European Multilateral Clearing Facility (EMCF), the Dutch-regulated pan-European central counterparty, could receive a verdict about its re-submitted application to interoperate with fellow CCP LCH.Clearnet from the Dutch central bank in the coming weeks.
Following the rejection of its first interoperability applications last year, which requested links with Swiss clearer SIX x-clear and LCH.Clearnet, EMCF submitted a revised application for LCH.Clearnet only just before year-end 2009. “The normal turn-around time for the regulator is about four to six weeks,” an EMCF spokesperson told theTRADEnews.com.
While a number of interoperability agreements were struck between European clearers in 2009, including EMCF, SIX x-clear, LCH.Clearnet and EuroCCP, progress halted after regulators in the UK, Netherlands and Switzerland voiced concerns about inter-CCP risk management and launched a review of the agreements.
CCP interoperability is considered key to achieving true trading venue competition in Europe, as it would ultimately allow users a choice of clearers irrespective of the platform they traded on. Most European trading platforms are currently served by a single CCP for equities, with the exception of the London Stock Exchange, which offers a choice of LCH.Clearnet and SIX x-clear, the only existing CCP link for equities.
The Dutch central bank rejected EMCF’s initial interoperability application, according to the spokesperson, because it had questions about how the links would work. The new submission answered the questions and provided additional information where required. “The two most important areas of concern for the regulator were how to cope with potentially unlimited exposure between CCPs and the quality of the collateral to be used.”
EMCF decided to progress with the LCH.Clearnet link first because it felt it was the most important to its clearing members and the trading venues it serves. According to the spokesperson, EMCF and LCH.Clearnet together clear the majority of Europe’s equity trades, with EMCF accounting for 30% of the total. LCH.Clearnet’s French division is the CCP for NYSE Euronext’s European exchanges, while the UK division clears for the London Stock Exchange. EMCF is the CCP for Chi-X Europe, the continent’s biggest multilateral trading facility, in addition to Nasdaq OMX Europe BATS Europe, QUOTE MTF, Burgundy and Nasdaq OMX’s Nordic exchanges.
“It made sense to focus on moving interoperability forward between the two largest players first,” said the spokesperson.
As part of its interoperability efforts, as highlighted in a paper it published on 29 December, EMCF proposed changing its collateral holding structure to use client funds to collateralise CCP links. Under its current legal framework, the clearer cannot use cash or securities deposited with it for any other purpose than handling the default of the client in question.
However, it is not yet clear if or when this change will be made. “The collateral holding structure will only be changed after all market participants – including regulators – have agreed that it will adequately protect all market players and if everyone agrees that this is the way forward in this process,” the spokesperson said.
Fellow pan-European clearer EuroCCP issued its own set of proposals for CCP interoperability last week, which included recommendations to avoid collateral-sharing between CCPs and to establish an ‘interoperability convention’ under which clearers would form multilateral rather than bilateral links and adopt common risk management practices.
“We are pleased with any proposals that help move forward interoperability,” said the EMCF spokesperson. “Our clients want interoperability and we are committed to providing it so long as everyone is comfortable with the way risk is measured and mitigated.”