The popularity of the clearing house is on the rise. While the financial crisis caused massive fallout on the bilaterally cleared over-the-counter (OTC) side, exchange-traded and centrally cleared derivatives escaped with barely a scratch. Since then, growing clearing volumes point to the clearing business becoming one of the major growth areas of the financial market.
The crisis exposed inefficiencies as large segments of the market were neither standardised nor automated – despite the speed of global trading activity and the increased complexity of transactions. This was not seen to be a problem in a bull market but, when the credit crisis rapidly unfolded, users of bilateral transactions were scrambling to pick up the pieces.
OTC market participants and regulators alike have realised that clearing houses offer practical solutions that the market desperately needs: transparency, neutrality and efficiency. Clearing houses around the world are gearing up for the new business that this represents, and Eurex Clearing, a member of the Eurex Group, is a main contender.
Regulatory outlook and impacts on clearing business
With a full 90%1 of global derivatives volume being conducted in the OTC markets, it is clear why regulators are concerned. Governments and regulators, especially in Europe and the US, have pushed for legislation forcing users of OTC contracts to clear their OTC business via an approved clearing house offering central counterparty services (CCP).
As a result of the crisis, in July 2009 the European Commission issued a report requiring the central clearing of standardised OTC derivatives, and it is thought that this will be put into practice by 2011. Meanwhile, similar steps are being taken in the US. Legislation that would require the clearing of standardised OTC derivatives is in preparation, and implementation is expected by late 2010. OTC derivatives not standardised enough to qualify for central clearing would still be subject to increased reporting and capital requirements. Displaying global commitment on behalf of governments to tackle the issues facing OTC derivatives, in its recent meeting the G-20 also came out strongly in favour of centralised clearing.
Stefan Knoblauch, head of clearing business development at Eurex Clearing, explains why Eurex Clearing feels that it’s well-positioned to deliver added value to customers: “Both the buy side and sell side are being encouraged to look for increased safety by their stakeholders and regulators. Eurex Clearing offers that safety – and a whole lot more in terms of transparency, neutrality and efficiency.”
Knoblauch adds: “As a CCP, Eurex Clearing addresses the challenges of the market-place by helping to rebuild trust and providing neutrality. The clearing house reintroduces the element of trust that, as a result of the crisis, has been severely damaged or even lost between bilateral participants. In a world in which the clearing house acts as central counterparty, participants can be confident in their counterparty and focus on the information that drives the market.”
Clearing-house neutrality – benefits for the market
Neutrality is another big positive for clearing houses, albeit one that appeals to some users of OTC products more than others.
OTC derivatives are sometimes complex and frequently not openly traded and, in most cases, there are information asymmetries between broker-dealers that issue and trade derivatives and the end-user. When everyone has equal access to pricing information, market participants can realise economies of scale and reduced handling costs by channelling more volume in all asset classes through one system.
Historically, the process of valuing OTC derivatives was opaque. For this reason, some market participants questioned the orderly functioning of markets and the value of traded assets. The introduction of clearing houses into the mix promises to correct these asymmetries because only the clearing house knows which counterparty is on the other side of a trade. This anonymity may encourage increased trading activity on the part of both buy-side and sell-side users.
Greater safety – risk management in real time
Unlike their OTC cousins, derivatives traded on regulated markets are automatically registered with electronic trade execution systems providing full post-trade transparency. By contrast, and as the industry knows all too well, without an automated CCP it is nearly impossible for market participants to get a realistic view of where they stand in terms of their overall risk exposure.
Eurex Clearing has valuable experience in supporting the idea of transparency and safety by providing a complete range of advanced risk management and clearing services to Eurex, the Frankfurt Stock Exchange (including the Xetra® cash market), Eurex Bonds, Eurex Repo, the European Energy Exchange and other securities exchanges.
The safest market is where every participant can see what is happening with their position – or what is about to happen – so they can assess their risk and organise their information. This demand has been a driving force behind Eurex Clearing’s product innovations. At the same time, customers need to see and assess the information flow within the environment as a whole so they can assess the integrity of each participant, and react quickly. And Eurex Clearing has now engineered the delivery of key risk data in real time.
In today’s fast-paced markets, increased safety is closely tied to the speed at which risk managers get access to up-to-the-minute information on positions so they can act in an emergency. Knoblauch stresses that: “We are the only clearing house that currently monitors and delivers real-time risk information on exchange-traded derivatives and we’re ready to leverage this experience in other asset classes.”
