Eurex Clearing, the central counterparty (CCP) operated by German exchange Deutsche Börse, has announced further details of a new service that protects buy-side firms in the event of clearing member default.
The CCP’s new individual clearing model, which went live last week, allows buy-side firms to legally and operationally segregate their margin collateral and positions at the clearing house level, giving them more protection when trading on Deutsche Börse’s Eurex derivatives exchange.
The need for such a service has increased with regulatory moves on both sides of the Atlantic to migrate OTC derivatives widely used by institutional investors onto exchange-like trading venues to reduce market participants’ exposures to broking counterparts.
When trading listed derivatives, buy-side firms and other non-clearing members must establish a relationship with a clearing member. The exposures of the clearing member and its customers are typically combined to achieve scale and netting efficiencies.
However, separating the assets of a non-clearing member can be a challenge if a clearing member defaults, as evidenced by the collapse of Lehman Brothers in 2008, which was the counterparty to 900,000 derivatives positions just one month before it went bust.
Under the new individual clearing model, the margin required by buy-side firms is calculated independently of the clearing member, which allows the transfer – or portability – of positions to a different clearing member in the event of a default. While this will ensure the exposures of the buy-side firm will remain separate from the clearing member, the scale efficiencies will be lost.
But in the next phase of its client segregation programme, Eurex Clearing plans to launch the omnibus model, which will offer the benefits of segregation but will pool the assets of non-clearing members so they can take advantage of netting and cost efficiencies.
“Maximum legal protection and immediate portability of client assets are at the heart of the value proposition for CCP clearing,” said Thomas Book, Eurex executive board member responsible for clearing. “In close collaboration with our participants, we have developed a unique offering of flexible alternatives for how client positions and assets can be held at Eurex Clearing, depending on clients’ individual protection needs.”
The European market infrastructure regulation (EMIR), which will impose new rules for derivatives trading in Europe, is likely to require clearing houses to separate the assets of customers from their own liabilities. EMIR is currently being debated by the European Parliament and the Council of the European Union, but has been delayed because of disagreements on issues such as instruments covered, trading venue access to CCPs and CCP access to the trade feeds of markets.