Next year the market is set to see the
introduction of mandatory client clearing in Europe, after
several false starts, but what effect will this have on
relationships, and what does the future hold, post-mandate.
Alice Attwood reports.
Client clearing is coming, that much is
indeed clear; the mandatory clearing of standardised
over-the-counter (OTC) derivatives, along with margin for
non-cleared trades, were key goals of the European
Union’s post-financial crisis regulation, the
European Markets Infrastructure Regulation (Emir).
While the rules came into effect back in
2012, the clearing obligations have been dogged by delays; the
European Securities and Markets Authority (Esma) last summer
delayed the provisions from early 2015 to early 2016.
The outcome, it seemed, was set out, and
firms began to get their technological, trading and
infrastructure-ducks in a row, with the European Commission
back in June confirming that mandatory clearing rules for
interest rate products were set to come into force as early as
April 2016, marking a key component of Europe’s
post financial crisis reforms.
Jonathan Hill, EU Commissioner for the
financial services and stability, told a public hearing on the
Emir review that "the first clearing rules for certain interest
rate products might be in place as soon as April of next
At the time, the commissioner also said he
expected that Europe’s supervisory authorities
would deliver draft rules on margin requirements for
non-cleared trades in the "coming months" with a view to
implement rules in late 2016, in line with internationally
However, at the time of writing
(mid-September), the most recent development from the European
Commission has seen the body adopt a number of new rules within
its enforcement governing mandatory clearing of interest rate
swaps, with the changes to the previous draft rules set to lead
to a likely delay of the expected compliance date on April
The Commission has been vocal in its plans
to introduce the mandate by April next year, but the recent
amendments could see this target extended by up to three
months, according to law firm Norton Rose Fulbright, which said
that while the formal adoption by the Commission started a
scrutiny period by the Council of Ministers and the European
Parliament, the inclusion of amendments could see this extended
from one to three months.
The amendment extends the phase in period
of mandatory clearing for intragroup transactions with non-EU
counterparties to three years after the entry into force of the
A moving of goalposts can be frustrating
for companies working to ensure readiness, especially after
work has begun, but the market is no stranger to delayed
implementation of rules.
A timeframe is key, Jamie Gavin, head of
institutional over-the-clearing at Societe Generale Prime
Services, told FOW: "That an implementation date and
requirements are imminent gives companies a clear timeline to
work to; clients seem to recognise this. The mandate will
crystallise the timing expectations and we will likely see more
clients come forward to prepare."
"We are moving to a landscape of more
robust timelines and guidance," added
Commerzbank’s head of execution and clearing
service, Eugene Stanfield. "We have both clients that are
actively clearing and also currently engaged to be ready for
clearing as of Q1 2016. Efforts have significantly increased
and we expect to be very busy, helping firms to ensure
readiness from September for the rest the year."
A London-based managing director of a
clearing house told FOW that that work toward new obligations
is the focus at the firm, ahead of work toward structural
changes, with protection and readiness to follow.
But nuances certainly remain, with
SocGen’s Gavin adding: "The market is not wholly
ready; the majority of the market has made strong progress but
there are still some clients that are being presented to. There
is now the feeling that things are being taken seriously,
especially from the buy-side; they know that this is definitely
CME Clearing Europe chief executive
officer, Tina Hasenpusch is pragmatic about the pace of work;
"Implementation of these changes requires effort and cost ahead
of a transition period to allow firms to get familiar with the
new regulations and technologies.
"There are a lot of structural changes
coming and they are set to have a considerable impact on the
market," she added.
Discussions over the preparedness of
companies for the impending mandate raises the contentious
issue of front-loading requirements
Earlier this year Esma raised concerns
over plans to exempt internal transactions made by non-European
firms from the clearing mandate in the draft regulatory
technical standards (RTS).
At the time the body said it backed the
European Commission’s modifications on its
front-loading section, but notes that further work is needed
here as front-loading can "create additional systemic risk
which can be caused by the counterparties of such contracts
adapting them in order to take into account the clearing
Commerzbank’s Stanfield said
that this adds another dimension to firms’ work.
"Firms are now formulating their clearing plans and
front-loading actually adds to the complexity of the scope of
work ahead. Whilst Esma has questioned the benefits of
frontloading and appears to be supporting its removal in its
Emir Review Report #4 such that the market would go straight
into a clearing landscape, it would seem a little late for this
to be done in time for the introduction in January."
"Mandatory clearing is falling into place
with front-loading requirements potentially set to take place
from January next year for direct members under Category 1 and
April for Category 2 and then full clearing being implemented
by May for Category 1 and November for Category 2 and
Categories 3 and 4 thereafter," he added.
Gavin from SocGen Prime Services, agreed,
stating that firms can use the requirement to support the
transition to operations under the mandate.
"Starting to clear early will help firms
and clients; you may be able to secure better credit lines and
pricing, and it also takes away the uncertainty surrounding the
front-loading issue for Category 2 clients; it will help firms
to move into the new world," said the head of institutional
Adopting a pragmatic approach, Stanfield
said: "The challenge and potential removal of the front-loading
requirements, whilst technically possible, by the rejection of
the current RTS by the European Parliament and Council, would
be a significant and unlikely undertaking at this late
Balance sheets remain a core issue for
companies to consider as we move into the new regulatory
landscape, with technology, margin requirements and the fees
associated with clearing all on the agenda.
