[ I N T E R V I E W | D I A N A C H A N ]
a CCP. EuroCCP could help emerging markets grow by making it easy for the international firms to trade there. Bringing liquidity to emerging markets is a very positive thing to do.
Opportunities for asset class diversification
“ For the next decade, shared infrastructure for equities clearing makes sense. It is demanding to comply with new regulations so the fixed cost component of running a CCP is always rising.”
into fixed income or derivatives are regularly reviewed by the company. The main challenge is access to trades. Fixed income is mostly a bilateral market adjacent to repo transactions, with strong network effects and incumbent CCPs that are unlikely to want to interoperate. Derivatives is characterised by exchanges asserting intellectual property rights over the indices and contracts, which constitute a barrier to entry. The market structure of these asset classes is very different from shares.
Two years ago, EuroCCP announced plans to diversify into clearing securities finance transactions. Although there is much potential for savings from capital and operational efficiency, it soon became apparent that firms were spending a considerable amount of time and energy on preparing for Brexit. Many firms did not have the bandwidth to do non-mandatory things while they were trying to prepare for the UK leaving the EU. Firms simply don’ t have the time to connect to a new service regardless of the benefits of us clearing those types of transactions. For the moment, that project is on hold. But the company may return to it if clearing of those transactions becomes mandatory through regulation.
HM: Looking to the future of clearing, do you see any trends developing at the moment? DC: With MiFID having broken down the rules on exchanges that prohibit their own members from trading with anyone else, we have seen a gradual move towards open access and interoperability. More and more stock exchanges are probably close to realising that there is no competitive advantage to doing their own equities clearing, but changing the status quo involves investment and effort.
EuroCCP is owned by three exchanges, Nasdaq, Cboe Global Markets and Euronext, so the firm is positioned very strongly in the market. Each owns 20 % of EuroCCP, while the remaining 40 % is owned by two other shareholders, ABN AMRO and DTCC. It is truly an open model where shareholders ensure that there is dynamic efficiency in equities clearing through strong competition. Interoperability has become the norm in Europe, and shared infrastructure among stock exchanges is the logical next step in the evolution to a more efficient post-trade configuration.
Moving forward, interoperability must become less expensive, with the reduction of inter-CCP margin levels and settlement volumes among the three interoperating CCPs. If we solve that problem, we will solve the scalability problem at the same time so that more CCPs can join the interoperability cluster. Once that happens, more CCPs can compete and I believe that’ s when we will see consolidation. EuroCCP’ s business model is to be a shared infrastructure, and shareholders are open to the idea of more exchanges investing in the firm. Why have your own CCP, when you can join EuroCCP as a shareholder and offer the lowest clearing fees to your clients? There is no competitive advantage to clearing your own equities trades.
HM: What’ s the latest in terms of EuroCCP’ s preparations for Brexit? DC: As EuroCCP is an EU Dutch-based clearing firm with UK participants and clients, the firm has discussed Brexit with the Bank of England in great detail. Before the European Market Infrastructures Regulation was introduced, the Bank of England had a regime called Recognised Overseas Clearing House or ROCH, which allowed non-UK CCPs to clear for UK platforms and UK participants. It is considering introducing a similar regime post-Brexit and EuroCCP has already submitted an application to gain that recognition status.
64 // TheTrade // Autumn 2018