Clearing members are calling for more standardisation of individual segregation models being offered by central counterparties (CCPs), as part of new European derivatives rules.
CCPs have had to re-apply for authorisation under the European market infrastructure regulation. Four CCPs – Nasdaq OMX Clearing, EuroCCP, KDPW_CCP and Eurex Clearing – have been approved so far, triggering the countdown to mandated clearing, expected as early as December this year.
Under the new rules, CCPs are required to offer individual client segregation accounts allowing clearing members to distinguish the assets and positions held for each client. This differs from the omnibus account, which keeps clearing members’ accounts separate from that of its clients.
Silas Findley, head of OTC Clearing, EMEA, at Citi, said clearing members have been urging CCPs to increase standardisation of segregated models where possible, which as of now have multiple different requirements and flows.
“The industry’s ability to support all the potential models being offered remains an open question,” he said. “While we certainly support innovation, which can create a better product for our clients, it is not efficient to have differing approaches at each CCP where such variation isn’t warranted."
He said the process is also complicated by clearing members, buy-side firms and CCPs having different technology and connectivity. “The more variation that you have, the more challenging it becomes. Many clients are still working to understand the varying models that are offered.”
Eugene Stanfield, head of derivatives execution and clearing services at Commerzbank, said CCPs’ offerings can be confusing and educating clients on the differences of one over the other has been a challenge.
“Buy-side firms are concerned about asset protection and the price of clearing, if we simplify the process and set up it will make choosing a lot easier,” he said. “Although an individual segregated account is best from an asset protection point of view, it does come at a higher cost to the client.”
FIA Europe’s clearing committee has been working with individual CCPs to encourage standardisation of clearing models – a move Gerard de Lambilly, secretary general and global head of legal at Newedge, said is key.
“If within the EU we have technical challenges or risk of regulatory arbitration, we won’t achieve the goals the European market infrastructure regulation set out for robust segregation models,” he said. “That’s why we have technical and operational debates on the individual segregation model.
“The more complex the model is, the more cost and operational risk you add, which is not in the best interest of customers including buy-side firms, who are typically customers enquiring mostly about individual segregated accounts."
FIA Europe CEO Simon Puleston Jones said CCPs appear to be open to the possibility of increasing standardisation.
“When everyone has been re-authorised, I think CCPs will begin to look at how the whole system can be more efficient. There are a number of non-commercial factors that can be standardised,” he said.
Eurex Clearing, a Deutsche Börse company, said it recognised the need for standardisation of processes to increase efficiency. “At the same time we recognise the challenge of implementing a standardisation of segregation models from a legal perspective against the background of diverse national insolvency regimes across Europe.”
Clearing members have also expressed concerned over the lack of an equivalent individual segregated model in the US, which only has the omnibus-equivalent LSOC (legally segregated, operationally commingled).
Newedge’s de Lambilly said a European client that clears through a US futures commission merchant does not as yet have the option of using an individual segregated account, as LSOC is not considered to be its equivalent to the EU individual segregated model.
“There is a lot of pressure as it gives a competitive disadvantage,” de Lambilly said.
According to Citi’s Findley, a solution may be on the horizon, as some regulators are looking into allowing US futures commission merchants to offer individual segregated accounts to their European clients via a European affiliate.
“The regulators are really focused on the policy goals around providing access to and incentivising more central clearing,” he said.