erasmus college

Rotterdam – 30 May 2014 www.ing.com

H. R. Verbeek Head of Trading ING Financial Markets NL

Fixed Income Trading

27-mei-14 Agenda

• ING Financial Markets • Fixed Income Products • Trade Flow • Primary Dealership • The Financial Crisis • The Debt Crisis • The future

2 Banking - Investments - Life Insurance - Retirement Services

Global Presence Financial Markets,

Sales and Trading locations

New York

Sao Paulo

Tokyo Hong Kong

Manila

Seoul

Singapore

Jakarta

London

Madrid

Milan

Paris

Moscow

Budapest Bucharest

Sofia

Brussels

Amsterdam

Luxembourg Frankfurt

Prague Warsaw

Bratislava

Geneva

Mumbai

Ankara

Sydney

Taipei Shanghai


Dealingroom set-up

• Bank Treasury & Financial Markets 1 Dealingroom • Unique set-up rings instead of rows • 70 traders, 3 groups

Equities, Fixed income, (bonds, derivatives) Currencies.

• 70 Sales • FM community:

Dealers Real money Clients Trading/ leveraged Clients


Overview FM and underlying's

Research Trading / Treasury DCM Sales

Corporate Issuer

The United States 07/09

General Electric EUR 2bn4.750% Fixed Rate Notes due 2014

Joint Bookrunner

Provide analyses on rates, FX, credit, macro economic developments, etc.

Manage the market risk on transactions closed by Sales with clients

Maintain relationships with clients in the field of hedging and investments and close transactions

Issue bonds for clients


About Financial Markets (FM)

Emerging Markets

Developed Markets,

Debt Capital Markets

ING Financial Markets is managed across four main business lines:

Global Equity Products

Equity Deriv.

Commodity

FX

Rates, Credits Issuance FX

Rates, Credits

6

GSF

Banking - Investments - Life Insurance - Retirement Services

Fixed Income Products

7

FIXED INCOME

Rates & credits STIR Primary dealerships

Repo

Market Making

Government bonds, Credits, Supra’s & Agencies

Asset Swaps

> 3 years < 3 years

Market Making

Government bonds, Supra’s & Agencies, Derivatives.

Securities Financing

Government bonds, Credits, Supra’s & Agencies, ABS etc.


STIR:

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• Short-Term Interest Rate Options & Futures

• Curve specific set-up

• Hedging efficient

• Liquid money Market Futures

• Up to 3 year


Trading/ Hedging:

9

• Balanced flow

• WareHousing

• Bonds vs. Bonds

• Bonds vs. Swaps

• Bonds vs. Listed Derivatives


Asset classes

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• Government Bonds Debt security issued by government to finance Government borrowing. These bonds are most often issued in domestic currency. • SSA’s Bonds (Sovereign, supranational & Agencies)

Sovereign bond: debt issued by national government but denominated in foreign currency

Supranational bonds: debt issued by international organization such as World Bank etc. Agency Bonds: debt issued by government-sponsored agency. The agencies are backed by government but not guaranteed since the agencies are private entities. Example is Fannie Mae.

• Corporate bonds Debt security issued by corporation. The backing of the bond is the

company cashflow.


Asset classes

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• OTC IR Swaps (interest rate) This is a highly liquid financial derivative instrument in which 2 parties

agree to exchange interest rate cash flows based on a specific notional amount from a fixed rate to a floating rate (and vice versa)

• Listed Derivatives A derivative is a risk transfer agreement, the value of which is derived

from the value of an underlying asset. The underlying asset could be an interest rate, a currency etc.

Listed derivatives are exchange traded derivatives also known as futures.These derivatives are executed over a centralized trading venue (exchange) and then booked with a central counterparty known as the clearing house. Examples: Euribor Futures, Bund, BOBL, Schatz Futures, OAT future etc.

• Asset swap Fixed investment such as a bond with a guaranteed coupon payments is

being swapped for a floating investment such as an index.


