European central counterparty (CCP) clearing houses are still hopeful that interoperability will become a reality this year, despite a lack of agreement at last week’s meeting with regulators.
Four European CCPs – EuroCCP, European Multilateral Clearing Facility (EMCF), LCH.Clearnet and SIX x-clear – met with Dutch, UK and Swiss regulators on 7 April to present their joint plan for collateralisation of the risks associated with forging links between one another.
The five regulators – the Netherlands’ AFM, the UK’s Financial Services Authority and Switzerland’s FINMA plus the Swiss and Dutch central banks – halted the four CCPs’ progress on interoperability last December by demanding to examine the counterparty risk provisions in the linkage agreements. The regulators issued a joint statement on 12 February saying that CCPs needed to put up additional collateral to fund the links.
In response, the CCPs developed a joint proposal for collateralising the links in conjunction with members of the Association for Financial Markets in Europe, a trade body for the continent’s wholesale capital markets.
TheTRADEnews.com understands that the CCPs had agreed on a margin exchange model to collateralise the links, but regulators required more detail, particularly with regard to the scalability of the collateral to respond to volume growth and entry of new CCPs.
The CCPs’ proposal said that they would collect some of the additional collateral from existing members, but that it was up to each CCP where they sourced the additional collateral. It is understood that regulators were unconvinced that collateral would be scalable and as such have sought further details on how collateral will be raised, the type of collateral and whether step-outs – where a CCP without margin would step out of a trade to allow others to margin against each other – would be involved. The CCPs are meeting this week to make progress on the new model.
Some CCPs hope that a new proposal could can be submitted in as little as two weeks, while others are expect a new agreement to be ready within a month. The CCPs expect the regulators to give a verdict within 90 days of receiving the new proposal.
“We are still hopeful that if the regulators take two to three months to approve the proposal we could be looking at a summer release for interoperability,” Tony McGuigan, general manager, London at SIX x-clear, told theTRADEnews.com.
However, while still optimistic that interoperability will take place this year, others believe it could be Q4 before CCP links become a reality. Little progress is likely to be made in July and August, and if CCPs take a month to come up with a new proposal, taking the process into mid-May, it could be September or October before regulators make a decision.
While interoperability may take longer than the CCPs hope, some feel it is inevitable. The European Commission’s clearing and settlement directive, which is expected to be unveiled this year, is expected to require inter-CCP links.
“It is a small setback,” said McGuigan. “Interoperability will still happen, whether it is by CCPs working with the regulators or by the new directive. There is still hope and optimism. The downside is that it shouldn’t have taken this long.”