Europe’s clearing houses are still lagging when it comes to detailing segregated account offerings, making it difficult for the buy-side to prepare for rapidly-approaching swaps legislation.
UK buy-side trade body, the Investment Management Association (IMA) has again expressed disappointment that central counterparties have not yet specified the exact terms of segregated accounts, as per their obligations under the European market infrastructure regulation (EMIR).
The IMA, whose members manage more than £4.2 trillion in assets, met with clearer LCH.Clearnet last Friday as part of a raft of CCP consultations. But, according to Jane Lowe, director of markets at the IMA, there is a continued lack of clarity regarding the functioning and structure of these new accounts.
“Clearing houses have been working on a client account that offers the highest level of security for assets and positions since last year, but none are ready yet,” Lowe told theTRADEnews.com. “Some on the buy-side want to adapt to the new clearing regime now, but CCPs have not yet established the details of these fully segregated account.”
Article 37 of EMIR requires CCPs, in conjunction with their clearing members, to offer the buy-side ways for them to segregate their collateral and positions, offering them increased protection in the event of a clearing member default. Many buy-side firms are expected to opt for full segregation, which splits the collateral and positions of each buy-side fund that uses the clearing house from other participants. However, this option will deny buy-side firms the ability to offset their exposures against related exposures held by their respective clearing brokers, meaning netting and a subsequent reduction of collateral payments cannot be achieved.
Lowe contends that the issue has slipped too far down the list of priorities for CCPs because of work they are doing to meet other regulatory mandates, but emphasised that a lack of progress would mean the buy-side’s end clients would ultimately suffer.
“Even though mandatory clearing under EMIR may not take effect until 2014, it is important that a full range of options for client clearing are available for those institutional investors that want to clear now. Otherwise these clients are being denied the best service and may be more exposed to risk of default than they would wish to be,” Lowe said.
In addition to last Friday’s meeting with LCH.Clearnet, the IMA has met with CME Clearing Europe, ICE Clear Europe and Eurex, none of which have made significant headway in establishing these new accounts, Lowe said.
Clearers had previously attributed the delay to a lack of clarity on how the market would react to central clearing and complexities associated with how defaults are handled under national law.
The European Commission today adopted the nine technical standards from the European Securities and Markets Authority (ESMA) as part of EMIR. ESMA submitted the standards in September and they will come into force after the Council of the European Union and European Parliament submit ‘non-objection’ approval. They are then entered into the EU’s Official Journal and can be enforced 20 days thereafter, which is expected be to during the first quarter of 2013.
One technical standard on colleges for CCPs was not endorsed and will be redrafted, although it will not have a bearing on CCP authorisation under EMIR.
“The adoption of these technical standards is the final step in achieving the mandatory clearing and reporting of OTC derivatives and in meeting our G20 commitments. This will improve transparency in the trading of derivatives,” said Michel Barnier, internal market and services commissioner at the European Commission.
BoE to take control of CCP oversight
Meanwhile, the Bank of England has published proposals on how it will supervise CCPs and securities settlement systems in the UK, when it takes over these responsibilities from the Financial Services Authority on 1 April.
The Bank said it would focus on operations and management of financial market infrastructures such as CCPs to ensure the strength of the UK financial system, based on the ‘Principles for Financial Market Infrastructures’ paper published by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions in April 2012.