Eurex Clearing has reinforced its belief for the need of a securities lending central counterparty (CCP) in an open letter to the International Securities Lending Association (ISLA).
In a response to ISLAs initial report, A Central Counterparty in the European Equity Securities Lending Market, Dr Thomas Book, a member of Eurex Clearings Executive Board, said Eurex Clearing is confident that its CCP model offered for the securities lending market will deliver the appropriate answers that meet the high level guidelines set out in the initial report.
In January 2009, Eurex Clearing announced that it would introduce its first CCP service for Quadriservs AQS platform for European equities. The launch date has been set for the beginning of 2010. The partnership will initially create services for trading, clearing and settlement in UK, German and Swiss equities.
The initial ISLA report had mixed views on the need for a securities lending CCP. ISLA put forward a number of potential benefits from the introduction of a CCP. Reduced capital requirements, lower use of credit lines, a wider group of counterparties and the preemption of enforced regulation may all stem from the introduction of a securities lending CCP.
However ISLA stated that the introduction of a CCP would only work if the CCP had a large and sophisticated back office in order to deal with collateral management, recalls, re-rates, corporate actions, collection of fees and dividend payments.
The report also pointed out that the securities lending market comprises of a variety of types of institution in many countries subject to different regulatory frameworks. Various regional regulators may have differing view regarding the demands a CCP would place on politically sensitive bodies such as pension funds.
According to Eurex, a CCP can be seen as a risk-free counterparty from a regulatory point of view and for this reason the exposure of a clearing member to a CCP is not required to be covered with regulatory capital and a zero weighting applies. Even where CCPs are not given a zero weighting, netting caused by using a single CCP would reduce capital requirements.
Eurex Clearing also has plenty of experience in providing a sizable back office. Eurex Clearing parent company Deutsche Bourse introduced a CCP on the Xetra trading system and on the floor at the Frankfurt Stock Exchange back in 2003, before CCPs became a regulatory buzz-word. Eurex has also launched a CCP for credit default swaps, although according to a Dow Jones report, no members have signed up to the CCP as of July 2009.