by Helen Cunningham
DTCC’s global expansion includes an increasingly robust presence and profile across Europe. One driver of the company’s momentum in the region is its European clearing subsidiary, EuroCCP, which went live in 2008 and now operates in 19 markets.
Since entering the fragmented European market for equities clearing, EuroCCP has established a reputation for boldness and innovation. It has played a major role in driving down costs; brought creativity and competition to this space; and taken a leadership position on the issue of interoperability among central counterparties (CCPs), which has the potential to upend the business of clearing in Europe.
“From day one, our goals have been to lower the cost and increase the efficiency of equities clearing in Europe – and to give trading firms a choice of CCPs,” said Diana Chan, EuroCCP CEO. “We are committed to forging a more integrated, competitive market infrastructure in Europe, which will make it more efficient and safer to trade across national borders.” EuroCCP’s accomplishments have earned it a seat at the table with the region’s major advisory and consulting groups, as well as industry recognition. It was voted the region’s Best Clearing House in 2010 and 2011 by a panel of 50 market leaders and experts brought together by Financial News.
Diana Chan, EuroCCP CEO
A welcome disruption
EuroCCP entered Europe in 2007 and went live in 2008 with a bold stroke. It slashed the price of equity clearing, offering a fee of 6 euro cents per side compared with the prevailing regional average of well over 20 cents.
The company’s pricing reverberated across the markets – and sent the fees of direct competitors tumbling. Today, according to Chan, the highest price charged by a direct EuroCCP competitor has fallen 90% from its pricing back in 2007.
The model and the brand
Another distinguishing characteristic of EuroCCP is its operating model. The company is an industry-owned business, rather than profit-driven, with a clearing platform open to the region’s many equities trading venues. In addition, by the end of 2012 it is expected to be the only CCP in Europe not controlled by a national exchange.
EuroCCP also brought to Europe the power of the DTCC brand, whose U.S. equity clearing subsidiary has, for almost four decades, been serving as a critical infrastructure to the world’s largest equity market. DTCC has extensive experience managing counterparty risk when firms fail – without disrupting the markets. Equally important, its robust business continuity management encompasses EuroCCP, giving the European subsidiary another competitive advantage.
The case for interoperability
To create market conditions conducive to choice of clearing venues, EuroCCP became an early champion of interoperability among the region’s CCPs.
With interoperability, more than one CCP can clear for a trading venue, which allows firms to select the CCP that best meets their requirements. As interop-erability creates credit exposure between CCPs, European regulators have established stringent inter-CCP risk management requirements as a condition for interoperating.
Interoperability offers multiple advantages, starting with capital efficiency. When firms can concentrate their trades at their CCP of choice, rather than being required to use different CCPs designated by each trading venue, it reduces their overall collateral and margin requirements. It also cuts settlement costs by allowing them to settle once with their CCP of choice, instead of with multiple CCPs.
Risk reduction is another advantage. Interoperability allows firms to choose the CCP with the risk profile best suited to their business. What’s more, interoperability gives trading venues built-in fallback plans, according to Chan. If one CCP exits the business, the trading venue is already connected to other CCPs that can clear its trades. Connecting to one CCP also reduces operational complexity for clients.
Ideas into action
To illustrate how interoperability can reduce cost, mitigate risk and deliver efficiencies, EuroCCP has mounted a sustained informational campaign that includes publishing white papers, participating in industry forums, meeting with regulators and market participants, and raising awareness of the issue in the media. Chan, who has earned a reputation as a compelling voice for interoperability and competition among clearing platforms, has been invited onto key industry bodies, including the European Securities and Markets Authority (ESMA) Post-Trade Consultative Working Group. She is also an alternate member of ESMA’s Stakeholders’ Group.
Most important in making the case for interoperability, EuroCCP put the concept to the test and proved its viability.
Mark Hemsley, CEO of BATS Chi-X Europe
A line in the sand,
In July 2011, BATS Europe implemented a multiple-CCP option with EuroCCP and two other CCPs. The model, called “preferred clearing,” was the wedge that pushed open the door to full interoperability, according to Chan.
“Preferred clearing was a daring and innovative move,” she said. “It was not the optimal solution, but it definitely got the ball rolling.” The drawback was that unless both parties of a trade had selected the additional CCPs, the trade would by default go back to the incumbent CCP, which did not interoperate. Even so, the tri-CCP option marked an indelible line in the sand for choice of clearing venues.
“It was the first example of multi-CCP interoperability in Europe’s equities markets; it met the requirements of regulators; and it demonstrated beyond doubt that there is demand for this model among trading firms,” said Chan. What’s more, several big global firms on the BATS Europe platform (Bank of America Merrill Lynch, Credit Suisse, Morgan Stanley and Nomura, among others) selected EuroCCP as their CCP of choice.
The message was not lost on the marketplace and, within two months, Chi-X announced that it would introduce full, four-way interoperability including its incumbent CCP – true competitive clearing. Following the merger of Chi-X and BATS Europe in December 2011, both venues went live on January 6, 2012, with a choice of four interoperable CCPs.
“Multilateral clearing interoperability has been a key goal for us in radically improving European equities clearing infrastructure,” said Mark Hemsley, CEO of BATS Chi-X Europe. “With CCP competition comes reduced clearing costs, as well as margining and operational efficiencies for customers, and these benefits will be further enhanced as incumbent exchanges progress with interoperability for their platforms.”
Three firms made the switch to EuroCCP on the first day of four-way interop-erability and, by early February after more firms made the switch, EuroCCP was clearing 40% of the trades for these platforms.
Without doubt, EuroCCP’s presence has driven down the cost of clearing in Europe and reframed the debate about optimal market structures for the region. In fact, the company can lay claim to making significant inroads to advance policymakers’ vision for a unified regional capital market. Europe’s CCPs have successfully delivered interoperability and choice of clearing providers to the region. The problem is that a number of trading venues in Europe are still not open to it. “Interoperability is half of what is needed to offer firms a choice of CCPs,” said Chan. “The other half is for the trading venues to give access to all the interoperating CCPs to clear their trades.
The marketplace will fully realize the benefits of competition only when all interoperating CCPs have access to the same trading venues.”
In recent months, Equiduct and Burgundy became the latest platforms to introduce competitive clearing, with plans to launch interoperable CCP clearing later this year, subject to regulatory approvals. These additions will bring to 10 the number of platforms EuroCCP serves.
“Creating a unified capital market in Europe has not been a straight path,” said Chan. “But interoperability is a driving force toward that goal and, as more trading venues adopt it, the landscape for European equities trading is being gradually transformed,” said Chan. “It’s an exciting time.” @