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by Steve Letzler

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  • At a recent conference held by EuroCCP for clients in London, participants representing a variety of firms exchanged ideas on the challenges in today’s equities clearing landscape in Europe.

    The March event, titled The Future of Clearing, featured a panel of top industry experts, several of whom expect European equity trading to grow substantially over the next year or two. More than 80 representatives of financial firms from seven countries in Europe and the United States attended the conference.

    Although centered initially on issues surrounding high-frequency trading, the discussion quickly moved to an urgent concern for European market participants: interoperability among equities central counterparties (CCPs). Panelists and conference participants agreed that CCPs need to find a solution for interoperability quickly on their own; otherwise, the market would force a solution on them.

    Range of issues

    One panelist noted that if the industry could fix issues surrounding post-trade processing and creating a consolidated tape, “then we should be looking to at least double the size of the equity market.”

    It was further suggested that there was an opportunity for equities trading in Europe to grow to volume levels comparable to the U.S., but the major challenge in doing that was efficient clearing, which requires effective interoperability among CCPs. Also mentioned was that the total cost of trading for high-frequency traders was prohibitively high in Europe at the moment.

    The experts believe that 2010 will be the year for multi-CCP interoperability, that clearing is still a relatively young industry for cash equities, and that once full interoperability is achieved, trading volume will “explode.”

    One expert explained that harmon-ization of securities laws among the member states of the European Union, while a valid objective, was not necessary to begin interoperability. “CCPs simply need to agree on how to work together.” The expert also noted that it was not natural commercial behavior to let competition into one’s market, particularly if a service provider is not sure it would be competitive. Others shared the same opinion, with one participant commenting, “We live in a world of competition, and people will just have to live with it.”

    Another participant felt regulators “agree conceptually” with the idea of interoperability, but nothing would happen without harmonization of regulation over CCPs. A number of the panelists said they felt regulators would intervene in the interoperability issue since “no one can keep pretending that the Code of Conduct works.”

    Diana Chan, CEO of EuroCCP, said EuroCCP would continue to work with the three other CCPs in multi-CCP interoperability negotiations to introduce competitive clearing to the equities market in 2010.

    One expert noted that the industry was pressuring CCPs to become interoperable, and said that true competition would probably lead to a period of consolidation. Further comments suggested that there would have to be a number of agreements in place because CCPs were so different in their business models.

    Touching on the complicated nature of multi-CCP interoperability and unbalanced exposure for CCPs, Chan said there was a need for additional collateral from users but the amount would not be compar-atively significant. In a recent study by the European Commission, it was found that typically €500 to €700 million of margin is posted with cash equity CCPs for each day of trading across Europe, so even if the level of margin requirement doubled, the additional funding cost for individual firms would be comparatively small.

    The panel, in summing up the results of the discussions, noted that “there is overwhelming pressure to drive efficiency in clearing systems” and that “interoperability needs to happen.”

    ‘Important industry topic’

    Lilia Tira, director of Product Management for EuroCCP, noted that attendance for the event was excellent and the feedback on the discussion has been highly positive. “This is obviously an important topic for the industry, and everyone seemed very focused on dealing with the issues at hand.”

    The March client conference was the second sponsored by EuroCCP. In January, EuroCCP held a conference on its white paper proposals on how to manage inter-CCP risks associated with interoperability.

    Since the March event, significant progress has been made on interoperability. EuroCCP, LCH, SIX x-clear and EMCF have been working together and consulting with trading venues and representatives of AFME (Association for Financial Markets in Europe) to agree on a model to manage inter-CCP risks arising from interoperability.

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