Europe’s Incumbent Exchanges Continue to Kick Their Heels on Clearing Interoperability
National exchanges, which generally only offer only siloed post-trade operations, continue to hold up the progress towards a fully competitive cash clearing model in Europe—despite the political agreement in Brussels for increased competition.
Since the launch of ‘interoperability’ in July 2011, over 50% of exchange-traded cash equities clearing in Europe now takes place under interoperable clearing agreements. And the momentum is growing for this freedom of choice as market participants eye reduced costs from the netting and cross-margining of trades between venues.
Regulation in the form of the European Market Infrastructure Regulation (Emir), which allows for interoperability between clearers, has now been passed into European Union law although its technical standards that are currently being worked on by the European Securities and Markets Authority (Esma), the pan-European regulator, and which are due out at the end of this month have yet to be finalized.
However, the national incumbent exchanges in Europe—many of whom who authorize access to only one central counterparty (CCP), with many still owning their own clearing house—are still loathe to free up access to other clearing houses, thus losing the lucrative revenues on offer from clearing. For example, Deutsche Börse, operator of the Frankfurt Stock Exchange, Germany’s largest bourse, owns the clearing house Eurex Clearing which is attached to the Frankfurt venue—a so-called ‘vertical silo’ approach.
One exchange group, Nasdaq OMX, which flirted with establishing a competitive clearing model at its seven national Nordic and Baltic exchanges earlier this year only to pull the plug on the move at the eleventh hour, continues to hold out despite, in principle, agreeing to interoperability.
“We postponed interoperability because there is still uncertainty with the regulatory requirements surrounding it even though there is political agreement in place,” Marja Hyttinen, who is responsible for competitive cash clearing at Nasdaq OMX Nordics, told Markets Media.
“So we believe there should be clarity and a level playing field in Europe before we can proceed.”
Hyttinen also thinks that Esma will miss its September 30 deadline, regarding interoperability at least, and that any announcement on interoperability will not now likely be until December 31.
“We believe interoperability is a good thing and really want to be an exchange that wants to implement that,” said Hyttinen. “We have tried to pursue a competitive cash clearing model since 2009 when we first announced our intent. We are convinced it will act to drive liquidity and lower investor costs and do good for European capital markets as a whole—interoperability is still our goal.
“But we want to ensure that interoperability will become a standard for everyone in the cash equities market in the European Union and this has to be a clear goal when all these regulatory standards are being finalized and there is a level playing field and reciprocity.”
Some of its rivals have claimed that because Nasdaq OMX holds a 22% stake in one of Europe’s four competitive clearing houses, Netherlands-based pan-European clearer EMCF, which is also the only clearer to operate in Nasdaq OMX’s cash equities markets, EMCF’s market share would be threatened if Nasdaq moves to interoperability.
Nasdaq OMX would not comment on this.
The four competitive clearers that currently operate in Europe are EMCF; EuroCCP, a London-based clearing house; the Anglo-French clearing house LCH.Clearnet; and Six-x clear, the clearing arm of Six Securities Services, which is the post-trade division of Swiss market operator Six Group. Then there are the national clearers attached to the national exchanges that have yet to open up to competitive clearing.
Bats Chi-X Europe and Turquoise, the leading pan-European multilateral trading facilities, have led the push for full interoperability, while of the incumbent exchanges to open up, only the London Stock Exchange and the Swiss Exchange offer any kind of clearing choice so far.
The competitive clearers, though, believe a true model of interoperability will only be achieved if exchanges also open up access to the trade fees of trading venues. Emir does not address the issue, although there is scope in the current revised Markets in Financial Instruments Directive, or MiFID II, proposals—which promise to significantly alter the way financial markets operate in Europe—for this to happen. But the regulation is still being hotly debated in Brussels and this rule may not make the final cut. MiFID II will also not come into effect until around 2015 either.
“Interoperability means CCPs agree to interoperate, but that is not sufficient—you need access to the trade feeds,” Tomas Kindler, head of clearing services at Six Securities Services, told Markets Media last month. “That has potential to be addressed by MiFID II. But this is still a work in progress and we are still to see the final version.”
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.