The European Securities and Markets Authority (ESMA) has released a consultation paper on interoperability between central counterparties (CCPs) as part of its obligations under new derivatives legislation.
The European securities watchdog’s consultation will result in guidance being issued by ESMA in Q1 2013 that clarify the issues national regulators need to consider when assessing existing or potential links between clearing houses.
Guidance from ESMA on interoperability is part of the watchdog’s responsibility under the European market infrastructure regulation (EMIR). Although EMIR is primarily viewed as Europe’s OTC derivatives market reform, clearing house interoperability will first be assessed for equities, listed derivatives and bonds. Under EMIR, ESMA is required to submit a report to the European Commission by 30 September 2014 on whether interoperability should be extended to other financial instruments.
The paper is focused on five areas related to interoperability arrangements comprising: the mitigation and management of legal risk; ensuring fair and open access and ensuring links between CCPs are not restricted other than on grounds, the identification, management and monitoring of risks; the management of collateral deposits and cooperation between national regulators.
Feedback to the consultation will be received until 31 January and will be used to finalise the guidelines that will be used for national regulators that will ultimately be responsible for interoperability applications under EMIR. Under the regulation, CCPs will need to obtain authorisation to do business in the European Union and can only apply for interoperability once they have been clearing products for three years.
Market participants hope the consultation will act as a boost to cash equity interoperability.
“We welcome publication of the ESMA consultation on CCPs’ interoperability arrangements. In principle they will help remove commercial barriers to market participants having a choice of where their trades are cleared. As such they are a positive step in the right direction.” said Diana Chan, chief executive of EuroCCP, a pan-European cash equities clearing house.
While multilateral trading facilities including London Stock Exchange-owned Turquoise, BATS Chi-X Europe, Nordic-focused Burgundy and dark pool UBS MTF have embraced interoperability and offer a choice of up to four clearers, domestic exchanges are yet to follow suit.
After the guidance is finalised in Q1, Nordic exchange operator Nasdaq OMX is expected to unveil its plans for clearing choice across the Swedish, Danish and Finnish domestic markets it operates.
“Until the ESMA guidelines on interoperability arrangements become available…there are uncertainties that prevent us from announcing a firm timeline,’ Bjørn Sibbern, head of the Nordic equity market, Nasdaq OMX, told theTRADEnews.com in October. “We’re still very much in favour of a competitive clearing model but do not want to implement something now that we may have to revisit and revise later.”