Progress towards post-trade interoperability in Europe's cash equities markets has taken a major step forward, following a letter from European regulators to central counterparties (CCPs) EuroCCP, EMCF, SIX x-clear and LCH.Clearnet expressing satisfaction that their proposals are conceptually sound.
The letter gives the green light to applications submitted by the CCPs in August 2010 to allow interoperable clearing, meaning that brokers would in theory be able to select a single clearer across Europe. This would reduce trading costs, which are currently held up by the need for brokers to connect to multiple CCPs across Europe to process trades executed on different trading venues.
Initial linkage agreements had been signed between the four CCPs in late 2009, however progress has been slow since regulators including the UK's Financial Services Authority, the Netherlands' AFM, Switzerland's FINMA and the Dutch and Swiss central banks requested in February 2010 that the applications be resubmitted to take account of inter-CCP risk. The regulators had been concerned that interoperability between Europe's clearing houses might introduce greater systemic risks, undermining the stability of the region's clearing infrastructure.
Now however, Wayne Eagle, head of markets at LCH.Clearnet, is confident that CCP interoperability will now be achieved by Q1 2011. “We are in sight of the finish line,” he told theTRADEnews.com. “If CCPs remain focused, I am comfortable that we should be in a position to go live in the first quarter of next year.”
The remaining areas being worked out are reporting requirements and intraday processes for inter-CCP risk management. Specifically, regulators are not yet satisfied with the timing of collateral transfer and how collateral is to be held.
“Regulators are most concerned that inter-CCP risk management is safe, not only for the present but for the future – the arrangements need to be scaleable,” said Diana Chan, CEO, EuroCCP. “There is a very long list of details about reporting requirements. The regulators want to be able to measure the level of activity moving through the interoperability link”
At present, the only operational link is between LCH.Clearnet and SIX x-clear for clearing trades on the London Stock Exchange.