Clearing houses need to consider the models they adopt to bring in the buy-side, according to the head of CME’s European clearing house.
With mandatory clearing for interest rate swaps sent to come into force in December 2016, and with banks contracting their clearing capabilities, central counterparties (CCPs) are looking at offering direct access solutions to fund managers as a means to alleviate higher capital costs for the banks.
While offering direct clearing access is one solution, Tina Hasenpusch, CEO of CME Clearing Europe, believes that there needs to be more detailed discussions regarding direct access models and the different elements that go into that.
“When the industry talks about direct access models for clients with the CCP, it is a little bit of a misnomer, because at the heart of it is a concept that CME Clearing Europe introduced two years ago – that of enabling clients to directly deposit collateral,” says Hasenpusch.
Hasenpusch adds that intermediaries, such as clearing banks, still have a vital role to play in clearing, especially when it comes to default management.
“There is still a central role in today’s market structure for intermediaries to play, specifically with regards to the necessary guarantee and default management obligations that typically all on clearing members. This is important, not least because some asset managers are not able to deposit funds in a way that might be subject to risk mutualisation,” she says.
Earlier this year Eurex announced the launch of ISA Direct, a new access solution aimed at insurance companies and pension funds, with the clearing bank now acting as a clearing agent.
In theory, buy-side firms signed up to ISA Direct will benefit from lower clearing fees from the clearing bank as there will be less capital required.
According to a recent study from TABB Group, while clearing disintermediation is distinct possibility going forward, there are a number of challenges for the buy-side to support a direct clearing framework.
These include building expensive systems to connect directly to the exchanges and clearing house, establishing enhanced treasury processes to maintain effective margining, as well as guarantee fund management.
In addition, the entrance of new participants could also reshape the clearing model for CCPs and the buy-side. Hasenpusch believes this will have a positive impact overall.
“New intermediaries, new platforms, new market makers and brokers etc, will enter the space, which will have a positive impact on all market participants and will ultimately allow existing clearing intermediaries to provide more cost efficient services,” Hasenpusch adds.
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