BATS Europe and Chi-X Europe, the two European multilateral trading facilities that completed a merger last week, will not include exchange-traded funds (ETFs) in the initial stage of their clearing interoperability offering, blaming an on-going regulatory review of the instruments for the delay.
“Due to the on-going regulatory review of exchange-traded products within clearing, BATS Europe has taken the decision to exclude all ETFs and exchange traded commodities (ETCs) from the scope of interoperability until the conclusion of these reviews,” the company said in a trading notice.
In a July consultation paper aimed at reviewing the UCITS directive’s treatment of ETFs, European watchdog, the European Securities and Markets Authority (ESMA), voiced concerns over a perceived lack of transparency and risks associated with the fast-growing ETF market.
Areas where ESMA believed transparency and disclosure to investors should be improved included better identification of ETFs, issues with how indices are tracked by ETFs, the securities lending activities of ETF manufacturers, and clearer delineation of actively-managed and leveraged ETFs from passive ETFs.
A spokesperson for ESMA told theTRADEnews.com that since the closure of a consultation in September, the watchdog had been reviewing the “extensive feedback” received from respondents and planned to issue a further consultation on its proposed “final” guidelines at the beginning of 2012.
In the meantime, BATS Europe and Chi-X Europe will continue to trade ETF/ETC securities, but all executions will be routed to existing central counterparty (CCP), EMCF, irrespective of the participant’s choice of CCP for the underlying market segment.
But both companies are planning to provide four-way clearing interoperability on all other instruments, subject to regulatory approval, on 6 January 2012 through EMCF, EuroCCP, LCH.Clearnet Ltd and SIX x-clear.
“With four-way clearing interoperability, participants are able to choose to have one or more CCPs clearing their business on the BATS Europe market,” the company said in a statement. “BATS Europe will enable clearing for participants once required documentation is in place with the respective CCPs. Participants will no longer be required to maintain a clearing relationship with EMCF for markets where they have chosen an alternative CCP.”
Under BATS Europe’s current interoperability programme, trading participants on both sides of the trade must elect to use the service. If one or both counterparties do not choose to use the service, the trade will be cleared by EMCF.
Having received clearance from the UK’s Competition Commission on 24 November, BATS Europe has begun planning for the migration of Chi-X Europe’s trading engine to its technology platform.
BATS Global Markets is aiming to integrate its MTF with Chi-X Europe by Q2 2012. The US-based market operator first entered into a definitive agreement to purchase Chi-X Europe in February 2011, but faced a series of delays after the deal was referred to the UK’s Competition Commission.
Based on November figures from data vendor Thomson Reuters, BATS Europe and Chi-X Europe combined would have had a pan-European equity market share of 24.8%, making it the largest trading venue in the region.