CCPs Push for Faster Mandatory Clearing in Europe

Terry Flanagan

Eurex Clearing and CME Group have pushed for faster implementation of mandatory clearing rules for derivatives in Europe as market participants are already experienced in clearing products in other regions.

The European Securities and Markets Authority issued a consultation paper on clearing interest swaps and has published responses from the financial industry on its website.

Eurex Clearing, owned by Germany’s Deutsche Boerse, said in its response that the introduction of mandatory clearing is significantly later in Europe compared to other jurisdictions, such as the US and Japan. As a result the vast majority of market participants in Europe are well prepared for clearing interest rate swaps and other derivatives.

“Therefore, the periods for both category one and category two could be significantly reduced in particular by small amendments to the definition of category two,” added Eurex.

CME Group agreed with Eurex that Esma’s definition of category two counterparties should be narrowed to include only more active financial participants which reduce the length of time taken to the implement the new rules and cause less market disruption.

The US exchange said in its response that the OTC interest rate swaps which will be cleared in Europe are largely consistent with those being cleared in the US.

“To further support the reduction of systemic risk through central clearing, CME Group encourages the inclusion of additional currencies under the clearing obligation in the future,” added the exchange. “CME Group, as well as other CCPs, clears as many as 18 currencies, which will allow Esma to eventually mandate those currencies, while potentially taking into account the timing of the clearing mandate in the local jurisdictions.”

The US exchange also recommended that Esma use product characteristics, such as standardization and liquidity profile, when deciding whether a product needs to be centrally cleared rather than basing the decision on the number of CCPs available to clear those products.

“Placing too much weight on the number of CCPs available for central clearing when deciding whether to mandate a product unnecessarily limits the advancement of the financial markets and the benefits of central clearing,” added the CME.

LCH.Clearnet Group, the multi-asset clearing house owned by the London Stock Exchange, said it would be helpful for Esma to clarify the procedure and triggers for not imposing a clearing obligation on a class or sub-class of OTC derivatives.

“We concur with Esma that considering the level of systemic risk posed by interest rate OTC derivatives, particularly in USD, JPY, GBP and Euros currencies, the priority is to impose a clearing obligation on these products,” added LCH.Clearnet. “We are also encouraged that Esma is considering the existence of a clearing obligation in other jurisdictions when addressing the suitability and timing of the clearing obligation.”

Stockholm-based Nasdaq OMX Clearing said that excluding Nordic currencies from mandatory clearing will lead to less clearing and transparency in the financial system in the region.

“A failure of one of the systemically important banks will in such scenario be much harder to resolve and by that impact the financial stability that most likely also will spillover to the Eurozone area,” added Nasdaq OMX Clearing. “This is especially true for the Nordic area as we have Euro countries in the region and banks with very large flows in Euro.”

Nasdaq OMX also said that Esma’s proposal not to include equity derivatives under mandatory clearing is not in line with the original mandate from the G20 leaders and may lead to continued use of standardized equity derivatives products in the over-the-counter market rather than on centrally cleared exchanges.

“Nasdaq OMX recommends that ESMA add in the proposal to the EU Commission to introduce a clearing obligation for any OTC equity derivative contract for SEK, DKK, NOK and EUR denominated classes that mirrors the listed exchange trade derivatives available for clearing at Nasdaq OMX,” added the exchange.

The Federation of European Securities Exchanges, which represents 41 exchanges active in equities, bonds, derivatives and commodities agreed with Nasdaq OMX that OTC equity derivatives should be included in the clearing obligation.

Fese urged Esma to consider the overall impact that its work on the Emir clearing obligation will ultimately have on the final implementation of the MiFIR trading obligation.

“Critically, because of the way the trading obligation is designed, any instrument which does not fall under the scope of the EMIR clearing obligation will not be eligible for the trading obligation,” added Fese.

The exchange group also warned that the Esma proposals included a loophole as derivative instruments traded on a regulated market will have to be cleared, while look-alike contracts traded OTC would only be subject to a requirement to clear if Esma mandates these products for clearing.

“Certain Fese members offering trading in securitised derivatives, foreign exchange derivatives, and contracts for difference on their regulated markets are currently observing a significant shift of trading in these products to OTC platforms as defined under Emir,” added Fese. “This shift to OTC means that clearing which was hitherto applied to these products on regulated markets will not be required automatically in an OTC environment.”

Fese recommend that Esma automatically requires clearing for look-a-like products where clearing is already required for that class of products on a regulated market.

Featured image via Dollar Photo Club

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