European Multilateral Clearing Facility (EMCF), the Dutch-regulated central counterparty that clears trades for three UK-regulated MTFs, has been granted recognised overseas clearing house (ROCH) status by the UK’s regulator, the Financial Services Authority. This will allow EMCF to act as a clearinghouse for regulated markets in the UK, including the London Stock Exchange (LSE), and enable it to cater for its existing MTF users should they wish to become full exchanges.
EMCF, which is regulated by the Netherlands Authority for the Financial Markets (AFM) and Dutch central bank De Nederlandsche Bank (DNB), previously cleared for multilateral trading facilities (MTF) Chi-X, BATS Europe and Nasdaq OMX Europe under foreign exempt status. There is no regulatory requirement for EMCF to have ROCH status to clear for the MTFs, but because of the alternative venues’ growing market share, the FSA had become increasingly keen for EMCF to become an ROCH, according to Jan Bart de Boer, chairman of the clearing house’s supervisory board.
In theory, EMCF could now offer clearing services to the London Stock Exchange. “From a regulatory perspective, EMCF is now ready to service LSE flow,” said de Boer. “EMCF would now be able to do a deal with LCH.Clearnet [The LSE’s clearing house] and the LSE. The question is whether LCH and the LSE are willing to do a deal.”
The ROCH status will make it easier for EMCF to become recognised as a CCP by CREST, the UK’s central securities depository, owned by post-trader provider Euroclear. EMCF currently settles trades in CREST through its parent, Fortis, acting as custodian bank. However, while both EMCF and CREST offer finality – i.e. trades are protected if either institution fails – the stage of the transaction handled by Fortis is non-final, which means trades would be at risk if Fortis collapsed.
EMCF is also seeking full finality of the settlement process in other European jurisdictions, but a spokesman said it is a lengthy process because of the lack of harminisation of CCP status across Europe.
EMCF began pursuing ROCH status last spring, after it had already been operating for a year. “We didn’t do it in the first year because we wanted to prove the concept, and were not willing to ask for FSA, Dutch central bank and Dutch financial regulator resources for something that was potentially not going to be that important. Now, it is important.”
AFM and DNB will continue to be EMCF’s lead regulators. The Dutch and British authorities have signed a memorandum of understanding under which they will cooperate and exchange information both on a regular basis and in times of crisis.