CME Clearing Europe CEO told FOW: "Costs
will subsequently increase due to education, technology
requirements and upgrades, but this ultimately leads to a safer
"Balance sheets remain a significant
factor in all commercial decisions," added Stanfield, while
lawyer at Dechert, Abbie Bell, warned that central
counterparties are still not sufficiently capitalised and the
considerable potential costs around fees and initial margin
requirements should be considered.
Bell said that additional charges, such as
the requirement for clearing member to contribute to a default
fund, could push up overall costs. "For cleared
over-the-counters, counterparty risk becomes less important as
risk is centralized via the central counterparty," she
Gavin warned that factors other than cost
must be considered by firms when signing new relationships
ahead of and for adherence to the mandate: "Firms should think
keenly about pricing before signing with a firm; there is a lot
of re-pricing going on, so while this means more research is
required, it should result in better-aligned long-term
A London-based managing director at a
clearing house who did not wish to be named told FOW that
direct clearing is a significant cost for clients, but this
cost will not initially hit at an industry or clearing
member-level, and warned that when it comes to the mandate, the
market may have to contend with a bottleneck situation.
Increased clarity in terms of timelines
has certainly ruffled feathers – and balance sheets -
across the market, and has sparked extensive development work
across clearing firms, members, banks and brokers alike, some
challenges remain, suggest industry experts.
Gavin from Societe Generale Prime Services
warned that more work needs to be done by some companies.
"Clients shouldn’t wait and should get clearing
broker partnerships agreed now as they are a finite,
diminishing resource. Clients need committed organisations to
Ensuring that agreements are in place
ahead of the clearing mandate kicking in is key. "Clients want
multiple relationships and they need to have these in place
from day one from a risk management perspective," added
But how will implementation of the mandate
affect those operating across the market?
Lawyer Bell is hopeful, stating that the
market could enjoy "potentially more competition through
CME Clearing Europe’s CEO
also expects this to be an area for opportunity to the creation
of new relationships. "When looking at the clearing broker and
client relationship – this could be the first time
that firms have used a clearing broker."
Stanfield from Commerzbank is eyeing a
spate of new market participants from a particular area, "There
are a number of new ventures that are coming to market,
offering collateral optimisation and mobilisation; the fintech
space is bringing the buy-side together and negating
requirements for the sell-side.
"We see collaboration between clearing
members, banks and the fintech space in order to achieve
collateral mobilisation; banks are looking for solutions that
minimise the impact on limited resources such as balance sheets
or risk-weighted assets," he said.
The mandate will certainly introduce
requirements, but, as published in an article on FOW.com in
June, Tomas Kindler, head of clearing services, SIX Securities
Services, said that while many jurisdictions are yet to mandate
central clearing, voluntary clearing is on the rise.
"At the same time, a surge in CCP numbers
means the market is set to fragment further," he warned. "We
welcome competition, but we also need to ensure that risk
mitigation is not hampered by, on the one hand, market
participants having to disperse their collateral across more
and more CCPs and, on the other hand, CCPs not indulging in
unrealistic pricing strategies to attract business in an
increasingly competitive environment."
When considering the long-term impact of
the mandate, Bell said that we may see some standardisation of
economic terms of OTC contracts. "However, the uncleared OTC
market will continue to be important in the development of
exotic OTCs; there are classes of OTC derivatives which will
likely never be suitable for clearing. [Also there is the]
potential for futurisation of OTC contracts which could push
down costs as margin requirements for futures contracts are
lower than for OTC trades."
Looking to a post-implementation
landscape, overall it seems the introduction of client clearing
holds many opportunities for tech firms, banks, brokers and law
firms alike, with clearing providers generally geared up and
ready for the new dawn.
The long-term impact on the buy-side
remains to be seen, however, though the market suggests that
post-implementation, the new landscape will simply become the
'new normal,’ with FOW sources suggesting that we
will also see a spate of new market entrants, with fintech
tapping opportunities as the mandate looms, though
CME’s Hasenpusch sounds a note of caution on new
entrants: "The biggest question central counterparties have
here is the scalability of new players."
The new European market landscape will
present challenges, however: "I think we will see what happened
in the US echoed; people got used to the process. It is human
nature to leave things to the last minute," said
"There will be a last minute rush,
resulting in short-term pain and teething problems, but the
market will get used to it," he added.
Stanfield added: "The market is preparing
for the clearing landscape ahead, and I expect this to become a
more commoditised product, with the complexity and technology
challenges of today to be removed and replaced by standardised
client solutions available to all."
Looking ahead, Hasenpusch warned of
another area to consider: "Another impact, on a long-term
basis, is how collateral management can be undertaken
efficiently. This is the next big question as it will cause
positive change and help to transition the market to a new
But the future is far from gloomy, it
seems. Indeed Commerzbank’s clearing head told
FOW: "I remain optimistic; in the future, clearing will be an
implemented and bedded down process, accepted as part of the
general daily market operations of a business."
Indeed, CME Clearing Europe’s
Hasenpusch said that as we move into the new dawn it should be
remembered that on the client side "there are a significant
number of entities that have not centrally cleared
before… The long-term buy-side impact is likely to be
positive; these market changes will prove to be catalysts to
provide innovation across workflows and process."
But with some market participants’ readiness
lagging, the new requirements present both threats and