Deutsche Börse-owned derivatives market operator Eurex is extending its buy-side asset segregation offering in light of new swaps market rules, with a new option designed specifically for UK clients.
Eurex Clearing, the exchange's vertically-owned central counterparty (CCP), will offer its UK clearing members a net omnibus clearing model that separates the aggregate exposures of all the clients served by a single clearing member.
The offering requires all buy-side firms that use the same clearing member to agree to participate in the service. According to Eurex, the net omnibus model is targeted at clearing members that need to comply with UK regulator the Financial Services Authority's client asset protection rules.
"Market requirements from the buy- and sell-side regarding segregation services are still evolving. We have strong segregation services in place and are continuously expanding this service portfolio to address new market requirements," Matthias Graulich, executive director, head of clearing initiatives, Eurex Clearing, told theTRADEnews.com.
Eurex already offers full segregation, which separates the exposures of each buy-side firm or their individual funds from other participants, in addition to its 'elementary' model that combines all the exposures of the clearing member and its buy-side clients, and separates them from other brokers.
The latter offers the least protection of assets, but allows the most efficient netting advantages by reducing margin payments by offsetting correlated assets.
The new buy-side offering forms part of the CCP's response to the European market infrastructure regulation (EMIR), new rules that will require OTC derivatives trades to be centrally cleared and reported to data repositories. Swaps will also need to be traded on exchange-like venues known as organised trading facilities under new rules in MiFID II.
Article 37 of EMIR requires clearing houses and their clearing members to offer buy-side firms the means to segregate their collateral and positions, so they are protected from the default of other market participants.
Buy-side support
While welcoming Eurex Clearing's segregation plans, Jane Lowe, director of markets at the Investment Management Association, a UK buy-side trade body whose members manage £4.2 trillion worth of assets, urged other clearers to follow suit.
"Eurex's proposed option for individual segregation under EMIR appears to go a lot further than other CCPs, in terms of offering a high level of protection that institutional investors desire for their clients," said Lowe. "We know that other clearing houses are working on better options for buy side clearing than they currently provide and that they aim to introduce a level of segregation that will allow clients to have their assets physically segregated and therefore returnable in the event of a clearing member default. But between concept and execution lies a gaping chasm and we remain concerned that the absence of full physical segregation accounts across the CCPs fetters clients' ability to plan for clearing."
The obligation to clear derivatives will also require the buy-side to post initial margin against their OTC derivatives trades for the first time, and pay variation margin in cash against each exposure as and when it is demanded by the clearing house - potentially up to six times per day.
The collateral shortfall the clearing obligation is expected to create has led a number of firms - including custodians and central securities depositories - to develop transformation services that help the buy-side convert assets into eligible collateral. Graulich said Eurex was in the process of developing its own collateral solution.
"We are working on a blueprint that will allow the buy-side to transform the assets they hold into cash, specifically for the use of variation margin. The plan is still at an early stage, but will help the buy-side to meet cash margin requirements in a cost efficient and protected manner," he said.