Against the background of a shifting regulatory framework, the European central counterparty (CCP) race for the derivatives market is heating up. NYSE Liffe is considering dropping out of the race altogether, whereas Eurex Clearing and IntercontinentalExchange (ICE) are planning to launch their offerings by the end of the month deadline, which was set by the European Commission earlier this year.
In February, the industry agreed to meet the Commission’s deadline to establish a European CCP for the credit default swap (CDS) market by the end of July. The European regulatory community is concerned that reliance on a CCP out of its jurisdiction will throw up a number of issues regarding regulation, supervision and monetary policy. The regulators are keen to have direct access to the CCPs and for the CCPs to be accountable to them regarding their operations, should problems arise.
The introduction of CCPs to the CDS market is aimed at reducing counterparty risk, increasing transparency and gaining operational efficiencies. This is in keeping with the G20’s aim of overhauling market infrastructures and the regulatory framework in order to tackle the issues that arose during the financial crisis.
In response to this call to action, a number of contenders for the CCP throne stepped forward, namely ICE, Eurex and NYSE Liffe. ICE has already launched a CCP for the US market in the form of ICE Trust, which began operations in March and has since attracted fairly healthy clearing volumes. In May, ICE announced that it was in discussions with regulators and market participants to launch a European version. It is still currently in negotiations with the UK Financial Services Authority (FSA) to launch by the end of July.
Eurex declared out of the US market in March, following the launch of ICE Trust, and has since focused on its European intentions. Thomas Book, a board member at Eurex, said at the time: “We would like to focus on a European Union solution with global products while other competitors are actively going for separate US and European solutions. Our priority is not to be the chosen one in the US, but to be the chosen one in Europe.” To this end, it is currently in the process of testing its Eurex Credit Clear system with 13 pilot banks.
NYSE Liffe, on the other hand, has indicated that it is now reconsidering its move into Europe. It has placed the BClear project, which launched last December, under review. Bclear, which is owned by NYSE Euronext, became the first CDS clearing counterparty to offer CDS clearing to Europe at the end of December. The platform covers the Markit iTraxx Europe, Markit iTraxx Crossover and Markit iTraxx Hi-Vol indices, but has failed to gain significant traction in the market and has not cleared a single contract.
This progress and its implications for the derivatives markets are likely to crop up during discussions within the regulatory community this week, as European regulators conduct talks ahead of September’s G20 summit.
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