EMIR and MIFID II Regulatory Reform

Following the financial crisis, OTC markets and OTC derivatives were brought under tighter regulatory oversight. Standard derivatives are now centrally cleared and many are subject to electronic execution mandate. In addition, Basel III also takes derivatives exposures into account in the calculation of bank capital. As a result, the once-opaque OTC markets are now much more transparent. The largest segment of the OTC derivatives market is interest rate swaps (IRS), which alone account for more than 60% of the global OTC market (BIS 2017). In this project, we analyze two main fixed income markets: The trading of IRS by major euro area banks. We propose to use the EMIR dataset of bilateral transactions, which allows us to shed light on the microstructure and the “who trades with whom on which type of IRS” in the EU. Trading in the European Sovereign bond market. We propose to use the MIFID II post trade transparency transactions made available by Bloomberg and other providers jointly with MTS data to investigate the role of MIFID II. We aim to investigate the following questions:

1) How has the post-crisis regulation changed the role of big non-dealer banks? Do we observe “new intermediaries" in this market?

2) What is the feedback mechanism between market liquidity (proxied e.g. by Amihud- type measures) and Dealer funding liquidity? How does the leverage and capital position of the main dealers affect market activity?

3) What are the costs of the derivatives market reform? More specifically, what are the costs i) of funding initial and variation margin that is posted to the CCPs or bilaterally; ii) of capital on banks associated with their derivatives exposures; iii) of transaction in terms of effective bid-ask spread; and iv) of access to central clearing and trading venues. We are particularly interested in the trade-off between measures for counterparty risk and (ex-ante internalized) costs. Thereby, it will also be important to track costs from clearing members to clients: How large is the share of costs borne by clients compared to clearing members?

4) How the post-crisis regulation has changed the liquidity and price discovery in the sovereign bond markets in Europe?