While progress has been slow on achieving interoperability between Europe’s cash equity central counterparties (CCPs), it is unlikely that the European Commission (EC) will step in and mandate links between clearing houses any time soon for fear of causing more job losses across the continent.
Few links have been established between CCPs in the three years since the EC introduced its voluntary Code of Conduct for Clearing and Settlement, designed to stimulate interoperability between post-trade providers in Europe, prompting expectations of a more forceful EC directive if more CCP links were not forged quickly.
However, Phillip Silitschanu, senior analyst at research and consulting firm Aite Group, thinks regulatory intervention is now unlikely until at least 2010 or 2011.
“Regulators know if they hand down a mandate that says ‘By 200X you must have interoperability’ that is going to translate into more efficiency, lower costs and more job cuts, because you don’t need 1,000 people in the back office clearing trades in every single country,” Silitschanu told theTRADEnews.com. “You would have thousands of people in the business being laid off and every 1,000 votes counts. I don’t think Brussels wants that blood on its hands.”
The two CCP interoperability initiatives announced so far – SIX x-clear’s links to LCH.Clearnet Ltd and EMCF – appear to show that the Code of Conduct is at last taking effect. “There have been two agreements, and over 80 interoperability requests so far, but ‘a little interoperability is better than none’ is the argument they are going to use,” said Silitschanu. “Regulators have bigger problems on their hands, namely keeping the eurozone afloat.”
SIX x-clear is a Swiss clearing house that acts as the CCP for SIX Swiss Exchange and several trading platforms, including buy-side-only crossing network Liquidnet. LCH.Clearnet Ltd, the UK arm of the LCH.Clearnet group, is the CCP for the London Stock Exchange, among others. EMCF clears for three pan-European multilateral trading facilities: Chi-X, BATS Europe and Nasdaq OMX Europe.
Despite the expected lack of regulatory intervention, some feel the push toward greater interoperability will come from elsewhere given heightened focus on reining in counterparty risks, including exposure to CCPs.
“I don’t think the impetus is coming from the regulators now,” said Wayne Eagle, managing director of LCH.Clearnet’s equity clearing service, EquityClear. “It is coming much more from trading venues whose liquidity providers are concerned about reliance on a single CCP.”
Nevertheless, progress could still be slow because of the number of barriers. Aside from the legal challenges of forging cross-border links and CCPs’ reluctance to interoperate with their direct competitors, some feel consolidation in the clearing industry is needed before interoperability can come to the fore.
“The competitive battle between the CCPs will be fought out first before there are many more links or before many of the links that are being talked about are in operation,” said Gareth Bevan, London account manager in the post-trade securities division of technology provider Sungard’s Global Trading business. “There are too many CCPs at the moment. Certain participants may drop out or merge and the whole CCP market will consolidate. At that point it will be easier to provide interoperability.”