One of the major proponents of post-trade interoperability in Europe's cash equities markets has turned its back on a new framework for managing collateral across clearing counterparties (CCPs) just weeks after it was given approval by UK and Swiss regulators.
EMCF, majority owned by Dutch Bank ABN AMRO, said it does not expect major trading venues to support interoperability arrangements and so would not support them itself, placing in jeopardy expected cuts in post-trade costs.
A spokesman for the CCP said, “EMCF's official position is that it has decided not to join this initiative at this time because today there is no expectation that we or other CCPs will get access to any major European trade feed”.
Given the all clear
An interoperability mechanism based on a series of bilateral agreements had been established after British, Dutch and Swiss regulators agreed in principle to a risk management framework proposed by the four pan-European CCPs, EMCF, EuroCCP, LCH.Clearnet and SIX x-clear. During May, the UK's Financial Services Authority, the Swiss central bank and Switzerland's lead financial regulator, FINMA, reaffirmed the existing interoperability arrangements between SIX x-clear and LCH.Clearnet on the basis of the new framework, which will also underpin multilateral trading facility (MTF) BATS Europe's preferred interoperable clearing programme in July.
Under this scheme trading participants would be able to choose between LCH.Clearnet, SIX x-clear or EuroCCP, or if no alternative is selected, the default CCP, EMCF, will be used.
EMCF currently provides clearing for MTFs Chi-X Europe, BATS Europe, Nasdaq OMX Nordics, Quote MTF, Burgundy and TOM, and as such may find its market share under threat from interoperability that does not include exchange-owned CCPs.
Interoperability is expected to be supported by the European market infrastructure regulation (EMIR), which provides guidelines for central clearing and risk mitigation of over-the-counter derivatives, CCPs, post-trade interoperability, reporting obligations and requirements for trade repositories.
The text of EMIR approved by the economics and monetary affairs committee of the European Parliament on 24 May is expected to be voted through by the parliament on 5 July. At present, it asserts that interoperability arrangements and access to data feed and settlement systems “shall only be restricted, directly or indirectly, to control any risk arising from that arrangement or access”. The text must also be agreed by the Council of the European Union, Europe's other key legislative body, populated by representatives of European national governments.
While the BATS preferred interoperable clearing programme will introduce choice for brokers, Marco Strimer, CEO of SIX x-clear, said asset managers should not expect an immediate fall in post-trade costs.
“It is down to brokers to pass along any benefits they receive,” he said. “But brokers do more than just execute trades so looking at the trading fees of buy-side firms in isolation may miss the point on the advantages that interoperability provides.”
However, if EMCF is correct, and major European trading venues will not provide independent CCPs with access to trade feeds, neither the sell- or buy-side will be offered cost savings in the near term. However, some observers note that overall post-trade costs have already fallen significantly since MiFID, making interoperability less pressing.
For exchanges with integrated clearing houses, such as Deutsche Börse, which obliges trading members to clear via its Eurex Clearing subsidiary, allowing a third-party CCP to access its trade feeds for the purposes of offering clearing services would result in an inevitable fall in clearing fees.
Ruben Lee, CEO of Oxford Finance Group, a consulting firm, and author of ”Running the World's Markets: The Governance of Financial Infrastructure', argues that the establishment of interoperable clearing on MTFs could still push incumbent exchanges to allow interoperability with their existing clearers based on competitive pressure.
“Because the cost of trading on an MTF including both trading and clearing costs, is lower than on major exchanges, these exchanges are facing a problem,” says Lee. “If an exchange is vertically integrated, and if its clearing house cannot beat the price of a competing CCP, then the exchange might have an incentive to allow interoperability.”
Although buy-side firms face delays in cost saving for cash equity clearing, exchanges are competing to provide solutions that help investment institutions to manage the collateral obligations and related costs associated with centrally clearing derivatives as proposed under EMIR.
Eurex Clearing's Client Asset Protection (CAP) service, for example, offers individual segregation of non-clearing member (NCM) positions and assets at the clearing house. The clearer also plans to introduce an omnibus segregation solution for all clearing members' clients. The CAP would mitigate the impact a clearing member's default, offers portability of positions enabling buy-side firms to continue trading in the event of their clearing member's default and also portability of client margin collateral in the event of a clearing member's default.
The omnibus segregation solution would offer greater capital efficiencies by allowing an asset manager's position to be calculated on a net level.