Clearing in Europe - interview with Eurex's Marcus Zickwolff

“Our EMIR authorisation is an important milestone,” says Marcus Zickwolff, senior advisor at Eurex Clearing. “It confirms full compliance of our clearing offering with the European Market Infrastructure Regulation (EMIR) rules. Now we can provide our clients and members with the clarity and reassurance needed to undertake their readiness planning and on-boarding preparation for the looming clearing mandate in Europe.”

I had originally met with Marcus at the Marketforce, Future of Clearing and Settlement conference in West London in March. It was doubtless with some relief that he was able to update our conversation with the opening quote here. At the time of our meeting, Eurex’s application to be an EMIR authorised central counterparty clearing house (CCP) was in limbo. The application for re-authorisation under EMIR had been fully and successfully submitted by 11 October 2013. The application hit a stumbling block, however, when the college of regulators established to oversee Eurex’s application did not majority approve it, despite positive feedback from BaFin, Eurex’s National Competent Authority in Germany.

That hurdle, however, was cleared and on 10 April 2014, Eurex became the fourth CCP in Europe to be authorised under EMIR. I approached the German regulator BaFin in search of answers as to the process, but was informed that ‘the approval process is confidential.’ No matter, the picture is a lot clearer for Eurex now than it was in March.

Other areas of interest in the clearing space, however, remain. Marcus is an interesting man to discuss the topics with. Not only is he involved with the processes of a European CCP, he is also the chairman of the European Association of CCP Clearing Houses (EACH), an organisation that represents European CCPs and is constantly engaged in discussion with regulators and policy makers to best serve the interests of the clearing community.

We started our conversation by talking about Deutsche-Boerse, the company of which Eurex is a part. I enquire as to the benefits of Deutsche-Boerse having both a CCP, in Eurex, and a central securities depository (CSD) in Clearstream, under its umbrella. “The main advantage is the unique chance in the area of product innovation,” says Marcus. “If we want to combine trading of a product with clearing and collateral management services, like we do with our GC pooling market for example, it eases the decision making process to have all of the systems and business streams under one roof. We can introduce new products much more efficiently and this is a great advantage.”

“GC Pooling is a secured money market. It offers electronic trading, there is a CCP so that all transactions are secured and the trading and clearing are linked to the collateral pools at Clearstream - Clearstream Banking Frankfurt, the local domestic CSD and also the ICSD. The icing on the cake here is the ability to be able to re-use the collaterals. The securities for the money market operations are gathered and the cash giver can re-use received securities for open market operations via the Bundesbank/ECB. This keeps the wheels spinning. The total outstanding volume is around EUR150bn - almost half of the money market activities in Europe are done via GC Pooling.”

The Deutsche-Boerse group has also recently branched out into another area of financial market infrastructure with the addition of a trade repository, REGIS-TR, which is half owned by Clearstream. It is all part of the evolving post-trade landscape.

In that landscape, CCPs are very much a vital cog. When I met with Marcus, he had just delivered an address in which he commented that, “robust CCPs are the key to market safety and integrity.” Indeed they are, acting as they do as the buyer to every seller and the seller to every buyer. A CCP failure could be potentially catastrophic. What then, the impact of competition in the space?

“It is an interesting question,” says Marcus. “I think that it has always been a regulatory goal that there will be no competition on risk management – that is why we have very tough regulation around risk management. This point certainly, though, does make competition on risk management less attractive because you have to add additional risk management procedures to the system.

“I think that competition between exchanges is well defined for the equities markets and there are models in place. There are always different kinds of clearing members that want to use one or the other CCP. Speaking from a German perspective, we have a lot of members clearing German equities that are not engaged in clearing in other markets. They just want to use their German CCP – there is no desire to use another CCP, which might be different for more international players.”

Gaps in the mandatory clearing model, a global initiative in the wake of the 2009 Pittsburgh G20 summit, have appeared in some jurisdictions of late, most noticeably in Korea where there was a default by a clearing broker at KRX that left the non-defaulting participants with a far heftier tab than they had anticipated in the occurrence of such events. “In Europe, EMIR has introduced several new layers of protection in order to avoid any spill-over effects from defaulting clearing members and in order to increase the integrity of markets,” counters Marcus. “First, the liable equity capital of CCPs was raised. In addition, also the CCP has to contribute to the default fund – the so-called ‘Skin-in-the-Game’. That is an amount that should cover such losses as occurred at KRX.”

This raises important questions about capital at CCPs. “As CCPs compete in a global market, at EACH we believe that the European Commission should not deviate from the upcoming Basel proposal. This should ensure a robust and competitive landscape for CCPs across the globe.”

It is yet another challenge for clearing houses in the post-crises era. Perhaps the biggest, however, is the requirement to clear over-the-counter (OTC) trades, those conducted off exchange. “You have to develop your own service model to adapt to these markets, as OTC clearing is very different to clearing listed derivatives,” explains Marcus. “We have tried, however, to combine the systems that we have in place for listed derivatives with our EurexOTC Clear service. What we do is to build upon the existing OTC infrastructure, so that market participants can trade OTC instruments like they did in the past, then we step in with our affirmation and confirmation tools and once the trade is confirmed, we will receive the trade into our clearing house and then we will use our infrastructure to clear it.

“Having said that, it is not so easy because in the past we have always had our products on an exchange – for example, when we receive the trades from an exchange we know that we can trust the prices. There are procedures in place and the price is always checked by the exchange. When we receive OTC trades, we have to check the accuracy of the pricing ourselves before we can step in and clear the trade. So it is a different process and we have to enhance our service as a clearing house.”

Another regulatory challenge is one of extraterritoriality – to what extent firms will have to comply with the rules and regulations laid out by overseas regulators. “EACH does not have a formal position on extraterritoriality,” says Marcus. “We, however, support global equivalence of CCP regulation as CCPs, especially those active in derivatives businesses, compete on a global basis. We believe there are numerous differences between EU and US requirements for CCPs that could distort this global competition, such as capital requirements, risk management standards and membership requirements.”

As competition evolves, so do the policies and requirements of CCPs. Authorisation under EMIR is, for European CCPs, the first target and Eurex no longer has to worry about that, instead shifting its focus to the regulatory technical standards that will be issued by the European Securities and Markets Authority (ESMA), that should be issued later this year.

“There are a number of international CCPs including us which are vying to clear OTC derivatives,” adds Marcus. “In my opinion, we will have at least two CCPs per asset class which will clear OTC transactions in each respective asset class.” His prediction looks likely to be true in Europe, with a further 18 CCPs, at the time of writing, awaiting regulatory approval under EMIR.

For Eurex, there is the security of knowing that their application process is done. They can now concentrate on the challenges further down the line.

Tags: CCPESMAEMIREurexClearingClearstreamcompetitionRegulation