Interoperability between cash equity central counterparties (CCPs) could be delayed until 2014 under amendments to the proposed European market infrastructure regulation presented in a draft report by German MEP Werner Langen to the Economic Affairs Committee of the European Parliament on 28 February 2011.
The report responds to proposals made on 15 September by the European Commission (EC) for the regulation of over-the-counter (OTC) derivatives, CCPs and trade repositories, commonly referred to as EMIR.
Langen said the aim of his report was “to reach an agreement which regulates these trades as much as possible to reduce risk without setting costs which are too high for market participants”.
Clearing interoperability in the European cash equities market is intended to foster competition between clearing houses and thereby drive down post-trade costs. Currently, trading firms must use the CCP nominated by a trading venue or exchange, but interoperability would allow them to select the CCP of their choice, regardless of where they trade.
The EC had originally proposed that the scope of rules around interoperability arrangements should only cover cash securities, due to “the additional complexities involved in an interoperability arrangement between CCPs clearing OTC derivative contracts”. The commission suggested that by 30 September 2014, the European Securities and Markets Authority, the pan-European regulatory body, should submit a report to the EC as to whether an extension of that scope to other financial instruments would be appropriate.
Langen is concerned that the complexity involved in creating interoperability arrangements between the cash equity clearing houses is not fully understood and has proposed that no arrangements should be made for clearing across any asset classes until ESMA has conducted an investigation report.
Prior to the regulation, four pan-European CCPs have been working with national regulators from the UK, the Netherlands and Switzerland to create an acceptable framework for offsetting the risks of interoperability, including the management of collateral across the participating CCPs.
Regulators have approved the CCPs’ framework in principle and Wayne Eagle, head of markets at CCP LCH.Clearnet, has expressed hope that the agreements would be put into operation in Q1 2011.
“Taking out the interoperability clause of the EMIR legislation will have a serious negative impact on competition and choice and we urge the European Parliament to reinsert this interoperability clause,” said Stephen Burton, director at the Association for Financial Markets in Europe, which represents sell-side institutions.
Elsewhere in his report, Langen disagreed with suggestions by some EU member states that all derivatives should be regulated. Rather, he advocates keeping to the original EC proposal, which would limit the scope of the new rules to OTC derivatives.
German exchange Deutsche Boerse’s planned acquisition of NYSE Euronext will create both a dominant derivatives platform in Europe and a vertically integrated cash equities trading and clearing model.
The draft report also rejected arguments that certain sectors, such as the energy sector or pension funds, should be exempted from the regulation. Instead, it seeks to restrict exemption possibilities.
During the debate, Langen insisted that pension funds should not benefit from a general exemption but accepted that the lesser obligation of bilateral clearing could be envisaged.
MEPs from the committee will be able to submit amendments to the text until 16 March and a vote in committee is expected to take place on for the 20 April before it is passed to the European Parliament to be voted on, expected to take place in H1 2011.