LCH.Clearnet and SIX x-clear have made public the documents behind their interoperability agreement.
LCH.Clearnet and SIX x-clear originally went live with interoperability for the London Stock Exchange Main Market in December 2008, however in October 2009 UK, Dutch and Swiss regulators voiced concerns about interoperability, focusing on the linkage agreements, particularly “inter-CCP margin requirements”.
Regulators have been eager to point out interoperability between CCPs would increase counterparty risk, and that this increase could be covered by the posting of additional collateral by CCP members. A July 2010 resolution from the European Union Parliament also demanded that CCPs must not be organised wholly by users and that their risk management systems must not be in competition with each other.
According to the full interoperability agreement posted by LCH.Clearnet and SIX x-clear, Each Party shall provide to the other Party collateral to secure its margin obligations from time to time to the other Party in respect to Balance Positions in respect of all Trading Venues (on a net basis).
Neither LCH.Clearnet nor SIX x-clear will be obliged to make any contribution to either firms default fund.
Regarding the approval of interoperability from the regulators, Marco Strimer, CEO of SIX x-clear said: We delivered our resubmissions in July. The regulators said they needed three months to deliver feedback, so that will take us to mid October. We will then go live as quickly as possible.
The publishing of the full interoperability agreement, and the prospect of interoperability between CCPs before the end of 2010, marks a significant turnaround from the regulatory stalemate in March 2010. At the time, not all members were so enthusiastic about reaching a conclusion. One CCP participant in the talks with regulators told GlobalCustodian.com that although the CCPs were narrowing the models down, there was no common approach.
LCH.Clearnet and the European Multilateral Clearing Facility also signed a master link agreement to achieve interoperability by November 2009, prior to the intervention of the regulators. According to Diana Chan, CEO of EuroCCP, the interoperability arrangements being put in place now are quite different from those that existed in the past, which were either not intended to introduce competition, or result in meaningful competition.
I think the regulators have encouraged strongly that the agreements be made public, which is what we have advocated all along. We aimed to get everybody to work on a single agreement but nobody wanted to, she says. Chan agrees that the publication of the agreement is a very welcome step, and EuroCCP will be publishing their agreements in the near future. However, I think [todays publication] is champing at the bit slightly, because the regulators have not finished their review of the interoperability agreements yet. They might require certain changes to the agreements, so anything that is being made public could still be subject to change.
The full Agreement between LCH.Clearnet and SIX x-clear can be found here
Giles TurnerNews Editor