Peter Norman, a DTCC-CSFI Post-Trade Fellow and author of “The Risk Controllers: Central Counterparty Clearing in Globalised Financial Markets” offers a preview for central clearing in the year ahead and after recent developments among blocked merger plans and ongoing regulatory delays.
On the face of it, 2012 should be a banner year for clearing and CCPs. Mandatory clearing of OTC derivatives, as prescribed by the G-20 nations, is scheduled from the end of 2012. Regulations to support this prospective business bonanza are progressing, albeit with delays, towards completion in the US and Europe.
At the same time, prospects have rarely been more confusing even though some long open questions have been resolved recently. Following compromises among the European Union’s member states and in the European Parliament, the EU’s European Market Infrastructure Regulation (EMIR) draft to regulate central counterparties (CCPs) and OTC derivatives should clear all remaining legislative hurdles and become law by Easter. On February 1st and as expected, the Commission rejected the planned merger of Deutsche Börse and NYSE Euronext as anti-competitive.
But these decisions still leave a very uncertain outlook for clearing and the wider post-trade sector.
Take Deutsche Börse and NYSE Euronext. When launched, their merger appeared part of a global consolidation of exchanges and clearing structures. Since then, not only have other high profile exchange mergers failed, but plans for clearing OTC derivatives point to fragmentation of a global business, with countries like Poland and South Korea planning their own OTC derivatives CCPs.
It appeared at one point that the DB – NYSE Euronext merger might bring structural changes in the EU by being made conditional on opening up clearing by Eurex, Deutsche Börse’s highly profitable vertical silo for trading and clearing derivatives, to others.
With the merger now blocked, will Deutsche Börse dig in its heals and admit no relaxation of its vertical silo structure? If so, NYSE Euronext will likely follow suit. How then will the London Stock Exchange Group react? It is seeking to acquire LCH.Clearnet, the multi-national clearing house. If that takeover goes ahead, will the LSE Group continue to support a “Swiss cheese” (full of holes) approach to clearing that would allow other trading platforms to access what will have become its vertically structured clearing facilities?
The activism of the EU competition authorities has been a new factor affecting the post trade sector in the past two years. Another is the growing involvement of central banks with CCPs. The European Central Bank’s policy aim of locating clearing houses that handle important volumes of euro-denominated instruments in the euro zone prompted the UK Treasury to initiate proceedings before the European Court of Justice. It was one factor behind the December 2011 EU summit bust-up between the UK and the other member states.
There is potential for more bad blood here. Could the near-pariah status of the UK and City of London in parts of the EU combine with the frustration of Deutsche Börse’s ambitions to trigger a backlash in the European Parliament and Council of Ministers against UK-supported legislative initiatives, such as MiFID II, which seek to open up silo structures?
Clearing is no longer an arcane backwater. It is the stuff of high politics, which must alarm many post-trade professionals. Thoughts of consolidation have given way to fragmentation, confrontation and politicisation. In these volatile circumstances, the sooner the Financial Stability Board completes work on a credible resolution regime for CCPs that run into in trouble, the better.
Peter Norman is the author of “The Risk Controllers: Central Counterparty Clearing and Globalised Financial Markets”, published by John Wiley & Sons [ISBN 9780470686324].
