What are the key pain points in the clearing space right now?
Looking at some of the areas of development, a lot has been done in the clearing space and sometimes we can forget the work over the last few years and beyond. We’ve moved a lot in the equity space for more open access. We’ve seen a lot more interoperability and more choice – interoperability being the mechanism by which trading venues allow more than one clearing house, and in doing that, market participants can choose their preferred clearer and where they want to clear.
That has unlocked a lot of benefits, whether that’s pricing, choice, netting or risk. All of that really is geared to mobilising more capital to grow European markets and to grow participants’ own businesses. The other thing that’s been very positive is that clearing has shown that it can deal with volatility and bring predictability to that. Whether we look at the pandemic or the unfortunate impacts from geopolitics, clearing has brought certainty into market structure and post-trade processes, which is something that we should recognise as a net benefit.
Looking into some of the challenges ahead, there’s still a journey to be had in terms of offering full choice across Europe for equities and really looking at interoperability in those markets that don’t have it. We’ve got preferred clearing, where some markets don’t have full choice and full interoperability, but they’ve introduced a halfway house – a stop on the journey – where if two organisations agree to clear somewhere else, that trade can be cleared by Cboe Clear, for example. That’s a great step, however, that’s a stop on the destination and it’s not the final destination itself. There’s still a lot of work to do there.
The other area is expanding clearing into other areas. At Cboe Clear, listed derivatives is a key area that we’re focused on and we’re partnering with Cboe Europe Derivatives (CEDX) and clear indices today. We’re also looking forward to single stock options in November and bringing that same level of innovation, certainty and risk benefit – especially when you can look at your equities business as well – and really trying to drive forward some of those efficiencies that we can offer in the market.
That’s around innovation in adjacencies to where we clear. We want to be able to offer the most amount of netting risk benefit and consolidation opportunities, so that we can get back to the fundamentals, which is releasing capital so that we can grow European markets, trading velocity and support our clients’ growth and their strategies for growth with their clients.
How can the European CCP landscape be better harmonised?
There are three areas. The first one is continuing that journey on open access. Embracing open access and the Capital Markets Union – the spirit within that and the spirits of the free movement of goods services across Europe. That can allow a continuation in the markets where we’re not fully interoperable.
The second area is bringing innovation to new asset classes. Even in the core equity landscape, we’re in very positive discussions on the OTC equity space and how we can bring more of that flow into clearing and how we can improve settlement efficiency by netting all of that together. The last area is around continuing to drive certainty and predictability. We look at our risk practices, our license to operate, our operational resiliency and our cyber security and those are continued areas where a lot of good work in the industry and with regulators continues. That means that everyone can be sure there’s a strong foundation that we’re all operating from.
What hurdles have been presented to securities financing transactions (SFTs) central clearing initiatives in the past and how will Cboe’s model overcome these?
When I reflect on that question, I think about Thomas Edison and the light bulb, particularly the comment that he didn’t fail 10,000 times, he just hadn’t succeeded yet. The market is large, we have by some estimates, US $3.3 trillion in terms of available securities to lend, whether that’s European equities and ETFs, and around $220 billion on loan. It’s a sizable market. What we’ve learned from the industry and from our conversations with participants is, when we looked at this between 2016 and 2017, there was a lot of mandatory change happening in the industry.
We had Securities Financing Transactions Regulation (SFTR) coming in, settlement disciplined regimes as well and everyone had a large book of work that they were looking at. What’s changed now is there are some areas of inefficiencies that are beginning to manifest themselves more than they previously were. We also have more free time with some of those mandatory projects not being as consuming now. Things such as risk-weighted assets (RWA), counterparty risk treatment under Basel 4 – that’s a big driver. You have operational efficiency, so settlement fails.
Whether you have agent lender disclosures, all of these areas are adding more friction into the market. What we’ve learned now is with those areas and in discussion with the market, we are absolutely a solution, being a cleared securities financing transactions (SFT) product. That’s where we’re looking at how we move forward with the broadest possible pool of equities when we launch next year. Dealing with some of these market frictions and capital challenges as well as bringing the benefits of certainty into that market.
What sort of regulatory hurdles exist in this space?
There’s a number of things that will be coming through in the next few months and certainly into 2024 and beyond. The bigger ones are in Basel 4. There is RWA in terms of the counterparty exposures you have. The exposures to a qualifying CCP that Cboe Clear Europe will be subject to regulatory approval, is something we’re looking to have when we clear this.
You have a lower exposure and will have that immediate challenge and opportunity to address that. There are also various agent lender disclosures that are coming in and are in place today, whereas with the CCP, due to our process and being in the middle of every buyer and seller and seller to every buyer – those agent lender disclosures are eased a lot more. There are also various other areas such as indemnification, ratings of beneficial owners and things of that nature that we feel that we can bring some real benefit to when we start to offer a cleared solution here.