Three of Europe’s major central counterparty (CCP) clearers have voiced their support for the UK, Dutch and Swiss financial regulators’ demands for more collateral to support interoperability between clearing houses.
The group of regulators, comprising the UK’s Financial Services Authority (FSA), the Netherlands’ AFM and Switzerland’s FINMA together with the Dutch and Swiss central banks, issued a joint statement on Friday outlining their position on interoperability.
While acknowledging the benefits of interoperability, the regulators contended that links would create inter-CCP credit exposures, introducing additional counterparty risk into the clearing system. This would require additional collateral to that collected by CCPs from members. “It is necessary that the additional counterparty risk present in the system is ‘priced in’ appropriately and matched by the holding of a sufficient level of additional collateral within the clearing system,” the statement read.
While stating that they would not prescribe the methods to collect such collateral, the regulators said CCPs must demonstrate that the arrangements for the calculation, provision and holding of the collateral are appropriate, and stipulated that the collateral must be pre-funded.
The regulators also urged the mitigation of non-counterparty risks, such as operational, technical, legal settlement and liquidity risks, and said such mitigation must include appropriate measures to ensure that, in the event of a failure, surviving CCPs’ resources would not be trapped in the failed one.
Pan-European clearers EuroCCP and European Multilateral Clearing Facility (EMCF) and Swiss CCP SIX x-clear all welcomed the regulators’ communication.
“EMCF is happy that there is now clarity about the direction regulators are going with regard to interoperability,” read EMCF’s statement.
EuroCCP said that its proposed augmented default fund approach, one of several interoperability recommendations it published in January 2010, meets the principles outlined in the regulators’ statement. “EuroCCP welcomes and supports today’s announcement. We will now resume work with the other CCPs to ensure that interoperability is implemented in a safe way that respects the regulators’ requirements,” its statement read.
Marco Strimer, CEO of Swiss CCP SIX x-clear, added. “Now that the guidelines have been produced, outstanding interoperability agreements should be worked out immediately given the demand from banks for their implementation.”
A number of interoperability agreements between EuroCCP, EMCF, SIX x-clear and UK clearer LCH.Clearnet Limited were signed in Q2 2009, some of which were due to come into force in January, but progress stalled towards the end of 2009 when the UK, Swiss and Dutch authorities started reviewing the agreements amid concerns about inter-CCP risk management.
The only working link for cash equities, between LCH.Clearnet and SIX x-clear for the London Stock Exchange, will be reviewed to ensure it conforms to the principles outlined in the regulators’ statement.
Interoperability would allow CCPs to clear for a wider range of trading platforms. A CCP linking to EMCF, for example, could potentially get access to flows from multilateral trading facilities Chi-X Europe, Nasdaq OMX Europe, BATS Europe, Burgundy and Quote MTF. Connecting to EuroCCP could open doors to clearing for Turquoise, SmartPool, NYSE Arca Europe and Pipeline Europe.
It is unclear when interoperability among Europe’s CCPs will become a reality. According to the timeline on its website, SIX x-clear expects to be able to clear for the MTFs supported by EuroCCP and EMCF in March this year.