EuroCCP calls for pan-Europe accord on clearing

By Jane Baird

LONDON, Jan 13 (Reuters) - EuroCCP on Wednesday called for all European clearing houses to break an industry impasse by agreeing on an industry-wide convention to allow brokers to use any of them to clear either side of a trade from any exchange.

'Clearing is too expensive and there are too many pots of collateral, and all of it is inhibiting growth of trading in Europe,' said Diana Chan, chief executive of EuroCCP, the European offshoot of the Depository Trust & Clearing Corp (DTCC).

A number of Europe's clearing houses were created and owned by national exchanges, which have been reluctant to direct trades to rival operations.

In the United States, by contrast, rival trading platforms all send trades to the DTCC as the legal monopoly on clearing and settlement of cash equities.

The London Stock Exchange recently cited data that U.S. trading has been more than double the value in Europe, despite its bigger grosss domestic product, in a plea for so-called 'interoperability' between clearers.

The European Commission in 2006 negotiated a voluntary code of conduct to help increase user choice of clearers, but it has failed to make much progress.

'Our objective is to stimulate the discussion to move the interoperability debate forward,' Chan said. 'Central counterparties (CCPs) have to collectively work on a solution.'

The industry is now under pressure to come up with a solution ahead of an EU law, which is expected to tighten regulation and force increased competition.

In April 2009, the DTCC scrapped a plan to merge with London-based LCH.Clearnet and has since been seeking alternative strategies to increase its business in Europe.



BILATERAL DOMINOES

Chan said EuroCCP has been working towards interoperability through reaching bilateral agreements with three other clearers -- LCH.Clearnet, X-Clear and European Multilateral Clearing Facility (EMCF).

Regulators have recently called a halt to such efforts, however, to consider fears they could increase system-wide risk.

A group of CCPs linked by bilateral agreements cannot assess their overall risks, because each accord is a confidential contract, the EuroCCP discussion document said.

'There are concerns that a CCP could be affected by the failure of another CCP with which it has no direct link, through a third CCP that both CCPs interoperate with,' the paper said.

A clearing house stands between both sides of a trade to guarantee that it is completed even if a dealer such as Lehman Brothers collapses.

While EuroCCP plans to proceed with bilateral efforts, it recommends ultimately a convention among all CCPs, providing public information on how risks are managed, Chan said.

To cope with the risk exposure to other CCPs, each clearing house should augment its own default fund and collect any additional amount required from its dealer members, rather than requiring each other to pay margins, EuroCCP recommended.

As a result, 'each CCP's risk management remains self-contained. There is consequently no systemic contagion, and each regulator needs to monitor only the CCPs in its own jurisdiction,' the paper said.

With full interoperability, a dealer could choose to be a member of only one CCP, which might result in lower funding costs than supporting a number of CCPs, Chan said.

Furthermore, trading platforms should remove all commercial barriers to clearing, which is likely to require legislation, EuroCCP recommended.

'The commercial interests of trading venues to favour certain CCPs and withhold trade feeds to others impede interoperability from delivering the real benefits of competition,' the paper said, adding that it makes returns on the necessary investment inadequate.

For the long term, the paper recommended CCPs adopt a common netting arrangement to reduce risk exposures.

(Editing by David Cowell) Keywords: EUROCCP/CLEARING ([e-mail], Reuters Messaging: [e-mail], [phone]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.