Central clearing counterparties need to develop new membership models according to industry participants as the sellside faces capital constraints and more products shift from the over-the-counter market into CCPs.
Corentine Poilvet-Clediere, head of regulatory strategy and post trade, Europe, at the London Stock Exchange was on a panel at a City & Financial Global conference on MiFID II on Tuesday. She said: “We are receiving more requests for direct membership but that will not happen overnight. We will develop innovative account structures and membership models.”
Poilvet-Clediere gave the example of a sponsored or hybrid membership model where buyside clients can post margins directly with a CCP, but a sellside firm acts as a guarantor in case of default. CCPs have default funds, a pool of member contributions, to protect against defaults and the failure of clearing members alongside the CCP’s own capital so that CCPs can continue to provide uninterrupted clearing.
Last October market-maker Citadel Securities (Europe) Limited become the first non-bank clearing member of SwapClear, an interest rate derivatives clearing service from LCH.Clearnet, the London Stock Exchange’s clearing business.
Paul Hamill, global head of FICC for Citadel Securities, said in a statement: “We are grateful to LCH.Clearnet for their partnership, and are proud to represent one of the few sources bringing much-needed additional liquidity to the market. Becoming a self-clearer further strengthens the foundation of the business and our commitment to the swaps market.”
In March Eurex Clearing, Deutsche Börse’s central clearer, said it was giving direct access to the buyside in a new model which should reduce fees for clients while generating higher returns for clearing members. The German clearing house has launched ISA Direct, a new membership type that allows buyside firms to have a direct contractual relationship with the CCP. The targeted clients are regulated clients domiciled in a member state of the European Union and Switzerland including insurance and financial services companies, pension funds and asset managers.
Daniel Berner, chief investment officer of Swiss Life Switzerland, said in a statement: “ISA Direct alleviates the regulatory requirement to centrally clear over-the-counter 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.”
The relationship is facilitated by a clearing agent, who has to be an authorised clearing member. However clearing agents face lower capital requirements as the ISA Direct member maintains legal and beneficial ownership of the collateral they place at the CCP. The clearing agent covers the default fund contribution to the CCP and default management obligations as many buyside firms generally have restrictions against mutualizing assets in a combined risk pool.
Matthias Graulich, member of the Eurex Clearing executive board, told Markets Media in April: “The new model should make fees more attractive as clearing members can lower their leverage ratios and risk-weighted assets and generate more attractive returns on equity, while at the same time being able to reduce fees for the client. Some firms may rethink their decision to exit clearing and we understand that some of those discussions are happening at the moment.”
Che Sidanius, director of financial services at KPMG, predicted at the conference that more CCPs will open up to the buyside.
Adam Jacobs-Dean, director, head of markets regulation at the Alternative Investment Management Association, agreed at the conference that the buyside would like to see a direct clearing model.
AIMA said in a letter to the European Commission last August: “AIMA members have concerns about the costs of clearing member services and would be grateful for future European Commission work to develop an alternative mechanism(s) for direct access by buyside entities to a CCP under Emir.”
In February the European Association of CCP Clearing Houses asked the European Commission to consider allowing highly creditworthy buyside firms to act as potential investment counterparties to central clearers.
EACH said certain buyside firms should be allowed to enter into repo transactions with CCPs for cash balances against high-quality liquid assets. “This would allow CCPs to further diversify their investment counterparty risk profile while providing additional liquidity to the repo market for buy-side institutions,” added EACH.
EACH continued that CCPs should be allowed to further diversify the range of secured investments to money market funds, under certain conditions, in order to release some pressure from the repo market.
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