By Terry Flanagan

Liquidity and Counterparty Risk Top Concerns

The post-crisis business environment poses new challenges for risk management, with the main investment risk issues faced by buy-side firms being emerging regulatory regimes and the interconnectedness of financial markets in the form of liquidity risk and counterparty risk.

Buy-side firms are very concerned about the uncertainty surrounding buy-side regulations such as Dodd Frank and Solvency II.

Almost 1 in 2 (45%) buy-side firms surveyed by SunGard and Primia believe that these regulations will increase the cost of doing business. On the positive side, a good proportion of participants (36%) have found that regulatory uncertainty has made their firms more risk aware, as they have started looking at risk and data in new ways in preparation for new regulation.

“The tsunami of regulation has finally washed over most buy side firms, and they feel swamped,” said Laurence Wormald, head of research at SunGard APT. ‘While there are a lot of challenges associated with incorporating those regulations into a risk system, once that’s completed, you are in a position to not only comply but be more competitive.”

The responses from buy-side participants show that the primary use of risk management is the monitoring of key risk indicators (21%). This monitoring in turn is done for internal reporting to the board and management (20%) and external regulatory compliance reporting (20%) – unsurprising given the risk and reporting challenges driven by regulations like AIFMD, UCITS, Dodd Frank and Solvency II.

In Europe, two of the largest equities clearing houses, EMCF and EuroCCP, are forming a new entity that will deliver greater efficiencies and sustainable competition to the pan-European market place.
The combined firm will provide best practices in a number of important areas, including risk management, technology, settlement and client service.

The new CCP will use the risk management framework and customer-service organization of EuroCCP, and it will run on the technology and operations infrastructure of EMCF. The new entity, to be called EuroCCP, is planned to be headquartered in Amsterdam, with client-facing functions located in London and Nordic coverage provided from Stockholm.

Diana Chan, CEO, EuroCCP

Diana Chan, CEO, EuroCCP

“Bringing together EMCF and EuroCCP reflects the desire of many market participants to see sustained competition, consolidation and greater efficiencies in European clearing and post-trade processing,” Diana Chan, CEO, of EuroCCP, said in a statement.

Regulation in the form of the European Market Infrastructure Regulation (Emir), which allows for interoperability between clearers, has been in force since March, with the adoption of technical standards that are currently being worked on by the European Securities and Markets Authority (Esma), the pan-European regulator.

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.

EuroCCP has developed a capability to clear over-the-counter (OTC) European cash equities trades. It currently clears trades matched on the Omgeo CTM platform and has been mandated by Traiana and by SWIFT Accord platform to provide pan-European clearing.

Market participants can trade equities on any venue EuroCCP supports and have their transactions netted for settlement and/or margin purposes for the same security traded on the same day, thereby reducing costs and operational risks.

Related articles

  1. Goldman Sachs Asset Management’s fundamental equity business manages over $20bn in thematic equities.

  2. Data extraction and integration is the second stage of a digitization process.

  3. With Ankit Mittal, Business Change Manager, Global Trading, Schroders

  4. IIGCC and lead investors will launch a pilot with companies including BP, Eni, Repsol, Shell and Total.