This week has been spent in a debate about clearing and settlement systems.
I’ll post something with more depth about this later in the week, but the most interesting dialogue has been about the US versus EU approaches.
The American system exists with a few core clearing systems based around the major exchanges – the Intercontinental and the Chicago Mercantile – along with the DTCC, which provides clearing for the US NYSE and NASDAQ markets and more.
In Europe, we have CSDs (Central Securities Depositories) and CCPs (Central Counterparty Clearing systems) for almost every country, in some cases more than one per country.
This creates issues of risk fragmentation, but also the opportunity for some to lock customers into their structures by being vertically integrated with the stock exchanges. Equally, it is virtually impossible to compare products and services of these integrated clearing systems, because they bundle everything into packages of products that make them incomparable with any others.
The challenge is illustrated by the range and specialities of clearers.
For example, there are several new clearing operations across Europe, including SIX x-clear, EMCF and EuroCCP; as well as others who are trying to shake things up such as Monte Titoli and LCH.Clearnet. There are derivative product clearers, such as Eurex Clearing (Deutsche Bourse) and LIFFE Clearing (NYSE Euronext); as well as many country based operations from CCP (Austria) to CC&G (Italy), from KDPW (Poland) to KELER (Hungary) and more.
We now are trying to regulate OTC markets and already believe we need to create more infrastructure for Europe, with our own data repository and clearing system.
All in all, this means we just have too many CCPs across Europe, and there is a strong argument that there should be just one CCP.
This is the same argument as there was in SEPA for a PEACH, but stronger as securities clearing creates systemic risks if it is fragemented. Furthermore if CCPs compete, as this lot definitely are, it seems to mean that they take their eye off the ball in terms of managing counterparty credit risk.
The issue is safety versus competitiveness, risk management versus cost and transparency versus margin.
This needs to be sorted out and the European Commission will do something about this.
The question is how long it will take them to get there.