Many factors are redefining the clearing landscape for European securities financing transactions, the main one, of course, being regulation, says Cboe Clear Europe’s Vikesh Patel.
He indicates that the forthcoming Basel IV regulations could potentially have serious consequences for the SFT industry. The introduction of a stricter standardised approach for measuring counterparty credit risk could result in higher capital requirements for participants and create increased expense for those accessing the securities lending market.
New regulations, including the Central Securities Depositories Regulation (CSDR), Securities Financing Transactions Regulation (SFTR) and planned Basel IV implementation, are forcing market participants to manage increased capital demands, as well as additional operational inefficiencies that increase the costs of bilateral SFTs and may lead to a reduced capacity and appetite to borrow or lend.
In this context, use of a central clearing counterparty (CCP) model could reduce the capital burdens associated with bilateral SFTs and offer significant operational advantages, Patel explains, therefore helping to maintain and grow activity in this capital markets function. From a capital efficiency perspective, trade exposure on CCPs offers lower risk-weights for borrowers and optimised netting benefits.
“There have been initiatives to introduce clearing to the European SFT market in the past,” Patel explains, “but these have had little success.” Cboe Clear Europe explored the introduction of an SFT clearing service in 2018, but decided not to proceed to delivery at the time for a multitude of reasons.
Fast forward, the firm was re-approached by securities finance participants to deliver a solution to mitigate existing and anticipated capital constraints, counterparty exposure limits and indemnification costs.
Responding to this request, the pan-European central counterparty is now working on a project to introduce a new clearing service for SFTs. Securing the support of a range of key market participants — including participant agent lenders BNY Mellon and Citi, and participant borrowers ABN AMRO Clearing Bank, Barclays, Citigroup Global Markets, J.P. Morgan and Goldman Sachs — the service is set to be introduced to the industry in Q3 2024.
Cboe Clear Europe says the new offering will introduce CCP clearing, with matching, settlement and post-trade lifecycle management for European SFTs in cash equities and exchange-traded funds (ETFs) for agent lenders and borrowers.
Operating across 18 European markets, with settlement taking place in 19 European central securities depositories (CSDs), the clearing service will be the only pan-European CCP offering consolidated services for SFTs in European cash equities and ETFs, the Amsterdam-based clearing house confirms.
An opportune time
With approximately 12 months until live date, the CCP aims to bring improved capital efficiencies, enhanced risk management and streamlined operational procedures to market participants. This includes greater settlement efficiency, as well as improved practices around fees management, corporate actions and post-trade lifecycle processing.
From an operational perspective, Patel indicates that a cleared model will help to harmonise, standardise and automate processes across the trade lifecycle, with the CCP being the “golden source for processing and reporting”. All parties will face Cboe Clear and no agent lender disclosures will be required, Patel confirms, thereby helping to reduce operational overheads.
Inevitably, the release of a new SFT clearing service will increase competition and choice for clearing customers. Well established players already dominate the sector including London Stock Exchange-owned RepoClear, which provides clearing for cash bond and repo trades across European markets. Eurex Clearing delivers services for derivatives, equities, bonds and secured funding, with a reach across Europe and for the clearing of swaps within the US. Also, the Depository Trust and Clearing Corporation (DTCC) provides clearing across US equities and fixed income markets.
Cboe Clear Europe identifies strong potential synergies between its proposed SFT clearing service and its pan-European cash equities franchise. From the launch of SFT clearing, the firm plans to offer cross-product margining between cash equities and ETFs, SFT trades and required value (RQV) in cash equities and ETFs.
From Patel’s perspective, this is an opportune time to deliver such a service to the market. Capital charges associated with SFTs continue to rise and this is driving demand among market participants for a clearing model.
He continues: “SFTR has been implemented, which has freed up clients’ capacity for change projects. The industry has moved beyond some of the uncertainties associated with Brexit, with Cboe Clear itself having become the first EU-based CCP to achieve permanent recognition from the Bank of England to operate as a third-country CCP in the UK.”
The launch of the clearing service fits within Cboe Clear Europe’s strategy to become the leading multi-asset class clearing house in Europe. In holding the necessary regulatory licences and having a deep pool of risk management expertise, the clearing house intends to expand the range of services it offers through client-led innovation.
Through its core cash equities franchise, Patel identifies solid growth potential in its interoperable and preferred clearing services. The firm says it aims to bring a competitive clearing environment where “full interoperability does not exist” and it anticipates an increasing uptake for this service on Euronext venues, particularly in Milan.
Patel expects the firm to clear its first trades on Deutsche Börse later this year and it is seeking access to additional venues across Europe. The firm recently expanded into equity derivatives clearing in support of Cboe Europe Derivatives (CEDX), a pan-European derivatives exchange operated by Cboe. In addition to clearing CEDX’s existing equity index derivatives, Patel confirms that Cboe Clear Europe is supporting the exchange’s launch of single stock options in November 2023, subject to regulatory approvals.
He concludes: “We believe SFT clearing has strong synergistic benefits with our existing cash equities clearing and will provide a clear pathway to clearing SFTs in other jurisdictions, as well as fixed income products subject to client demand.”
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Image: Vikesh Patel 
