Pan-European clearing house EuroCCP has proposed the adoption of a single, standard European convention for interoperability between providers of central counterparty (CCP) clearing services. The clearer hopes CCPs will be able to reach an agreement on the convention by Q1 2010.
“We would like to have the convention public, agreed and at a good stage by early next year,” said Diana Chan, CEO of EuroCCP, at a press briefing on Wednesday.
EuroCCP envisages that the convention would replace the bilateral agreements that currently exist between interoperating CCPs, simplifying the web of contracts. To date, four pan-European CCPs – LCH.Clearnet Ltd, SIX x-clear, EuroCCP and EMCF – have agreed to interoperate, resulting in six bilateral agreements. “That is already too many,” said Chan.
Were a fifth CCP to join the group, a further four bilateral agreements would be required, and the addition of a sixth would require a further five deals, bringing the total to 15.
By proposing the convention, EuroCCP also hopes to standardise the way interoperating CCPs manage their exposure to each other, improving overall risk management. As the linking deals are all bilateral, details such as how much margin is held against a fellow CCP failing can vary, and those details will not be visible to all CCPs providing clearing for a particular trading platform. This means it is not always clear to all CCPs what their exposure is if one of their fellow clearers collapses or fails to fulfil its obligations.
The convention, however, would require CCPs to agree on risk management arrangements that are transparent to all market users, trading platforms and regulators.
“Although some progress has been made on interoperability, there is insufficient transparency in how new risks caused by interoperability are managed,” Chan said in a statement. “The arrangements between interoperating CCPs must be robust, and complete transparency in how CCPs manage their exposure to each other is important for systemic safety.”
EuroCCP, a subsidiary of US post-trade utility the Depository Trust & Clearing Corporation, currently clears for pan-European multilateral trading facilities Turquoise, NYSE Arca Europe and SmartPool. It has also been appointed to provide CCP services to the European operation of US block trading platform Pipeline, and has teamed up with post-trade processing firm Omgeo to develop a CCP for hedge fund transactions.