Meff launches Spanish central counterparty for repos

Meff, the Spanish derivatives exchange, plans to act as a central counterparty for government bond repurchase agreements (repos), following a change in Spanish finance law.

Meff will take on the rights and obligations of the parties in each contract and should reduce overall counterparty risk in the Spanish repo market, which trades volumes of about €25 billion a day.

Meff has formally filed a proposal to establish a central counterparty clearing house and aims to commence operations before the second half of the year. Meff has teamed up with Iberclear, which the Spanish exchange expects to regulate the new service.

MThe derivatives exchange has acted as a central counterparty for equity futures and options contracts since its creation in 1989. It now plans to boost its activities as a central counterparty in the Spanish government debt market, beginning with repos, and then adding outright spot trades.

For repos, it will guarantee each of the parties receives the securities or cash originally agreed upon on maturity. In the case of outright spot trades, the clearing house aims to cover the risk between the trade date and T+3, the date when the trade is actually settled. For this purpose, as in the case of futures, the clearing house requires that participants provide guarantees.

At present, the Spanish government bond repo market trading takes place between account holders at the Central de Anotaciones (CADE) - now integrated into Iberclear. The electronic platform Senaf - which is part of the mF Group, along with MEFF and AIAF - processes about €1.8 billion trades a day. The remainder is traded via brokers or directly between parties. The Spanish repo market totalled €5.1 trillion in 2002.