Saturday, April 10, 2010

Lack of coherence on clearing reform

Original posted in the FT by Jeremy Grant:

Efforts to cut post-trade charges across Europe have suffered a blow after regulators and clearing houses failed to agree on proposals to spur competition as a way of reducing costs.

The development highlights how regulators’ concerns over systemic risks in the wake of the crisis have become paramount.

The region’s equities markets are saddled with post-trade costs – mainly clearing and settlement – that can be up to eight times higher than those in the US.

LCH.Clearnet, Europe’s largest independent clearing house, EMCF, a Dutch clearer that clears for Chi-X Europe and other platforms, X-clear, a Swiss clearer, and Euro CCP, owned by The Depository Trust & Clearing Corporation of the US, had been trying to forge links with each other that would allow traders a choice over where their trades are sent for clearing, helping to reduce post-trade costs.

The process, known as “interoperability”, has been pushed by the European Commission since 2007.

But it ran into trouble late last year as clearers disagreed over issues such as risk management and how to treat margin, or collateral, posted by one clearer to another.

Watchdogs are concerned about the possibility that proposed linkages between clearing houses could pose fresh dangers to the financial system.

They fear two-way or three-way linkages between clearers could trigger a domino effect if one clearer was to default.

A clearing house acts as a buyer to every seller and seller to every buyer in transactions, using margin posted by market participants to ensure that transactions are completed in case of default.

The four clearers met British, Swiss and Dutch regulators this week to present a fresh proposal on how margin could be handled between interoperating clearing houses.

They addressed demands of regulators, laid out in January, that extra collateral be found to bolster clearers’ financial positions before interoperability could start. They suggested that it come from clearing house members or third parties. But regulators raised further questions about how fresh margin funding would be found and used, according to people familiar with the matter.

One said: “The regulators believe that they need more substance, specifically on how margin is scaleable. It’s unpredictable.”

The development means that any resolution of the issue is a further three to four months away, longer than market participants had hoped. Some clearing experts said regulators were unwilling to commit to interoperability, while Brussels is separately preparing sweeping new rules for clearing houses.

No comments: