Level 2 for bonds: a view from the AFM Hans Wolters ICMA MiFID II conference Amsterdam, 10 November November 2015Pagina 1

1.Regulatory process - Where are we - Next steps - ESMA process 2.Transparency for bonds - Level 1 - MiFIR - Key points RTS non-equity - Liquid market for bonds (IBIA versus COFIA) - Size specific and large in scale determination - Post-trade deferrals non-equity Agenda 10 November 2015Pagina 2

Level 1 - Publication in Official Journal June 2014 Level 2 - Technical Advice ESMA to Commission, December Publication RTS ESMA, September Delegated acts, end 2015? - ITS, deadline publication ESMA January Endorsement RTS Commission, (non) objection EP and Council, publication in Official Journal Q1/Q Level 3 - ESMA Guidelines, Q and A’s, opinions, supervisory convergence: Regulatory process - Timeline 10 November 2015Pagina 3

Recap: Regulatory measures in the Lamfalussy process Level 1 Framework legislation, proposed by the Commission and adopted by the Council and Parliament: Regulation (applies directly) Directive (needs to be implemented by Member States) Level 2 More detailed technical rules to supplement the Level 1 framework: - Delegated acts (drafted by the Commission with advice from ESMA) - Technical standards (prepared by ESMA and adopted by the Commission) Regulatory technical standards (RTS): legal obligations Implementing technical standards (ITS): forms etc. Level 3 Implementation and convergence: Q&As Opinions Guidelines 10 November 2015Pagina 4

ESMA process -Preparation of drafts by Task Forces ESMA -Discussion of drafts in Standing Committees ESMA -Decision making Board of Supervisors ESMA (June and September 2015) -Early legal review Commission Legal Services (summer 2015) Stakeholder input -Discussion paper May Consultation paper December Consultation responses, open hearings, bilateral meetings, position papers, data provided by market participants “Lobbying” in final stage -Letter negotiating team EP -Letter Treasuries UK, DE, FR How did ESMA develop the RTS? 10 November 2015Pagina 5

Board of Supervisors (BoS) Standing Committees (SC) Task Forces (TF) e.g. Transparency and trading obligation for derivatives SMSC: Secondary Markets Standing Committee (relevant SC for bonds) Others: IPISC: Investor Protection and Intermediaries Standing Committee CDTF: Commodities Derivatives TF (position limits, position reporting, ancillary activity) MDRWG: Markets Data Reporting Working Group (transaction reporting) Organisation ESMA preparation Level 2 Drafting of L2 work is collaborative effort of ESMA Staff and NCA representatives 10 November 2015Pagina 6

2. TRANSPARENCY FOR BONDS 10 November 2015Pagina 7

Policy objective: to increase transparency Extension of scope: from shares to equity-like and non-equity Four waivers pre-trade (equity) have remained, ESMA to provide further detail at Level 2 Introduction double volume cap for dark pool trading equity, max 4% per venue, 8% for all venues, 6 months suspension if breached Introduction trading obligation for derivatives and shares Transparency: recap key points level 1 10 November 2015Pagina 8

Art. 8 MiFIR pre-trade transparency requirements for trading venues in respect of bonds, structured finance products, emission allowances and derivatives - make public current bid and offer prices and the depth of trading interests, also applies to actionable indications of interest - make public on a continuous basis during normal trading hours - calibration for different types of trading systems Art. 9 waivers pre-trade for non-equity - large in scale and orders held in an order management facility - actionable indications of interest in RFQ and voice trading systems that are above a size specific to the financial instrument - derivatives not subject to the trading obligation and other (non- equity) financial instruments for which there is not a liquid market Art. 18 obligation for systematic internalisers to make public firm quotes non-equity Key articles MiFIR: pre-trade bonds 10 November 2015Pagina 9

