European central counterparty clearers LCH.Clearnet Limited and SIX x-clear have published a summary of their linking agreement, which came into force in December 2008, as a template for interoperability between other clearing houses in the continent.
The move is the latest effort from central counterparties (CCPs) to break the interoperability stalemate, caused by regulatory concerns over inter-CCP risk management.
A number of bilateral linkage deals were signed last summer between LCH, x-clear, European Multilateral Clearing Facility (EMCF) and EuroCCP. Some of the links were due to come into force in January, but reviews of the agreements by the UK, Dutch and Swiss regulators have stalled progress.
The LCH/x-clear link was the first and currently the only interoperability deal in place for cash equities clearing in Europe. The two clearers argue that their agreement withstood the collapse of investment bank Lehman Brothers in September 2008, and so serves as a “framework for successful interoperability across Europe”. The said the model has been designed to minimise the risk of contagion by safeguarding the assets of the non-defaulting CCP and its in the event of a collapse.
Under the LCH/x-clear agreement, each CCP retains its ability under its own published rules to reject trades not meeting its eligibility criteria. With regards to collateral and margin, the net position of each CCP with the other under balance contracts should be subject to margin calls and collateral requirements that are broadly equivalent to those a CCP would impose on its own members.
“LCH.Clearnet and SIX x-clear have a proven model that has withstood the largest default in history,” said Wayne Eagle, director of equity services at LCH.Clearnet, in a statement. “It demonstrates that interoperability can be safe and secure so long as the structure preserves the integrity of the CCPs and minimises contagion in the event of a default through securely ring-fencing the surviving CCP and its members.”
Urs Wieland, member of the executive committee and head of risk management at SIX x-clear, added, “The introduction of competitive clearing for UK equities on the LSE caused no market disruption and showed the true benefits of the system – move to your favoured clearer immediately or simply stay with the incumbent, all the while experiencing no disruption.”
On 29 December last year, EMCF published a set of interoperability recommendations in a bid to spur progress. EuroCCP followed suit in mid-January.
EMCF hit a new record of 5 million daily cleared transactions on 6 February, 20% higher than its previous record of 4 million, which it reached on 22 January. According to the firm it became the largest clearer for on-exchange European cash equities in Q4 2009.
LCH.Clearnet Limited is the incumbent CCP of the London Stock Exchange, and SIX x-clear provides post-trade services to SIX Swiss Exchange. EMCF clears for multilateral trading facilities Chi-X Europe, Nasdaq OMX Europe, BATS Europe, Burgundy and Quote MTF. It also provides CCP services to Nasdaq OMX’s Nordic stock exchanges.