Interoperable CCP calls for exchanges to play ball
Six months on from when four-way
clearing first rolled into Europe, much of the hard technical work of making
interoperability operational has been done, says Diana Chan, CEO, EuroCCP. Now it’s up to more venues – especially
exchanges – to enter the fray and bring the benefits of interoperability to a
greater number of market participants.
Chan is very proud of the
progress she and the other interoperable central counterparties (CCPs) have
made in a reasonably short period of time.
January 2012 saw multilateral
trading facilities (MTFs) BATS and Chi-X implement full interoperability with
four CCPs, including EuroCCP, the European arm of US post-trade utility DTCC.
Previously, in June 2011, BATS Europe
launched its preferred interoperability programme. The original service gave
the MTF’s members the option of sending their trades to one of three CCPs – Anglo-French
clearer LCH.Clearnet, Swiss central counterparty SIX x-clear or EuroCCP.
To opt in, trading participants
on both sides of the trade had to elect to use the service. If one or both
counterparties choose not to use it, the trade will be sent to EMCF – BATS
Europe’s incumbent clearer, which acted as the default CCP.
“If we had not started with preferred central counterparty
clearing, the industry never would have achieved full interoperability among
multiple CCPs,” says Chan. “It was more costly for brokers to make the move to
a preferred CCP under this sub-optimal arrangement, but they were willing to
incur that cost because they knew if they didn’t move, then full
interoperability would not have happened. These firms made a public statement
that interoperability was important for the industry. Because they moved, they
showed that they were serious. If BATS didn’t take the very brave step to
introduce preferred clearing, full interoperability might not have happened.”
Spreading across Europe
Last month, Burgundy became the
first Nordic market to go live with a three-way clearing model. This month, Equiduct
– the retail-focused pan-European regulated market launched by Börse Berlin in
2009 – became the latest platform to join the interoperability trend in Europe.
But Chan freely admits that
there was nothing altruistic about MTFs going interoperable: “MTFs chose to go
the interoperable route as a differentiator.”
On BATS and Chi-X – which joined
forces in a merger in November – by early February, EuroCCP was already forging
ahead of the pack.
“Within one month of the launch of full interoperability, we
were clearing 40% of the trades on BATS and Chi-X – that’s an impressive figure
when you consider it resulted from a large and immediate migration from the
incumbent,” she says. “On Day One, three firms lined up to switch clearers. Now
on certain days we’re clearing more than 50% of BATS Chi-X Europe’s trades.”
The London Stock Exchange-owned
MTF Turquoise is now also cleared by the same four interoperating CCPs –
EuroCCP, LCH.Clearnet, SIX x-clear and EMCF (which joined interoperable
clearing on BATS in January).
“Turquoise also opened up to multiple CCPs but there was not
as much movement of clearing market share,” she says.
In May, figures from the
Federation of European Securities Exchanges show that EuroCCP was clearing 60%
of the trades executed on all three MTFs – contributing to a market share of
30% for all trades on major venues in Europe. EuroCCP’s total European market
share for May was 25% of all trades executed on regulated markets and MTFs.
Coming into buy-side focus
Chan admits clearing isn’t
always the most front-of-mind subject for buy-siders but she maintains it is
nonetheless an important consideration.
“The benefit for the buy-side is indirect. Institutional
investors are served by intermediaries. If there is effective competition among
intermediaries, they will need to pass on the benefits from a reduction in
infrastructure costs to their buy-side customers,” she says, drawing a parallel
with how a reduction in the cost of base metals flows through to reduce the
cost of cars. “Consumers benefit from a reduction in the cost of raw materials
when competition between manufacturers brings down the cost of cars. As long as
competition exists among intermediaries, then reductions in infrastructure cost
will be passed through to their customers.”
And she says interoperability and access will continue to be
important for the European equities market. The difficult part – achieving
interoperability and ensuring that it is done safely – has been done. But
access to venues is not yet universally achieved.
Regulated markets typically only use one clearer for
equities. Some of them use two of the four interoperating CCPs but the original
incumbent CCPs still clear the vast majority of the business.
“If exchanges open up access to all four interoperating
CCPs, then the market participants could consolidate their clearing with their
CCP of choice,” says Chan. “We have customers who save 30-40% on their
settlement and 70% on their collateral costs by consolidating with us.”
New regulation in the form of MiFID II will force exchanges
to grant access eventually. But in the meantime, as long as they refuse to give
access to all interoperable clearing houses, Chan says exchanges are hindering
investors’ ability to realise savings: “At the end of the day, it’s just
passing data from one place to another… How hard could that possibly be?”