Swiss and UK Clearinghouses Publish Details of Connectivity Agreement
September 6, 2010
Swiss clearinghouse SIX x-clear and London and Paris-headquartered LCH.Clearnet on Monday made public the terms of their agreement on how they connect with each other.
The document, the clearinghouses said, includes “the integrity of risk management” and “protection from contagion” in the event of a default. That means that each clearinghouse retains the right to determine the eligibility of trades for clearing and its margining process. In addition, the potential default of one clearinghouse on its obligation to clear a transaction will not impact the other clearinghouse.
Clearinghouses act as central counterparties to each buy and sell order. This protects buyers and sellers from the possibility that their trades will not settle in case the other party goes bankrupt. When clearinghouses link to each other they are supposed to post their own collateral – that is cross-collateralize transactions to guarantee their settlemnet
“Publishing the full document provides a greater degree of transparency which will promote understanding of the clearing links between LCH.Clearnet and SIX x-xlear and how the risk is managed,” says Wayne Eagle, director of equity services for LCH.Clearnet. “Together with SIX x-clear we have led the way with clearinghouse interoperability for a number of years and continue to advocate competitive clearing across he European equities market.”
SIX x-clear, the clearinghouse for the SIX Swiss Exchange, has been linked to LCH.Clearnet since 2008 allowing traders on the London Stock Exchange and Swiss exchange to clear trades in their respective markets in either of the two clearinghouses.
The decision to publicize the terms of their contract comes at an opportune time. While the apparent goal is to persuade European regulators to permit other similar “interoperability” agreements among clearinghouses, it is also clearly aimed at boasting LCH.Clearnet’s stature as a top-notch European clearinghouse when it faces the defection of some key clients. In May NYSE Euronext said it was developing its own equities and derivatives clearing services in-house to replace LCH.Clearnet and the London Stock Exchange has also said it is evaluating its relationship with LCH.Clearnet.
“Interoperability” agreements between clearinghouses allow trading firms to use whichever clearinghouse they want to clear their trades on a trading system. Having this choice presumably creates competition between clearinghouses and reduces post-trade processing costs.
In 2009, the Financial Services Authority and the Dutch Authority for Financial Markets blocked members of LCH.Clearnet from clearing trades on multiple electronic trading venues due to concerns over “inter-CCP margin requirements.” That meant the collateral requirements of the clearinghouses. In February 2010, U.K., Dutch and Swiss regulators asked European clearinghouses SIX x-clear, EuroCCP and LCH.Clearnet to provide more information on how they plan to reduce risks involved with linking to each other.
