Europe Edges Towards Interoperable Clearing Model

Terry Flanagan

Traders are hopeful that the move towards a competitive cash equities clearing model in Europe is gaining ground as one of its biggest advocates says that the move to drive down the hefty costs of clearing is “at the end of the beginning”.

EuroCCP, the pan-European cash equities clearing house owned by the U.S. post-trade giant the Depository Trust & Clearing Corp, has been keen to promote the benefits of interoperable clearing in Europe.

Competitive clearing began in earnest in Europe last year on multilateral pan-European trading venues Bats Chi-X Europe, UBS MTF and Turquoise after European regulators gave a cautious green light to expand competitive clearing, with Nordic venue Burgundy following suit earlier this year. Equiduct, the retail-focused pan-European electronic trading platform, has this week become the latest venue to open up its clearing services.

“As interoperability is adopted across trading venues and market participants see the cost savings that result from competitive clearing, the European trading landscape is transforming,” said Diana Chan, chief executive of EuroCCP.

“But six months on from the launch of full interoperability, we are really just at the end of the beginning. It is only when interoperating CCPs [central counterparties] get equivalent access to all the trading venues they clear for, that trading firms will see the full benefits of true competition.”

To date, Equiduct has used incumbent CCPs in the markets in which it operates. EuroCCP now offers interoperable CCP clearing with the incumbents in these markets. Where interoperability with the incumbent CCP is not yet possible, a ‘preferred’ clearing model will be used.

“The positive impact of the launch of competitive clearing is being felt right across Europe and we have seen a growing demand for it from our customers,” said Peter Randall, chief executive of Equiduct. “They will benefit from the greater security of having the choice of more than one CCP and in turn reduced funding and settlement costs.”

Clearing houses, which act as intermediaries that sit between the buyer and seller of a trade, reduce the amount of risk that market participants are exposed to by absorbing the loss if one party defaults.

Incumbent domestic exchanges, which traditionally operate an exclusive relationship with a clearer—leaving brokers with no choice as to who they clear with—have been slow on the uptake although the London Stock Exchange has offered two-way clearing interoperability since 2008 while in May Germany’s Deutsche Börse said that it was “open” to allowing third-party clearers access to its cash markets following an internal investigation.

The incumbent exchanges, generally, have been loath to free up access to other clearing houses in the cash equities market, which would allow market participants to net and cross-margin trades between venues, thus cutting costs. Interoperability would also push down overall clearing costs and allow investors more choice in where their trades are cleared. Clearing costs are still considerably higher in Europe compared to the U.S. due to the lack of competition.

Critics have warned that a fully competitive clearing model is not perfect as it could leave interoperable CCPs open to systemic risk were a clearer to go bust.

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