Pan-European central counterparties (CCPs) and regulators have finally reached a resolution that could see interoperability between CCPs before the end of the year.
Initial linkage agreements between four CCPs – SIX x-clear, LCH.Clearnet, EuroCCP and EMCF – were signed in Q2 2009 and expected to come into force in Q1 2010. But so far only one link – between LCH.Clearnet and SIX x-clear for clearing trades on the London Stock Exchange – has been approved.
CCPs stand between two trading counterparties, effectively guaranteeing payment for, and delivery of, securities between entities. Interoperability between CCPs would give market participants a greater choice of where to clear trades, potentially enabling them to decrease trading costs significantly by using a single CCP regardless of the number of execution venues they access.
However, the CCPs' individual regulators and respective central banks in the UK, Holland and Switzerland, halted progress by raising concerns about risk management processes between the CCPs. In a joint statement at the time, the UK's Financial Services Authority, Holland's AFM, Switzerland's FINMA and the Dutch and Swiss central banks asked CCPs to resubmit their applications having “priced in” the appropriate arrangements for managing inter-CCP risk.
Following a recent meeting, full links between all CCPs seem to be in sight.
“The four CCPs have been working closely together on the structure and the proposals for collecting extra collateral to manage inter-CCP risk and for business continuity planning,” Marco Strimer, CEO of SIX x-clear, told theTRADEnews.com. “The next stage will be for CCPs to resubmit the link agreements with the new framework, which we expect to do by the end of July.
After the resubmission, regulators will have the final say on when interoperability between clearing counterparties can begin. Strimer added that all CCPs were technically ready and were close to finalising the legal arrangements for setting up the linkages.
“We expect to be interoperating by the end of this year, if not sooner,” added Strimer.
The new solution would require clients to provide the extra capital needed to satisfy the regulators' risk management concerns.
According to Diana Chan, CEO of EuroCCP, the pan-European clearer owned by US post-trade utility DTCC, the need to raise capital quickly and in a scalable manner narrowed down CCPs' options for raising extra collateral.
“When the market becomes stressed or volatile, regulators are concerned that margins CCPs have exchanged under interoperability arrangements might be insufficient in the event a CCP defaults,” said Chan. “Regulators want the CCPs to have a buffer. The most logical source for the extra money needed to ensure safety would be the CCPs’ customers who benefit from interoperability. Other sources, such as a CCP's own capital or bank loans, could be considered not sufficiently scalable or reliable in difficult market conditions.”