23 April 2014

FN: Time for a change in derivatives trading

Last month’s decision to authorise Nasdaq OMX’s clearing house under the new regime started the countdown for when these instruments need to be processed via clearing houses under EMIR. But Nasdaq OMX’s approval is just one step in a long process. Some of the largest clearing houses are yet to be approved and there is still a long way to go and a number of issues to solve before the start of mandatory swap clearing in Europe.

Under the EMIR rules, it is imperative that other national regulators are involved in clearing house authorisation to "avoid divergent national measures or practices and obstacles to the proper functioning of the internal market". ESMA, the ECB and national central banks sit in on the college meetings to ensure the consistent application of EMIR, but do not have the power to approve or reject the re-authorisation of clearing houses.

The college membership is based on the other European countries where the clearing house is most active. John Wilson, global head of OTC clearing at French broker Newedge, said the college approach made sense but added that "this could cause a problem as the composition of the college is based on where the clearing house’s members are based. Therefore, you may not necessarily get a consistency of decision-making nor always have the most qualified experts from around Europe in this process".

A clearing house is approved if a majority of college members give a positive opinion on the application. If a majority is not achieved, the college members have 30 days to explain why and refer the decision to ESMA if needed. There have been concerns over the way regulators from other countries with competing clearing houses have a say in the approvals. Eurex Clearing, the Deutsche Börse-owned clearing house that is one of the largest for European futures and options, saw its initial application rejected by its college with some insiders suggesting that national interests may have been at play.

As well as ensuring clearing houses can perform their duties effectively in the new swaps market environment, the EMIR approval process also starts the clock ticking on when OTC derivatives need to be cleared in Europe. Once an approval is granted, ESMA has up to six months to produce technical guidelines relating to the products the clearing house wants to offer. Several sets of guidelines may run in parallel, depending on when clearing houses are authorised.

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