A mess of clearing ...

This week has been spent in a debate about clearing and settlement systems.

I’ll post something with more depth about this later in the week, but the most interesting dialogue has been about the US versus EU approaches.

The American system exists with a few core clearing systems based around the major exchanges – the Intercontinental and the Chicago Mercantile – along with the DTCC, which provides clearing for the US NYSE and NASDAQ markets and more.

In Europe, we have CSDs (Central Securities Depositories) and CCPs (Central Counterparty Clearing systems) for almost every country, in some cases more than one per country.

This creates issues of risk fragmentation, but also the opportunity for some to lock customers into their structures by being vertically integrated with the stock exchanges.  Equally, it is virtually impossible to compare products and services of these integrated clearing systems, because they bundle everything into packages of products that make them incomparable with any others.

The challenge is illustrated by the range and specialities of clearers. 

For example, there are several new clearing operations across Europe, including SIX x-clear, EMCF and EuroCCP; as well as others who are trying to shake things up such as Monte Titoli and LCH.Clearnet.  There are derivative product clearers, such as Eurex Clearing (Deutsche Bourse) and LIFFE Clearing (NYSE Euronext); as well as many country based operations from CCP (Austria) to CC&G (Italy), from KDPW (Poland) to KELER (Hungary) and more.

We now are trying to regulate OTC markets and already believe we need to create more infrastructure for Europe, with our own data repository and clearing system.

Great.

All in all, this means we just have too many CCPs across Europe, and there is a strong argument that there should be just one CCP.

This is the same argument as there was in SEPA for a PEACH, but stronger as securities clearing creates systemic risks if it is fragemented.  Furthermore if CCPs compete, as this lot definitely are, it seems to mean that they take their eye off the ball in terms of managing counterparty credit risk.

The issue is safety versus competitiveness, risk management versus cost and transparency versus margin.

This needs to be sorted out and the European Commission will do something about this.

The question is how long it will take them to get there.

Comments

[FAMelo]

I guess your position is one out of two possible and perfectly acceptable. The other is the fact that one single CCP would also be a competition threat and above all a concentration of risk that would never be 100% safe under good margin management and that under a binding and single CCP rule, would mean that in case of severe CCP failure all market would fail.

Decisions will be taken but everyone seems to be undecided or at least eager to have either a single mandatory CCP or several. And as stated, none of those solutions seems to be fit. Maybe we should think outside the box. Unfortunately that takes time we do not have now...

[Bill Hodgson]

The EU approach is to require clearing for OTC Credit contracts through a CCP, but has left it to the market to decide which. It is almost certain there will be only one CCP for credit, the network effect tends to mean there's no point in firms joining two or more, it splits risk and is worse than a single CCP.

There is a single CCP for OTC Rates products, SwapClear, which for now is global and likely to remain so.

There isn't any good argument to clear all capital markets products through a single CCP - as there aren't necessarily risk or processing reasons to do so. Even the US has multiple CCPs for multiple products, competition weeds out the winners.

Pointing to the multiple service providers doesn't mean this is a bad thing, many of them specialise in specific products and don't overlap.

Bill

[Chris Skinner]

I agree with the idea of one CCP per instrument Bill to be honest, or even two. The issue being raised is more to do with how many cash equities clearers do we need, and how many OTC clearers will there be.

There could easily be a position where there are 2-3 CCPs per product in Europe alone ... whereas the business case today should be pushing for 1-2 CCPs per product globally.

Maybe ...

Chris