Eurex Clearing will launch a new service to allow buy-side participants to become direct clearing members, as institutional investors gear up for incoming clearing rules in Europe.
The service, named ISA Direct, will be available from this summer and will be initially offered for Eurex Clearing’s interest rate swaps and repo transactions. Listed derivatives and securities lending transactions are to follow, according to a statement from Eurex.
It will enable buy-side clients to have a direct contractual relationship with the clearinghouse, while also being direct counterparts (ISA Direct member) with a clearing agent (such as a bank). Eurex hopes to exclusively capture European pension funds, investment funds, re-insurance and financial services companies with the service.
“ISA Direct alleviates the regulatory requirement to centrally clear OTC derivatives in several ways. By enabling us to become a direct member of the CCP, our concerns regarding counterparty credit risks, clearing costs and portability of our assets are much better addressed compared to the traditional client clearing model,” said Daniel Berner, CIO Swiss Life Switzerland.
The move to launch a direct clearing service for the buy-side comes as a number of banks have begun to pull back from client clearing of OTC derivatives due to heightening capital costs.
As of the end of 2015, the number of banks providing clearing for the buy-side dropped to just 54, according to data from the US Commodity Futures Trading Commission (CFTC). This number could drop even further when margin rules for uncleared derivatives come into force in September this year.
However, through the direct access model Eurex believes it could mean reduced capital requirements for both the buy-side and sell-side. The direct posting of collateral with the CCP would prevent it being counted on the clearing broker’s book, and therefore being subject to a capital charge under the Basel III rules.
“ISA Direct allows clearing members to continue their operational clearing relationship with clients without requiring the traditional performance guarantee. Therefore, we support a quick roll-out of both products by Eurex Clearing,” added Jason Vitale, managing director for listed derivatives and markets clearing, Deutsche Bank.
Several other central counterparties (CCPs) are said to be weighing up a form of sponsored direct access to buy-side members, in order to work around capital and default fund rules. This type of model, already offered by ICE Clear Europe as a ‘Sponsored Principal’ account, allows the client to become a direct counterparty to the clearing house with separate position, margin and asset accounts.
Furthermore last year, LCH.Clearnet signed on Citadel Securities as its first non-bank clearing member for its interest rate swaps clearing service, SwapClear.