Eurex hopes to offer a new clearing model for investors as strict leverage-ratio rules drive up capital costs on banks clearing for buy-side firms. Europe's largest derivatives exchange is planning to offer a model where a buy-side institution such as a pension fund becomes the principal to the trade with the clearinghouse, rather than a clearing firm.
As EU and US regulators continue to disagree on clearing issues, such as mutual recognition, buy-side firms are increasing concentration among central counterparties. Some buy-side companies are choosing noncleared derivative securities, while some clearing entities are leaving the business, forcing remaining clearinghouses to do more work. That increases risk, market observers say.
LCH.Clearnet and CME Group will compete for buy-side business in the repurchase market with Eurex Clearing and Depository Trust & Clearing Corp. LCH is reviewing various buy-side clearing models for repo in order to provide clearing to buy-side cash lenders, and LCH or CME may well provide cross-margining for swaps, repos and futures all under one risk-management shield.
At ISDA's Annual General Meeting in Singapore, market participants voiced concern that many buy-side firms will not meet Wednesday's deadline for signing up to a business-conduct protocol and therefore could lose their ability to trade over-the-counter derivatives. About 7,500 counterparties have agreed to business-conduct standards from the Commodity Futures Trading Commission, says Katherine Darras, ISDA's general counsel for the Americas.
Woodbine Associates has assembled a checklist for buy-side market participants to see whether they're ready for rules on over-the-counter derivatives clearing that are set to take effect March 13. Clearing, execution venues and pretrade analysis are among topics mentioned in the 50-page report.