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Interview with Cecile Nagel, CEO of EuroCCP

"The ETF business is an interesting market"

The CEO of the pan-European equities clearer on the forthcoming Frankfurt connection, growth projects and the derivatives marketCecile Nagel, CEO EuroCCP

Deutsche Börse is to face competition in the first half of the year for clearing in the cash equities segment in Frankfurt. This was announced by Cécile Nagel, CEO of the pan-European clearing house EuroCCP, in an interview with Boersen-Zeitung. In addition, EuroCCP aims to expand its ETF clearing offer.

Ms Nagel, EuroCCP originally intended to offer clearing of shares traded on the Frankfurt Stock Exchange in the first quarter of 2019. When will you be ready?

We are currently planning for the 1H of 2019. There are still some technical issues that need to be clarified during implementation - it took a little longer than expected, but we are on the right track.

Do you have all the necessary requirements from the supervisory authorities, in particular the Hessian Securities Supervisory Authority (the Hessisches Ministerium für Wirtschaft, Verkehr und Landesentwicklung)?

For our part, we have filed with the regulators and are expecting to receive approval ahead of the go-live. The Exchange Council – Börsenrat - of the Frankfurt Stock Exchange still has to give its approval.   Deutsche Boerse is responsible for all approvals required on their side.

The clearing access is a milestone in the history of Frankfurt as a financial centre. For the first time, shares traded here can no longer only be cleared via the central counterparty of the Deutsche Börse subsidiary Eurex, but also via EuroCCP. What does the market gain from this?

The industry is interested in this project because it strengthens competition. We can offer customers who want to clear their transactions via EuroCCP and trade German equities on both Deutsche Boerase and multilateral trading platforms lower costs and netting efficiencies, which are conditions that Eurex cannot offer. Netting of positions is possible if they are settled in the same clearing house - i.e. with EuroCCP.  This is a so-called clearing preferred model. This is exclusively about the cash equities market. We have been working on it for a very long time - the European financial market regulation Mifir helps here. This is a first step. We are not establishing a clearing link between Eurex and EuroCCP, as we did with Six Clear and LCH. If a clearing member selects Eurex as as its preferred CCP and one selects EuroCCP, the transaction will be cleared via Eurex as the default option. Both clearing members have to select EuroCCP for the transaction to be cleared by EuroCCP.

What other plans does EuroCCP have?

There are no additional plans related to Deutsche Börse, but when we look at the European landscape, more markets will open up. For example, we have gained access to the Italian cash equities market. There, too, clearing was previously part of a silo, and we will also offer a preferred clearing model there. We expect further change in competition between clearing houses. There are still a large number of cash equity clearing houses in Europe. Local, smaller cash equity clearing houses are faced with the question of how sustainable their business can still be. We are one of the largest equity clearing houses and one of the three clearing houses able to offer a genuine pan-European offering.

Will EuroCCP also be active in market consolidation?

That is not on our radar at the moment. In general, however, consolidation is likely to take place in the area of market infrastructure, not least because of the benefits from economies of scale.

The profitability of EuroCCP suffered in 2017 and the clearing volume decreased. What did it look like in 2018 - will you continue to be negatively affected by competition?

The margins in equity clearing are indeed very low, the market is highly competitive. That is why it is important to gain volume. In 2018, EuroCCP cleared 1,126 million trades in total -  or an average of 4.4 million trades a day – which has been broadly flat on 2017. We represent about 30% of the European market. In the area of interoperable cleared transactions we achieve a share of over 40%. Interoperable cleared transactions run either via EuroCCP, Six Clear or LCH - there is a clearing connection between all three providers. The market is competitive and clearing members sometimes switch providers.  . With our strategy and projects, we want to secure our leading position in Europe, by gaining access to new markets, including market access in Frankfurt, but also by diversifying our offering,

What does that mean?

There are a number of organic growth projects. Business with exchange-traded products - above all exchange-traded funds, i.e. ETFs - is an interesting market. We do clear ETF transactions, but the market in Europe is extremely fragmented and 70% of these transactions are traded off-exchange and cleared OTC.

This is quite different from the USA - where ETFs are actually traded on stock exchanges, as the name suggests, but in Europe they are mostly traded off-exchange.

Yes, this leads to a lot of inefficiencies in Europe. Part of the financial industry has understood that there are structural problems here, especially with regard to settlement efficiency. Under the CSDR, for example, penalty fees and mandatory buy-ins are introduced if ETFs are not delivered on time This will have a major impact on the ETF industry as it will be covered by this regulation in the future. This is also driving the ETF industry towards central clearing, which is a great opportunity for us.

Could you imagine buying a market maker in ETF trading?

No, but we are working very closely with a number of market participants, including Flow Trader, for example, a leading market maker in ETFs. Such market makers want their transactions cleared in the future.

That should not have escaped your competitors either.

We are in a good starting position because we are completely focused on equities and have a pan-European presence. Moreover, unlike LCH and Six X-Clear, we are already under EU27 regulation and can ensure a seamless continuation of operations in case of a hard Brexit. Our competitors Eurex and LCH also have a slightly different focus. Eurex concentrates primarily on derivatives, LCH on derivatives and repo transactions. It would not be attractive for market makers and market participants in the ETF market if, for example, only ETFs from one or a few countries could be cleared via a clearing house.

Other clearing houses are likely to point to cross-asset efficiencies and advantages in collateral management.

There are opportunities for cross-margining between cash equities and ETFs as ETFs are equity like instruments so the collateral to be provided can be offset against each other and thus reduced; but there will be no cross margining in the ETF business with interest rate derivative positions,. We are also investigating a number of other initiatives designed to give our clients greater settlement efficiency. These projects are still at an early stage. However, we currently have no plans to offer interest rate derivatives or repo clearing.

Last but not least, the Federation of European Securities Exchanges (Fese) recently recommended in a white paper that open access to derivatives should be abandoned in Europe. Open access means, for example, that for the settlement of derivatives traded on Eurex, another clearing house can request that it settles these transactions for its customers.

There will be no open access in the derivatives area in the medium term. Deutsche Börse has done a good job here. I do not know whether it will really bring changes and efficiencies, as in the cash business. In the Fese white paper there are some aspects worth considering that I can understand.

The interview was conducted by Dietegen Müller
Börsen-Zeitung, 15th of May 2019