Cash Equity Clearing in Europe: Thoughts from our UK panel event

Since the introduction of MiFID II, cash equity clearing in Europe has mainly been divided into two models but recent developments may start to change the landscape.

As part of its New Frontiers UK Panel Series, BNP Paribas hosted a discussion moderated by Alan Cameron, Head of Client Line Advisory, Securities Services at BNP Paribas, which explored some of the dynamics shaping Europe’s cash equity clearing landscape.

Panellists included Camille Papillard, Head of Financial Intermediaries & Corporates Client Line, EMEA, Securities Services at BNP Paribas, Tim Beckwith, Head of Commercial & Business Development at CBOE Clear Europe, Eric Bey, Group Post Trade, Head of Clearing Services at Euronext; and Michael Gort, Head Markets & Products at SIX x-clear.

So what were the main discussion points?

Interoperability versus preferred clearing

Appetite for Interoperability – despite the initial fanfare – appears to be slowing down, relative to the preferred clearing model.

So what differentiates these two approaches towards centralised clearing?

Interoperability is a set-up whereby multiple CCPs (central counterparty clearing houses) can offer clearing services to an individual trading venue’s members. This enables both counterparties to a transaction (i.e. buyer and seller) to choose which CCP they want to clear with. In contrast, the preferred model requires both trading counterparties to select their preferred CCP and for their preferences to align, otherwise the transaction will be cleared at a default CCP.

Despite preferred clearing offering users less choice, some exchanges and their members are not embracing interoperability. There are a number of reasons behind this.

One speaker said bluntly that demand for interoperability from exchanges and their members was there, but noted certain national CCPs – especially those operating within vertically integrated exchange groups – had not been receptive to the idea of facilitating open access. This reluctance on the part of national CCPs is forcing institutions to resort to the preferred clearing route.

Cost is another issue. A speaker said some of the efficiencies initially promised by CCP interoperability have not been realised.  Although interoperability has driven down clearing fees by at least 50%-60%, it also means CCPs are more exposed to each other. In order to mitigate this increased counterparty risk, CCPs need to collect margin from their fellow CCPs, which requires clearing members to post additional collateral, thereby negating –  at least partially –  the benefits of reduced clearing fees. Furthermore, interoperable settlements are more expensive at certain CCPs. However, a speaker pointed out that the efficiency gains from consolidating trading flow from several trade venues with an interoperable CCP might be even greater than the reduction in clearing fees. The reduced number of required CCP memberships, the reduced risk exposure as a result of cross-trade venue settlement netting and the resulting reduction in tied up collateral Contribute to the attraction of an interoperable model.

In contrast, preferred clearing may appear to offer some cost synergies for users. “Preferred clearing is advantageous in theory as users get competitive pricing from the preferred CCPs, as they want to attract more clients. Moreover, users do not have to incur the costs which come with interoperability,” they said.

However, there are strong limitations to the preferred clearing model. Although preferred clearing works well in theory, trading counterparties have no control over where their trades are being cleared, if they select different CCPs. This results in inefficiencies, especially from a netting perspective.

Looking to the future

The impact of Brexit on UK CCPs, and their relationship with the EU, was also touched upon. As things currently stand, equivalence between the UK and EU on the matter of CCPs is due to expire in 2025, although one speaker predicted there would be some sort of extension. However, the speaker continued that cash equities – unlike interest rate swaps – have not featured in any of the equivalence discussions around Brexit. 

Elsewhere, speakers noted that the adoption of T+1 in equity settlements – despite its purported risk benefits – would not result in CCPs lowering their initial margin requirements by that much, if at all. One speaker said this is because the risks facing counterparties trading under a T+1 model are still fundamentally the same as what they would be with T+2.

And finally, speakers are bullish about the prospect of more OTC transactions moving into clearing, as counterparties increasingly look to obtain netting benefits.

Clearing – uncertainty lingers

The cash equity clearing segment is going through a period of uncertainty. Despite the initial bullishness, interoperability has yet to become entrenched with some financial institutions getting attracted by preferred clearing. In this uncertain environment, relying on a solid Global Clearing Member such as BNP Paribas, connected to all Cash Equity CCPs in Europe helps navigating the complexity of this evolving landscape.

New Frontiers: Cash Equity Clearing in Europe was part of a series of UK panel events that will continue across 2023. The sessions explore key themes impacting the industry and offer an opportunity to discuss emerging trends with industry peers.

If you would like to attend the next event, please contact your relationship manager. You can read our whitepaper on post-trade efficiency here.