EuroCCP plan published
The European Securities Forum, the group of 24 of Europe’s largest investment banks, has published a blueprint outlining a target model for introducing a single, pan-European central counterparty (EuroCCP) by the end of this year.
The blueprint stems from frustration at the breakdown of talks last year between existing European counterparties aimed at producing a EuroCCP. At the time, some Forum members suggested creating anew entity, a move since rejected as being technically too different.
Instead the ESF is trying to convince existing European clearing houses to work together and create a single counterparty. According to the blueprint, it seeks to solve concerns that Plan A, or the ‘tri-party’ proposal- co-operation between Europe’s major CCPs, the London Clearing House, Eurex and Clearnet work together- may either be unfeasible or too drawn out.
ESF’s proposal has been sent to all interested parties and replies are expected by the end of the month. In addition it is lobbying the European counterparties to try and produce a workable solution.
The blueprint aims to shape discussion and is not a pre-determined model for functions such as risk management, netting and routing. At the basis of the proposal is a not-for-profit monopoly resulting from co-operation, not a clearing house built from scratch.
According to Darren Fox, senior manager at the ESF, the approach is marginally different to the failed negotiations last year. “Last time the initiative was with the service providers. This time we’ve said ‘this is what we want as an industry,’” he says. If the approach is unsuccessful, the ESF will issue a formal request for proposal.
ESF’s blueprint draws an analogy with the US market which had seven CCPs until the creation of the National Securities Clearing Corporation in the 1970s. “If the US experience is any judge, benefits of CCP integration have far exceeded expectations,” it says. But in making the analogy, the paper takes a dig at the three European CCPs’ historic lack of co-operation.
“Opposition from the infrastructure, or processors, to reforming the system in the US has been historical. Despite clear and compelling evidence of reduced clearing fees, lower and optimised clearing fund contributions, lower costs of operating one CCP versus many, improved regulatory reporting and surveillance, and savings to members, both large and small… the infrastructure entities which would be absorbed into a single national system opposed the elimination of even one CCP,” it says.
The ESF’s model prioritises equities as it believes this is the sector requiring immediate attention but the European CCP is intended to embrace all financial instruments including fixed income and listed and OTC derivatives.
In his introduction to the document, Pen Kent, executive chairman of the ESF, warns of the consequences of inaction. “Due to the widely-expected increase in trading in European securities, especially in equities, it is felt the combination of existing inefficiencies and a rapid rise in volumes could cause a serious capital market disruption.”
Copies of the blueprint are available from the EuroCCP project office in Frankfurt. Tel: +49 69 910 82492.