CCPs Gain Traction in Europe

Terry Flanagan

The use of central counterparties for funding collateral has increased according a survey by the European Central Bank ahead of mandatory clearing being introduced in the region.

The ECB’s March 2014 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter derivatives markets collected information on changes in credit terms between December 2013 and February 2014. Respondents were a panel of 28 large banks, made up of 13 euro area banks and 15 banks with head offices outside the euro area.

The report said: “The majority of respondents indicated that the use of CCPs for the funding of various types of collateral included in the survey had increased over the three-month reference period.”

The ECB also found that credit terms have eased for the majority of counterparty types and that funding collateralized by euro-denominated securities has become less stringent for most collateral types. However credit terms for OTC derivatives that are not cleared through a CCP have either tightened or were unchanged.

“While a large share of survey respondents indicated basically unchanged liquidity and trading for all types of non-centrally cleared derivatives, a limited number of respondents indicated a deterioration of liquidity conditions in non-cleared OTC derivatives markets” added the ECB.

The reporting banks have increased the resources and attention they are giving to the management of concentrated credit exposures and the survey found that this was most noticeable for the management of concentrated credit exposures to CCPs.

The European Securities and Markets Authority has begun to authorise CCPs under the new European Market Infrastructure Regulation, which will mandate clearing in Europe for certain products.

The four approved CCPs under Emir are EuroCCP, the Netherlands-based equities clearer; Nasdaq OMX Clearing, the derivatives clearer based in Sweden, Poland’s KDPW_CCP and Eurex Clearing, part of Eurex Group owned by Deutsche Börse, the German exchange operator.

Eurex commissioned consultant Oliver Wyman to calculate the impact of shifting OTC products onto exchanges and estimated that European sell side and buy-side firms could save at least €5bn in costs through central clearing.

“For interest rate derivatives, repo and securities lending transactions, an integrated cross-product CCP structure with a broad collateral spectrum can deliver up to €4 billion to €5 billion incremental cost benefits to the European sell- and buy-side community combined, on top of €5 billion to €7 billion cost benefits of central clearing on a baseline CCP which are to a certain degree already realized,” the study said.

Feature image via Artur Marciniec/Dollar Photo Club

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