Clearig iitiatives

Transcription

1 The vertical challege The past two moths have see the lauch of clearig iitiatives across five cetral ad easter Europea markets. What prospects do they offer for lower tradig costs i the regio? Images: istockphoto Richard Schwartz Talk to ay broker who trades outside a sigle jurisdictio i Europe ad chaces are the high cost of post-trade services will be high o the list of complaits. MiFID might have facilitated tradig veue competitio, but securities services are far from itegrated across the EU ad posttrade market ifrastructures are multiple ad varied. The iitial promise of lower costs through horizotal itegratio has ot met expectatios. A decade or so ago, says Kevi Mile, director of post-trade services, the Lodo Stock Exchage (LSE), There was a real idustry sese that horizotal itegratio was the way forward. This resulted over time i mergers amog exchages (NYSE /Euroext, NASDAQ/ OMX, LSE/ Borsa Italiaa), clearig etities (LCH/Clearet) ad depositories (Euroclear ad several atioal cetral securities depositories (CSDs)). The feelig was that if you could get these itegrated, it would push dow the cost, says Mile, but the horizotal model has so far failed i its executio to realise the savigs people had hoped for. At the same time, he says, the vertical silo approach may have brought efficiecies, but oly 52 the trade growth markets issue

2 withi a closed eviromet where competitive pricig pressure is lackig. Part of the problem, he suggests, is that, Tradig models have evolved rapidly, but post trade has ot. That creates frictio poits. Squarig the circle New iitiatives i posttrade services, otably relatig to cetral couterparty (CCP) clearig, would seem to idicate that markets are lookig for somethig short of horizotal covergece, that evertheless allows a degree of ratioalisatio at the operatioal level. I early Jue, the Austria capital market ifrastructure provider OeKB aouced the creatio of a ew solutio, CCP.CEE a stadardised cross-regioal clearig ifrastructure for local cetral ad easter Europea (CEE) markets, begiig with the Austria, Czech, Hugaria ad Tradig models have evolved rapidly, but post trade has ot. That creates frictio poits. Kevi Mile, director of post-trade services, Lodo Stock Exchage Slovee exchages that form the CEE Stock Exchage Group (CEESEG). CCP.CEE will begi rollout i Viea i mid-2012 followed by the Prague cash markets. The Lodo Stock Exchage Group is providig the techology ad related services to the ew group CCP structure. CEESEG is already i the process of implemetig Deutsche Börse s Xetra tradig platform across all its veues. Lower cost of access is expected to be a early beefit of the iitiative, which will, however, leave the idetity of each atioal market itact. The combied approach could be particularly iterestig for cliets who are already members of oe of the existig stock exchages, says Peter Peschek, director, head of direct securities services, Austria, at Deutsche Bak. Most iteratioal brokers are already members of the Viea Stock Exchage ad should ow be able to participate with less effort i the other markets, which should see improved liquidity. Hubertus Hecht is product maager, CCP.CEE, at OeKB. Cliets gave us a very clear idicatio that their mai problem is the cost of eterig these markets separately, he says. With their ow techical iterfaces, tradig ad posttradig arragemets, that cost was very high for the volumes of busiess they expected to do. Havig oe tradig system ad oe CCP will lower the costs of etry. The stock exchages will the trade growth markets issue

3 Offerig our services to other markets may form part of future strategy, but our priority is to attract more direct members to the Polish securities market. Iwoa Sroka, presidet & CEO, KDPW remai, he explais. The market model is to have four stock exchages, oe tradig platform, oe CCP, four CSDs ad four atioal baks for settlemet. Settlemet will cotiue to take place locally, though itegrated clearig will allow for some streamliig of collateral maagemet. We will calculate the margi ad collateral requiremets across all markets, says Hecht. Eve if you are active across more tha oe of the markets, you will have oe margi requiremet ad you ca choose where you keep your collateral. If you are a Czech broker, for example, you may hold it i CSD Prague, or across two or more CSDs. Mile suggests that most local regulators would be uwillig to sactio a edto-ed market merger. Natioal baks ad atioal regulators will always wat to maitai a tight grip o their atioal clearig process, he argues. It has to match their appetite for risk ad is see as part of the atioal fiacial system. The model that the LSE is providig CEESEG allows for this. The idea is to eable risk maagemet, cliet relatioships, local regulatory relatioships ad treasury maagemet activities to be cotrolled at a local level, while outsourcig the less sesitive operatioal aspects, he says. I practice says Hecht, the local regulators have so far ot idicated ay substatial divergece or special requiremets. They may have certai reportig requiremets that we have the capability to meet, but there is othig special that ay market has asked for so far that is substatially differet from what we already do i Viea, he says. Iitially, the OeKB was lookig to buy a commo piece of software for the four atioal clearers, says Mile. We proposed operatig it for them o a fixed cost agreemet. We've set it up as 54 the trade growth markets issue

