The transition of OTC swaps from a bilateral to a centrally-cleared model is encountering some speed bumps in the form of opposition by some market participants to what they view as attempts by exchanges to bundle post-trade processing services.
Exchange operator CME Group has proposed a rule, now awaiting action by the Commodity Futures Trading Commission, that would require all users of CME clearing services, including swap dealers and major swap participants, to permit data for swaps cleared by CME’s derivatives clearing organization (DCO) to be reported to CME’s own swap data repository (SDR).
The rule would effectively require dealers and participants to use CME’s SDR to satisfy certain swap data reporting obligations, dealers say.
Dealers are concerned that the proposed rule would eliminate reporting counterparties’ choice of SDR, in conflict with the principles of fair and open access to clearing services, and regulatory prohibitions on anti-competitive practices by DCOs and SDRs.
CFTC regulations “prohibit an SDR from tying or bundling the offering of mandated regulatory services with other ancillary services that an SDR may provide”, said Craig Goodrich, managing director and senior counsel at Deutsche Bank, in a comment letter.
A fragmented SDR environment would undermine the ability of reporting counterparties to comply with reporting obligations in non-U.S. jurisdictions, noted Goodrich, including obligations arising as a result of Emir—Europe’s similar regulation to that of the Dodd-Frank Act in the U.S. which is attempting to push all standardized OTC trades through centralized clearing—and expected reporting obligations on other regions.
Fellow exchange operator IntercontinentalExchange defended the proposed CME rule, saying in a comment letter that it will not prevent users from choosing among various SDRs.
“The core argument is competition,” said IntercontinentalExchange. “The DTCC [Depository Trust & Clearing Corporation] would prefer to be the single SDR for all swap asset classes, whereas CME seeks to capitalize on the existing connections between its SDR and clearing house.”
The European Securities and Markets Authority (Esma), the pan-European regulator, expects about 11 applications for trade repositories, each likely submitting a document between 200 and 1,000 pages long, according to a report on staffing and resources required for Emir that was submitted by Esma to the European Parliament last month.
“The industry and regulators alike struggled with the pace of regulatory changes mandated by politicians last year, but it looks like Esma intends to meet that challenge head on in 2013,” said Christian Voigt, business solutions architect at Fidessa, in a blog. “Let’s hope the industry will too.”
Exchanges are boosting their investments in post-trade processing, both to garner additional revenue and to address the long-term issues of reducing systemic risk embedded in the Dodd-Frank Act, MiFID II, Emir and other legislative and regulatory initiatives that are an attempt to reduce risk and increase transparency following the financial crisis.
Nearly all of the major exchanges have their own clearing houses—the so-called ‘vertical silo’ model—where trades made on the exchange are automatically channeled to a bourse’s own clearing house.
The European Commission, in its most recent MiFID II proposals, set out a more horizontal approach—allowing ‘open access’ to competitors’ exchanges—whereby clearing structures would be able to centrally clear products for various exchanges and execution facilities.
Examples of vertical silos for futures and derivatives include IntercontinentalExchange through ICE Clear Europe, CME Group with CME Clearing Europe and Deutsche Börse with Eurex Clearing, as well as various national clearing houses for the equities markets.
Horizontal clearing structures, which encourage market competition and supports new market entrants, include LCH.Clearnet, SIX x-clear, the Options Clearing Corporation and the Depository Trust & Clearing Corporation in the U.S..