Trade Flow

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Sales/ Voice Electronic Trading

Platform: TradeWeb, BloomBerg

Trader /Market maker

Inter Dealer Broker Inter Bank Platform

Trade

Hedge

Exchange Listed Products


Trade Flow

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Voice Electronic Trading Platform:

Trader /Market maker

RFQ for Trade

Hedge

Pricing Engine

Market data

Trade

Repo/Financing


Repo:

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• Repurchase Agreement

• Seller of a security agrees to buy back from the buyer at a future date against a different price.

• Short/ long position need to finance

• Crucial to create funding

• Trading approx. 300 government bond trades a day


Trader the spider in the web…

Trader

Facilitates market participants

Provides balance sheet

Provides market knowledge

Manages aggregated risk

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Gives liquidity Joins Sales

WareHousing Funnel


VAR Risk

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TOTAL IR FX CS TOTAL IR FX CS Limit Utilization

Market Making Government Bonds 1.00 1.00 0.00 - 0.78 0.78 0.00 -

Portfolio Trading & Finance 2.99 2.83 0.01 0.54 2.70 2.65 0.01 0.57

Market Making Derivatives 1.18 0.77 0.81 - 1.20 0.77 0.81 -

Government Bonds & IRD Mgt & Other 0.00 0.00 - - 0.00 0.00 - -

Inflation Linked Bonds 0.24 0.24 - - 0.21 0.21 - -

RATES AMSTERDAM 4.53 3.89 0.81 0.54 3.93 3.22 0.80 0.57 8.00 57%

HVaR Results by Desk (in mio EUR)

19/May 16/May 19/May


Primary Dealership (PD’s)

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A primary dealer is a pre –approved firm that buys government securities directly from the government with the intention of reselling them to others. • Primary Dealers are appointed by governments • The State uses services of PD’s for:

Trading, Promotion Distribution of State loans. Advise

• PD’s have an exclusive right to particpate in auctions. • Auctions are used as a price discovery mechanism in the

process of covering funding need. • To Ensure the liquidity on the secondary market they are obliged

to act as a Market Maker by providing continously bid and offer prices, the quotation obligation on Internet market

• They provide monthly reports on their activities in the secondary market. Banking - Investments - Life Insurance - Retirement Services

Primary Dealership: Outstanding

18

29.3

309.6

Treasury Bills

OLOs

Belgium: Outstanding in Bln

0.65

320.75

5.30 22.95

0.08 3.65

0.76

Cash

DSL

DSL foreigncurrencyDTC

ECP

Private Loans

Private Loansforeign currency*

Netherland: Outstanding in

1,142

39

Bonds

Bills

Germany: Outstanding in Bln

1,723

347

Bonds

Loans

Italy : Outsanding in Bln


Primary Dealership: Supply

19

2.98

30

3

Treasury Bills

OLOs

EMTN

Belgium: Supply 2014

50

37.7 DSL

Money Market(DTC+ECP)

The Netherlands: Supply 2014

161

44 Capital Markets

Money Market

Germany: Supply

267

203 Bonds

Bills

Italy: Supply 2014 (ING Estimate)


The Financial Crisis


The Financial Crisis

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2007: Start of financial crisis • Housing buble starts to burst • Subprime meltdown • Credit crunch loss of confidence by US investors in the value of

sub-prime mortgage. • Liquidity crisis • August 2007: BNP Paribas announced ceasing of activities in 3

hedge funds that specialised in US mortgage debt. • Seizure of banking system due to trust evaporating overnight.

2008: • Collapse of Lehman Brothers kicked the Global Financial crisis into

high gear • No longer held true that all banks were “too big to fail” • Domino effect/ Panic mode • Unwinding of derivates trades in market • Unwinding of repo trades in market • Market into flight to quality mode Libor Spreads , credit spreads


The Financial Crisis: Libor Spread


Impact Crisis: Flight to Quality

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• Outperformance Germany across the curve (Strong buy side Schatz, Bund, BOBL)

• Libor Spreads wider

• Risk off Market

• Default market flattening periphery curve cash invested more relevant than duration.

