After ICE’s ‘Sponsored Principal’, Eurex gets ahead of Basel III with direct access for buy-side

As the buy-side community faces the upcoming clearing obligation for standardized OTC derivatives in Europe to start in June 2016 in a phased approach, among other challenges such as a shrinking industry (trading counterparts and clearing brokers (sell-side banks)) and increased costs for securities financing transactions and derivates-related services caused by charges in regulatory requirements such as leverage ratio and the risk-weighted assets (RWA), Eurex Clearing pledges to ease the pains of the buy-side.

The clearinghouse, part of the Deutsche Börse Group, plans to launch a new membership type that allows buy-side participants to have a direct contractual relationship with the clearinghouse facilitated by a clearing agent that acts as agent to cover the default fund contribution, default management obligations and optionally certain operations and financing functions. Its members will still maintain legal and beneficial ownership of collateral.

The service, fully approved by regulatory authorities and available from summer 2016 onwards, is called ISA Direct and will initially be offered for interest rate swaps and repo transactions of Eurex Repo’s “Select Finance” service. Derivatives and securities lending transactions will follow.

Eurex Clearing claims it contributes to the safety, robustness and efficiency of the overall market, while meeting new regulatory requirements with reduced counterparty risk, offers asset protection and frees up equity capital. The company is currently managing over €57 billion in collateral pool of 185 clearing members, processing gross risks valued at €17 trillion per month approximately.

In reaction to the announcement, Matthias Graulich, member of the Eurex Clearing executive board, said: “This new innovative CCP membership type is a win-win for all involved parties. Besides higher capital efficiencies and the resulting lower costs as well as enhanced segregation and portability, ISA Direct will broaden the membership base of the clearinghouse, thereby lowering the concentration risk among existing clearing members; and subsequently strengthening the robustness and diversity of the CCP.”

In January 1 of 2016, the US Commodity Futures Trading Commision (CFTC) indicated a drop to 54 in banks providing clearing for the buy-side and new margin rules for uncleared derivatives due in September 2016 might lower the number even more. The reduced capital requirements via direct access designed by Eurex is their claim, since a direct posting of collateral with the CCP could prevent being subject to a capital charge under the Basel III rules as it wouldn’t be counted on the clearing broker’s book.

Eurex Clearing is not the only central counterparty (CCPs) getting ahead of what is to come in September, working around new capital and default fund rules. ICE Clear Europe already offers a similar service called “Sponsored Principal”, allowing the client to become a direct counterparty with separate asset, margin and position accounts.