Clearers Pursue Interoperability Arrangements

Terry Flanagan

Competition among providers of post-trade services in Europe is being spurred via so-called interoperability arrangements, which enable market participants to specify a preferred clearer.

European Multilateral Clearing Facility (EMCF) has announced that it is entering into interoperability agreements with competitors servicing European MTFs and exchanges.

EMCF has indicated to Chi-X Europe, BATS Europe and Nasdaq OMX that it will pursue interoperability arrangements in coordination with platforms and interoperating CCPs in the coming weeks. EMCF aims to launch the interoperability arrangements by Jan. 1, 2012, pending regulatory approval.

Promoting greater competition in financial markets is one of the key goals of European Market Infrastructure Regulation (EMIR), but a key controversy remains as to whether the EMIR central clearing obligations from OTC derivatives to listed exchange-traded derivatives.

Opening listed derivatives to EMIR would bring “vertical silos” where trading, clearing and settlement take place under one roof would dilute or eliminate the competitive advantage currently enjoyed through linking clearing and trading together.

“There’s a massive political issue over breaking up the Euronext/Deutsche Borse ‘silos’ and opening them to competition,” David Morgan, marketing director, trading and client connectivity at SunGard’s global trading business, told Markets Media. “If this happens, and if people can get round the intellectual property issues involved with those exchanges’ major contracts one can expect new trading platform competitors to spring up or, more likely, the current leading platform players in the equity markets to diversify, as they are already doing in relatively small scale into equity & index options/futures.”

MTFs have had a symbiotic relationship with CCPs: as their business has grown so has that of the CCPs, which enables them to reduce prices due to economies of scale. In the case of Chi-X, it helped to jumpstart EMCF, Europe’s largest cash equities clearing company.

Interoperability will make European markets more efficient and is a toll to open up the clearing and settlement silos in Europe, according to Jan Booj, CEO of EMCF.

EMCF will enter into a strategic dialogue with the major European exchanges to enable user choice and consolidation of clearing volumes in a single CCP, he said.

Full interoperability among the major CCPs means that customers will be able to choose which CCP clears their trades, and consolidate clearing with their respective CCP of choice if they wish to do so.

BATS Europe, for example, has launched a Preferred Interoperable Clearing Program to allow trading participants the choice of a preferred clearer from three interoperable clearers: LCH.Clearnet, SIX x-Clear, or EuroCCP, pending regulatory approval of interoperability arrangements between these three CCPs.

Chi-X Europe, which is now being acquired by BATS Europe, had announced a similar plan to offer a choice of clearing among LCH.Clearnet, SIX x-clear or EuroCCP in 2009.

Under the preferred clearing service, if both parties to a trade executed on BATS have selected one of the preferred CCPs, the trade will be cleared by each party’s chosen CCP; if one or both parties do not select one of the preferred CCPs, the trade will by default go to the incumbent CCP, EMCF.

CCPs favor interoperability, provided that trading venues furnish the interoperating CCPs with their trade feeds. “EMCF has consistently supported interoperability, provided that a level playing field through access to transaction feeds from other exchanges and MTFs is within range,” the company said.

BATS has given trade feeds to three CCPs that will be interoperating: EuroCCP, LCH, and X-Clear. A trading firm can designate one of the interoperating CCPs as its preferred CCP for all trades or for a specific market segment.

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