Central counterparty (CCP) clearing firms will most likely face a capital requirement level set by regulators that will “hurt but not kill” the CCP, says Diana Chan, CEO of European cash equities clearing house EuroCCP, exclusively to Euromoney.
“The amount of capital a CCP would need under new regulations is definitely the ongoing concern, as this also includes levels set on minimum operating costs for a minimum period for orderly wind downs in the event of a CCP failing to attract customers and therefore needing to make an exit,” says Chan. “There is a provision that European Securities and Markets Authority (ESMA) and European Market Infrastructure Regulation (EMIR) are working in the context of a default waterfall.”
“This means that if a bankruptcy occurs, like in the case of MF Global and if the CCP (in closing out MF Global’s open obligations) has exhausted the margin money and funds contributed by MF Global, then it is looking at whether the CCP would have to put up a portion of its capital to fill any loss before going into loss sharing with the rest of the surviving members. So while that amount is not yet defined, it is likely that it will be an amount to make it hurt but not kill the CCP,” adds Chan.
EuroCCP is the European clearing subsidiary of the US market infrastructure provider The Depository Trust & Clearing Corporation (DTCC) and was established in 2007 and it clears equities from 17 European markets and from the US, as well as exchange-traded currencies and depositary receipts.
It is also the only built-for-purpose pan-European CCP, which operates at-cost and has a board of directors comprised mainly of its users.
“There are a couple of things that distinguish us. We are not affiliated or owned by another exchange,” says Chan. “EMCF, a European cash equities clearing company, is 22% owned by Nasdaq, LCH.Clearnet has shareholdings in Euronext/LME and the LSE has made a bid to own LCH. Meanwhile all the other players are parts of verticals, such as Eurex, CC&G.”
In October this year, it was revealed that EuroCCP received nearly €5 million in April from the DTCC in order to meet UK regulatory capital rules, which takes up the total extra capital it received from its US parent group, to €75 million.
However, the business structure of EuroCCP could mean that regulatory capital requirements will not hurt as much.
“Our business model is very different, as EuroCCP has its own board of directors, comprised largely of EuroCCP participants,” says Chan. “This is unique as we are user-governed. Our priorities and strategies are approved by the board, which are the users of the system. Other CCPs operate in a different way, where they have trading platforms on the board. Investor users could be interested in making money to get dividends, whereas for us, it’s completely different that way.”
For the full interview, check out the January issue of Euromoney magazine.