The central clearing of securities finance transactions (SFTs) is not a new concept, it is one which has been tried before with varying degrees of success.
In Europe, there have been multiple failed attempts to successfully introduce and maintain SFT clearing, with the most recent high-profile cautionary tale coming through Eurex Clearing which announced it was shutting down its Securities Lending CCP service in 2021 as a result of low clearing volumes and a prioritisation of other businesses.
Despite the widely touted benefits, other attempts have come and gone over the years, including efforts from EuroCCP – now operating as Cboe Clear Europe after being acquired by Cboe Global Markets in 2020. However, the group now believes it has the recipe for success and has subsequently announced plans to introduce a new offering in Q3 2024, bringing matching, CCP clearing, settlement and post-trade lifecycle management for SFT transactions in European cash equities and ETFs.
Speaking at The Network Forum in Athens, Tim Beckwith, head of commercial and business development, Cboe Clear Europe was asked about the rationale of the launch.
“The regulatory push for products to come into clearing – not necessarily Emir, but Basel changes in 2025 – will introduce much higher risk weighted asset on lenders and borrowers in the market, by putting that through a CCP that brings it down significantly,” he explained. “You will free up capital, balance sheet optimisation and effectively have more opportunities for trading in the market and it will come with the additional benefits of compression of margin, netting etc.”
The CCP has certainly secured the support of a broad range of key market participants, including banks, clearing firms, asset managers and custodians, who are expected to support the launch of this service. Participant Agent Lenders include BNY Mellon and Citi, while borrowers include Barclays, JP Morgan and Goldman Sachs, among others.
The DTCC launched a similar service in the US recently, and much like its counterparts across the Atlantic, Cboe said it expects “to help to bring improved capital efficiencies, enhanced risk management and streamlined operational procedures to this market”.
When asked about why the CCP’s latest efforts to introduce SFT clearing would succeed where others have failed, Beckwith said: “It didn’t work because the regulatory push wasn’t there then, the Basel requirements weren’t so heavy. There was an alternative collateral model that could be used instead of a CCP.”
Regarding EuroCCP’s previous endeavours he added: “I’ll be frank, we were independent then, so we needed to go to clients for investment.
“So now we have tighter regulatory change which has increased the business case, we’ve got European access in terms of CSDs which makes the product much more fungible and we’ve got one owner now.”
Subject to regulatory approvals the service is aiming to launch in September 2024.