• Debt crisis

• Only Sellers

• Illiquidity

• Artificial markets through central banks

• Rate cuts

• Balance sheet contrains


The Debt Crisis


The Debt Crisis

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2009:Greece budget deficit revealed 12,7% of GDP. Twice what is was expected to be and 4 times higher than targeted.

2010: Crisis spreads to Periphery countries. • Spain budget defecit totaled 11,2% of GDP • Portugal government announced plans to cut the budget defecit • Greece requests loan of 45 bil. from eurozone countries • ECB (May 2010) announced beginning of Securities Markets

Program. Central bank would buy sovereign debt to ensure depth and liquidity. SMP

• EFSF created as special- purpose vehicle to provide loans to cash strapped countries.

• Ireland takes a bailout of 85 bil euro • European banks perform poorly in stress test, revealing major

weakness. (7 out of 91 fail)

2011: Crisis deepens. Potugal, Hungary request bailout, Greek bond holders requested to take 50% haircut, ECB cut rates to 1% etc. • ECB buys Italian and Spanish bonds after Italian bond yields jump


The Debt Crisis

Banking - Investments - Life Insurance - Retirement Services 26

October 2011 : • MF Global (formerly known as Man Financial) files for chapter 11

bankruptcy • Jon Corzino Ceo / Commodities brokerage firm • MF Global made a $ 6.3 bln investment on own behalf in Government

Bonds: Italy, Spain, Portugal & Ireland • Large number of complex repo agreements for funding and for leverage

profit • Liquidity crisis due to Margin & Capital requirements • Improper transfer of over $891 mln from customer accounts to MF

broker-dealer account to cover losses created by trading losses. • $ 200 mln surplus reported to commodities commission but no back-up

documentation • Shortfall in customer segregated funds. Not able to repay filed for

chapter 11 • December 2011: ECB announces LTRO credit support measures to

support bank lending & liquidity in euro area money markets. Maturity 3 years

The Debt Crisis

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2012: Containing the crisis • ESM affective or operational • Spain requests bailout for banks • Cyprus requests for bail out • ECB cuts interest further • Moody downgrade France • September 2012: Draghi annnouces the OMT program ( Outright Monetary Transaction) which allows for unlimited ECB purchases of sovereign bonds on the secondary market.

• OMT focus on bonds with a 3 years period or less

Speech by Mario Draghi, President of the European Central Bank at the Global Investment Conference in London

26 July 2012

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”


The Debt Crisis


The Debt Crisis

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Eurex data


Changing market

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• National buying Italian Investor buying Italian paper • Volatility risk profile is changing • Less Market Makers due to risk appetite • Primary Dealerships life line to liquidity • Issuer limits decrease • Balance Sheet restrictions on leverage (Basel II/III) • Best price execution more electronic trading/ OTC in the past • Less Relationship driven • Due to regulations market participants are forced into Central Clearing


The modern trader

• Macro developments • All via the electronic gate way, electronic distribution vs. Voice • Trades via automatic trading systems DTD • Clients via automatic trading systems DTC • Latency crucial, Pricing engines crucial • Brokers give background info, so more transparency • One click trading • “Electronic competition”, velocity of information up • Prices on screen, pricing engines crucial

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Profile of trader is changing: From grey hair to Nintendo jockey


• Regulatory constrains FATCA MiFid 2 EMIR

• It / information / trading skills / distribution • Risk charges • Transaction Tax • Prices in Competition • Market is commoditized • The future is client centric • Regulators force market-

Participants into Central Clearing

Future challenges


• The future trader is more sales • The future trader is more IT specialist • The future trader is more information broker

The Future


Banking - Investments - Life Insurance - Retirement Services 34

Certain of the statements contained in this release are statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING’s core markets, (ii) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, and (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forward-looking information contained in this document.

www.ing.com

Rotterdam – 30 May 2014 www.ing.com

H. R. Verbeek Head of Trading ING Financial Markets NL

Fixed Income Trading

erasmus college

Education