes to create an obligation for all bilateral trading to be carried out through a Systematic Internaliser, except primary issuance

Systematic Internaliser – pre trade transparency for non-equities – Article Investment Firm Client A (i) If the client requests a quote; and (ii) The investment firm agrees to provide the quote Investment Firm Client B Client C Client D (i)The quote must be disclosed to all clients (ii)Below a certain size, the quote must be made available for other clients to transact upon Quote must be firm

Systematic Internaliser – pre trade transparency for non-equities – Article 17 3 Investment Firm Public Below a certain size, the quote must be disclosed to the public Regulatory objectives For all clients to have: Access to fair prices through provision of the same quotes Price discovery Binding quotes

Post trade transparency Multilateral Trading facility Regulated Market Organised Trading Facility Systematic Internaliser Over-the- Counter Multilateral Trading VenuesBilateral Trading All will be subject to post trade transparency requirements The price, volume and time of transaction will have to be reported real time or with a certain time delay Time delay will be based on size and type of the transaction The ECON MiFID/MiFIR Draft Report proposes to require the volume of the trade to always be published Commission has indicated that primary activity will be subject to the requirements

Post Trade Transparency Market Initiative: objectives & key features Objectives: Develop and implement a single framework that is appropriate for the fixed income cash bond market Key features of the framework to achieve the objectives: Developed by the industry: sellside & buyside Single model for all asset classes (corporates, covered bonds, government bonds, securitisation, high yield, surpranationals) Real time and delayed publication based on objective and measurable factors Dynamic and adapts for changes in market liquidity Empirical data is being used to ensure that the framework is technically robust Aim to develop as a consolidated tape from the outset

Higher degree of post trade transparency Key features of calibration Time delay determined by: Liquidity category of bond: total number of trades and volume of trades measured over a reasonable periodic basis (e.g. monthly) Issue size Transaction size: enables differentiation between retail and wholesale (normal and block) Disclosure requirements: real-time vs. deferred (end-of-day, T+3, T+7, T+Max) Liquidity category periodic measurement: short enough to reflect market changes but long enough to eliminate skew events Recalibration: model is dynamic to cater for changes in liquidity; protocols will be in place to account for liquidity events Post Trade Transparency Initiative

1.Pure voice trading should be allowed under the OTF regime 2.Investment firms under the SI should not be required to provide binding quotes and quotes that other firms should be able to execute on 3.Pre-trade transparency: the regulatory objective of ensuring price discovery and price formation can be met by requiring firms to provide price information for liquid bonds and small trades to retail clients and wholesale clients (which include smaller institutional firms). 4.The post trade transparency calibration should be based on liquidity of the bond, should enable volume omission and be a phased in approach. Market partisipants’ position