The clearing house launches its cutting-edge risk technology in March 2010: the real-time distribution of risk data through a specialised high-frequency interface, called the Enhanced Risk Solution. This interface represents a real breakthrough in clearing technology.
Eurex Clearing Solutions – proven synergies
Eurex Clearing takes a holistic approach to risk management and provides state-of-the-art risk management comprising three major elements: pre- and post-trade risk management tools; a comprehensive set of highly granular real-time risk data; and emergency handling tools.
Eurex Clearing’s advanced risk management offering promotes efficiencies by using standardisation and automation to simplify a complex situation, which promises to bring significant added value to users.
Central clearing with Eurex Clearing:
- Reduces the number of counterparty relations with which a bank has to deal.
- Centralises necessary calculations, automatically collecting or paying margins, thus preventing disputes.
- Offers cross-margining to help to keep collateral deposit requirements to a minimum.
- Frees up balance sheets.
- Promotes standardisation and automation of products and processes, which can reduce costly mistakes.
Next steps in clearing
When it comes to promoting safer markets, Eurex Clearing has the know-how to deliver. Eurex Clearing offers more efficient processes based on innovative and proven technology. For more than 10 years, the clearing house has been successfully shaping the future of the derivatives industry. Today, it processes gross risk of about €47.5 billion for all asset classes cleared, a figure that includes daily derivatives volume of more than 6.6 million contracts3. Centralised clearing for the market in OTC derivatives as a whole is entering the implementation phase and market participants on the buy and sell sides are evaluating competing platforms.
Eurex Clearing’s OTC services for exchange traded products, as well the award-winning OTC credit default swaps clearing solution, offer compelling reasons for market participants to take a closer look. They have been designed in conjunction with market participants so that they feature the right amount of flexibility and security to ensure the integrity of the market. Eurex Clearing’s commitment to promoting safer markets bodes well for customers – and the industry as a whole.
The new standard in risk management – Eurex’s Enhanced Risk Solution
Eurex Clearing, the leading European clearing house, sets another milestone in risk management. From March 2010 onwards, Eurex Clearing will be the only clearing house worldwide that provides its members with real-time risk data via its Enhanced Risk Solution interface.
Provision of real-time data represents a real step forward because it allows members to monitor developments in risk as they happen. And quicker delivery of risk data promotes more proactive risk management, which protects the integrity of the markets as a whole – especially during volatile markets. It also enables very efficient use of collateral and can provide indications of intraday margin calls as risk managers can monitor margin surpluses/shortfalls in real time.
Eurex Clearing is also enhancing the granularity of the data that it will deliver to customers in real time via the Enhanced Risk Solution interface, i.e.:
- margin parameter utilisation
- position report
- margin components
- total margin requirement
- margin shortfall/surplus
This interface uses FIXML-based messages over the new industry standard Advanced Message Queuing Protocol (AMQP), featuring the following characteristics:
- two-way socket interface
- independent of hardware platform
- independent of operating system and compiler
For members that already have developed in-house risk management systems, the Enhanced Risk Solution provides an important additional tool that they can use either independently or in conjunction with their systems to monitor their risk exposure and benefit from enhanced treasury management opportunities.
In fact, Eurex has already developed and successfully deployed two other high-frequency trading and market data interfaces called the Enhanced Transaction Solution and the Enhanced Broadcast Solution, respectively. As an indication of their widespread popularity, the exchange estimates that, by the end of 2009, 60–70% of all futures and options orders and quotes entered by Eurex members were using the Enhanced Transaction Solution.
Stefan Knoblauch gained more than 15 years of listed derivatives operations experience at Deutsche Bank in various positions in operational line functions as well as projects and global responsibilities. He joined Eurex Clearing in 2008, where he heads the Clearing Business Development Team, which covers the functional aspects of all larger clearing-house-relevant projects across listed derivatives, cash equity, cash bond, repo and risk design elements.
1 See “The Global Derivatives Market – A Blueprint For Market Safety and Integrity”, page 8.
2 “Improving over-the-counter derivatives markets: All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the FSB [Financial Stability Board] and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.” (G20 Pittsburgh Summit Leaders’ Statement, September 2009).
3 Average daily volume of Eurex Exchange for 2009.