Eurex Extends Securities Lending Clearing
Eurex clearing, the post-trade arm of Germany’s Eurex derivatives exchange, is to act as the clearinghouse for the new SL-x Trading Europe securities borrowing and lending (SBL) platform, which is due to launch by year end.
Eurex will act as a central counterparty (CCP) for SL-x’s initial SBL transactions in Belgian, Dutch, French, German and Swiss stocks. The platform will be rolled out across 17 European markets.
Eurex’s Lending CCP was started by Eurex Clearing in November 2012, covering the equity, fixed income and exchange traded funds (ETF) arenas.
“We are very pleased to further expand distribution for the Lending CCP by working with SL-x,” said Thomas Book, chief executive officer (CEO) of Eurex Clearing. “It helps banks to reduce the amount of capital they require to run their securities borrowing/lending businesses, enables them to improve operational efficiency, and reduces counterparty credit risk.”
The SL-x electronic trading platform, which has been under development for two years, will provide a clearing system for stock lending transactions between investment banks representing stock borrowers, such as hedge funds, and custodian banks who act for stock lenders, such as pension funds.
The SL-x platform uses social media technology to support its stock lending activities and will facilitate the move away from over-the-counter (OTC) securities lending towards a more regulated environment under the incoming European Market Infrastructure Regulation (Emir) and the global post-crash rules which require non-corporate hedging OTC derivative trades to be centrally cleared and hosted on a central repository, with defined Basel III collateral requirements.
The technology, which is the subject of pending patents, will enable stock lending trades to be channeled through centrally-cleared systems, and will offer significant financial savings for market participants including potential reductions in regulatory capital of over 90 per cent, as well as the elimination of counterparty credit risk and a reduction in overall operating costs.
Eurex Clearing’s securities lending CCP combines the trading capabilities of Eurex Repo’s SecLend Market and Pirum System’s Real-Time service for bilaterally agreed OTC transactions with the tri-party collateral management services of Clearstream Banking Luxembourg and Euroclear Bank.
An analysis from Eurex Clearing shows an 80% cost of capital reduction if participants use its securities lending CCP versus a bilateral transaction.
“CCPs are likely to create new market dynamics that are not yet accounted for by borrowers, lenders or service providers,” said Josh Galper, managing principal of research firm Finadium, in a report. “Exchanges and clearing houses looking to bring securities lending into the CCP fold have been making a business case in earnest for some years now. The argument is that global regulations will favor cleared transactions across asset classes and products and make “riskier” bilateral arrangements more costly, in turn reducing the relative cost of CCP usage.”
Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.
Temporary equivalence is set to expire on June 30 2022.
IRS trading volumes have fragmented without an equivalence agreement.
Phase 5 of the uncleared margin rules came into effect on 1 September.
Triparty repos can be executed across U.S. Treasury securities to central clearing.