CCPs forging more links, but progress could be slow

Two links have already been forged between European central counterparties (CCPs), and more are being worked on amid growing demand for trading platforms to have multiple clearing houses.
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Two links have already been forged between European central counterparties (CCPs) and more are being worked on amid growing demand for trading platforms to have multiple clearing houses. But several barriers – not least the reluctance to share business with competitors – could impede progress.

Swiss clearing house SIX x-clear has been involved in both the links announced so far. It started interoperating with the UK arm of European clearing house LCH.Clearnet on 12 December last year, following the London Stock Exchange’s introduction of competitive clearing, and on 3 February this year it signed a memorandum of understanding to interoperate with pan-European CCP European Multilateral Clearing Facility (EMCF).

According to Marco Strimer, CEO of SIX x-clear, more links are in the pipeline in response to demand from clients. “We have requested trade feeds from Deutsche Börse and Euronext and want to interoperate with their incumbent CCPs,” he told X-clear is also seeking a trade feed from Turquoise and interoperability with its clearing house, EuroCCP.

A big driver for CCP linkages could be MTFs seeking multiple CCPs, especially as many may no longer be comfortable only having one clearing house. EMCF, for example, was rescued by the Dutch government following the near collapse of its parent company Fortis last year.

Although EMCF now has government backing, this event alerted many to the fact that a CCP could fail. EMCF is the clearing house for the majority of the pan-European multilateral trading facilities (MTFs) that have been launched in Europe – it serves Chi-X, BATS Europe and Nasdaq OMX Europe.

While declining to comment on specific interoperability initiatives his firm is working on, Wayne Eagle, managing director of LCH.Clearnet’s equity clearing service, EquityClear, said, “I think there will be more CCP linkages, and it is likely to be driven by liquidity providers being uncomfortable with single or lighter CCP solutions,” he said. “It is easier to add more CCPs in the MTF space than the incumbent markets, which tend to have a greater regulatory burden.”

He added, “We constantly talk to MTFs about the possibility for LCH to clear for them.”

Diana Chan, CEO of EuroCCP, agrees. “After the market events of last September, we received a lot of demand for us to become an alternative CCP for some MTFs as there was a widespread concern about the safety of CCPs,” she said.

But she adds that there are three barriers to CCP interoperability. The first is regulation – some jurisdictions, such as France and Germany, require CCPs to be registered as banks. The second is risk – the fact that interoperating CCPs are exposed to the risk of each other’s failure. The third and, argues Chan, the most important, is commercial.

“Incumbent CCPs have no interest whatsoever in sharing their lunch with anybody,” she said. “An incumbent CCP would prefer to interoperate with those that pose the least competitive threat, which by definition brings the least value to most of the incumbent’s users. The Code of Conduct is a good framework for interoperability, but everyone knows there are a lot of requests that have been stuck for a while.”

Miranda Mizen, senior consultant at research firm TABB, said in a recent report on European equities clearing that there were more than 80 interoperability requests outstanding. “Most of the 80 will never see the light of day,” she wrote.

Chan said EuroCCP is in discussions about clearing for new platforms that have yet to appoint a CCP, although she declined to name them, and is working on becoming an alternative CCP for the Nasdaq OMX Nordic markets. Nasdaq OMX has appointed EMCF, in which it owns a 22% stake as one of the CCPs, but is hoping to offer a range of clearers.