4 a model to sell to other markets. Mile sees such opportuities arisig i the medium term from a push to multi-asset class ad real-time clearig, the platform for which requires sigificat ivestmet to maitai. Natioal focus I the meatime, ambitios for further market itegratio i the regio appear limited to the loger term. The first of July saw the live lauch of KDPW_ CCP, the ew Polish CCP, spu out of the KDPW depository, for clearig trasactios executed i the regulated market e.g. the Warsaw Stock Exchage ad across alterative tradig systems. As a iterim step to the lauch, KDPW Clearpool acted as a trasactio settlemet guarator, backed by a 15 millio guaratee fud, but did ot act as a pricipal to the trasactio. We eeded to separate the risk maagemet ad collateral admiistratio system from the depository i order to meet iteratioal stadards, says Iwoa Sroka, presidet & CEO of KDPW ad KDPW_ CCP. But it is ot simply a questio of establishig a separate legal etity for clearig activities. I additio to ew guaratee ad cash ettig fuctios, we will develop ew services, icludig securities ettig which we pla to itroduce by the ed of this year. Clearig ad guaratee of OTC derivatives trasactios, repos, reverse repos ad market ledig are also plaed for the curret strategic cycle. The clearig house will use a risk maagemet system based o Stadard Portfolio Aalysis of Risk, which calculates iitial margis due to ad from clearig members, accordig to the largest possible loss icurred by a portfolio takig ito accout price ad volatility. We are implemetig a risk maagemet system based o well accepted stadards, says Sroka. The techology is licesed from the Chicago Mercatile Exchage. KDPW_CCP will be able to use up to 25 millio of its ow capital to guaratee clearig liquidity. Sroka sees expaded membership criteria of the clearig house as a particular attractio to foreig ivestors. Direct membership of the CCP is ot limited to local fiacial istitutios, 56 the trade growth markets issue

5 but ca iclude foreig etities that perform a clearig fuctio, icludig ivestmet firms, she says. While she ackowledges that there may be potetial to offer clearig services to other securities markets i the regio that curretly lack a cetral clearig fuctio, this is ot curretly a priority. The focus is more o improvig the service to ivestors i Polad. Offerig our services to other markets may form part of future strategy, but our priority is to attract more direct members to the Polish securities market, Sroka says. Polad is the biggest market i cetral ad easter Europe ad our CCP is correspodigly the biggest i the regio. Our priority is to esure the quality of our ew services to ivestors i Polad. Sroka is evertheless ope to iteroperability with other markets. We are iterested i liks to other CCPs, subject to agreed terms of cooperatio ad, of course, the asset of the regulators, she says. Altogether whe? Quite how cosolidatio might play out at differet levels of Eve if you are active across more tha oe of the CEESEG markets, you will have oe margi requiremet. Hubertus Hecht, product maager, CCP.CEE OeKB market ifrastructure across the regio remais to be determied. Ay advaces i this directio are likely to be cautious, however, give that the drivers may vary for each participat. While CCPs explore the potetial for iteroperability, albeit somewhat gigerly, CSDs are also lookig to reduce the operatioal burdes of settlig cross-border trasactios. Both the Lik Up Markets model ad Euroclear iitiatives cotiue. At a bilateral level, the latest iitiative i cetral ad easter Europe, aouced i late Jue, is a agreemet betwee CSD Prague ad the Slovak Cetral Securities Depository (CSD SR) to develop a techical lik to facilitate the settlemet of dual-listed securities. Cosolidatio i cetral ad easter Europe is a big topic, Deutsche Bak s Peschek admits. He sees potetial for the expasio of CEESEG to more markets i the regio. The CEESEG model makes it easier for others to joi without losig their idetity, he says. If the four markets are successfully itegrated from a operatioal perspective, it will be a good sigal to others. At the same time, sesitivity to local cosideratios is likely to limit the attractiveess of grad plas for the meatime. Steps towards greater cooperatio will cotiue, with clearig attractig particular attetio owig to the high profile that risk maagemet is receivig i the post-crisis climate, but competitive cosolidatio seems for ow to be off the table. the trade growth markets issue