The International Swaps and Derivatives Association (ISDA) has advanced a series of recommendations to promote an open market clearing structure in the European Union that is competitive and cost effective.
In a newly-published white paper, ISDA responds to the European Commission’s efforts to promote the appeal of clearing in the EU and the Commission’s steps to reduce what it views as an over-reliance on systemically important third-country CCPs.
Commenting on these recommendations, ISDA CEO Scott O’Malia says that market participants should be free to choose where they clear, based on their own commercial and risk considerations.
The paper, A Roadmap to make EU Clearing More Attractive, advances 15 steps that ISDA believes will advance these objectives.
These are grouped into three categories which aim to encourage a wider range of firms to clear derivatives transactions in Europe, to provide a competitive advantage for EU-based central counterparties, and to remove unnecessary barriers to clearing in Europe.
In the first category, ISDA recommends that policymakers could make clearing more attractive to pension funds by addressing their concerns around access to cash to meet margin calls. This may include development of a central bank-backed service to support collateral transformation for buy-side firms.
The Association proposes that EU financial authorities could encourage public entities to clear on a voluntary basis, thereby improving liquidity in European clearing markets and boosting domestic capacity.
It also suggests amendments to the Settlement Finality Directive and Financial Collateral Directive to widen the range of eligible participants and collateral types, and a recalibration of UCITS counterparty exposure limits to differentiate between cleared and non-cleared transactions.
ISDA proposes a wider set of measures designed to give EU CCPs a competitive edge in international clearing markets. This includes extension of European Central Bank operating hours for its TARGET2 payments platform and TARGET2-Securities platform for securities settlement. It encourages the European Commission to promote anti-procyclicality tools for collateral haircuts and regulatory changes to strengthen bankruptcy-remote initial margin frameworks. It also welcomes measures to improve operational procedures for EU CCPs and steps to harmonise central bank access.
The trade association adds its thoughts to long-running dialogue on removing barriers to clearing in Europe. This includes steps to remove conflicting and duplicative requirements for EU firms that are operating internationally. It also encourages greater international openness by revising rules on recognition of third-country CCPs.
O’Malia indicates that ISDA’s recommendations are building on what are already strong foundations in Europe’s clearing marketplace. “While UK-based CCPs clear a high proportion of interest rate swaps denominated in global currencies, including the euro, the share of EU CCPs has risen since Brexit,” he says. “In fact, Eurex has a larger market share in euro-denominated OTC interest rate derivatives (IRD) than CME’s market share in USD-denominated OTC IRD.”
The report notes that some of these measures do not require legislative change and could be implemented relatively quickly.
The outcome, it hopes, will be an open market structure that encourages competition and eliminates barriers, providing an incentive for firms to clear in the EU. “As policy proposals are thrashed out, ISDA will continue to engage with EU policymakers to discuss our recommendations and help them achieve their objectives while retaining safe and efficient derivatives markets,” concludes O’Malia.