Art. 10 post-trade transparency requirements for trading venues non- equity - make public price, volume and time - as close to real time as technically possible Art. 11 authorisation of deferred publication - large in scale - not a liquid market - above a size specific Art. 21 post-trade disclosure by investment firms including SI’s non- equity: price, volume and time through an APA P.M. Art. 28 trading obligation (RM, MTF or OTF) for derivatives Key articles MiFIR: post-trade bonds 10 November 2015Pagina 10

Pre-trade transparency for trading venues Post-trade for trading venues and investment firms trading outside a trading venue Provisions common to pre- and post-trade transparency - art. 13: methodology to perform the transparency calculations, e.g. determination of liquid market, size of orders large in scale compared with normal market size, size specific to the instrument Annexes with details of content pre- and post-trade, liquidity assessment, LIS and SSTI-thresholds Overview RTS non-equity (RTS 2) 10 November 2015Pagina 11

Definition liquid market in art. 2 MiFIR (17) Liquid market means:…..a market for a financial instrument or a class of financial instruments, where there are ready and willing buyers and sellers on a continuous basis, and where the market is assessed in accordance with the following criteria….: (i) the average frequency and size of transactions….. (ii) the number and type of market participants.… (iii) the average size of spreads, where available. Liquid market: IBIA or COFIA for bonds (1) 10 November 2015Pagina 12

Non-equity instruments for which there is not a liquid market: pre-trade transparency may be waived, post-trade publication may be deferred Liquidity assessment for individual financial instruments (IBIA) or classes (COFIA). ESMA CP proposal: to use COFIA for bonds Empirical exercise shows a clear relation between liquidity and issuance size. ESMA designed the classes of bonds optimising the issuance size (e.g. 2 bln. for sovereign debt) Reasons CP preference COFIA: stability and predictability, much less complex, less of an administrative burden for industry and authorities, easier and straightforward for newly issued financial instruments Methodology implies there will be some bonds belonging to a liquid class that are illiquid in reality (false positives, i.e. they do not meet the liquidity criteria) and vice versa (false negatives) Liquid market: IBIA or COFIA for bonds (2) 10 November 2015Pagina 13

-Discussion Paper (May 2014): explanation issue and two options -Consultation Paper (December 2014): ESMA preference for COFIA -Intensive lobby market participants, buy-side and trading venues generally in favor of COFIA, sell-side prefers IBIA -EP: preliminary preference for IBIA, also Treasuries UK, DE, FR -Publication RTS (September 2015): ESMA opts for IBIA, assessment on a quarterly basis IBIA/COFIA - Decision making process ESMA 10 November 2015Pagina 14

-Liquidity criteria: each individual financial instrument shall be determined not to have a liquid market… if it does not meet one or all of the following thresholds of the quantitative liquidity criteria on a cumulative basis: -Average daily notional amount: EUR 100,000 -Average daily number of trades: 2 -Percentage of days traded over the period considered: 80% New issues (bonds admitted to trading or first traded during the quarter): specific combination of bond type and issuance size, e.g. threshold sovereign bond 1 bln., corporate bond 500 mln. Liquid market for bonds in RTS 2 10 November 2015Pagina 15

Percentiles to be applied for the calculation of the pre-trade and post-trade SSTI and LIS thresholds for each bond type: - SSTI pre-trade trade percentile: 60 (covered bonds 40) - LIS pre-trade: 70 - SSTI post-trade: 80 - LIS post-trade: 90 Size specific and large in scale thresholds 10 November 2015Pagina 16

Without deferral - publication as close to real time as is technically possible and in any case - within 15 minutes after the execution of the transaction - within 5 minutes from January 2020 Deferred publication possible (NCA may authorise) local time on the second working day after the date of the transaction - thereafter, all details of the transaction on an individual basis shall be published unless extended time period of deferral is granted Extended deferral regime at the discretion of the NCA - 4 weeks extended time period of deferral (e.g. for volume omission or weekly publication of several transactions in an aggregated form) - publication of all details of the transactions on an individual basis after 4 weeks (except sovereign debt, NCAs may allow weekly publication in aggregate form for an indefinite period) Post-trade deferrals non-equity Pagina 1710 November 2015

Questions? 10 November 2015Pagina 18