Brokers are calling for the language within EMIR around non-discriminatory access to clearing houses to be more ‘prescriptive’ to ensure fair competition among execution platforms.
“There needs to be prescriptive text [in EMIR] so ESMA can’t mandate clearing [of some OTC instruments] until the market structure is in place to support a competitive solution,” said Scott Fitzpatrick, GFI EMEA’s Client Relations Director and Director & Council member at the WMBA.
As it currently stands, and without this clarification, it is feasible that newly identified clearing eligible instruments could be mandated for central clearing before the clearing houses have completed their review process of the execution platforms actively trading these products. This would mean that the process of mandatory clearing through approved Trading Venues would be implemented prior to all suitable [incumbent] venues being approved for clearing.
The potential and unintended consequence of this arrangement is that clearing houses, which mostly operate as part of large exchange groups, will approve their own execution platforms (owned by the parent group) first and could even delay the review and approval of independent execution platforms such as those provided by GFI, or other brokers.
“We don’t want to create a cycle of activity that enables [unfair competition] to happen,” said Fitzpatrick. Any delay in obtaining access to a CCP could cost a broker/execution platform valuable business and liquidity, which is difficult to regain due to the highly competitive nature of the OTC derivatives market, he noted. Also, it is unknown what any escalation process for execution platforms to air concerns to the regulators would look like and additional delays caused by this process would likely only cause additional delays and thus loss of market share.
Clarifying the non-discriminatory clause and calling for the review processes to precede the mandating of instruments for central clearing would make it difficult for a CCP with vested interest in an (its own) execution platform to give preferential treatment thus limiting anti-competitive action.
This issue ties in with the ongoing vertical silo and open access debate where the large exchange groups are pushing to maintain closed access to keep volumes within their exchange groups silos from execution to clearing.
Open access among clearing houses is reportedly included in the most recent draft of the Markets in Financial Instruments Regulation (MIFIR).
The expectation that the next phase of EMIR, which will review the technical, operational and implementation requirements, will be the opportunity to iron out these details on CCP access and hopefully tackle this and many more potential and unintended consequences of new regulation.
