Special report: Clearing and settlement

Regional financial institutions are hooking up with major dealers to access their CCP clearing memberships, bypassing the hefty start-up costs associated with direct access to such services. But these third-party arrangements are giving regulators a headache

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Major dealers are scouring the Asia-Pacific region to find financial institution clients interested in using their multiple derivatives central counterparty (CCP) clearing memberships and other derivatives capabilities on a third-party basis.

By using a major dealer as a counterparty, other financial institutions can avoid the hassle of establishing clearing memberships with the vast array of CCPs springing up within the region and elsewhere, as well as preventing the need to stump up substantial amounts of capital to place in CCP default funds.

The argument is attractive – perhaps doubly so given the proliferation of CCPs and trade repositories in the Asia-Pacific region. Having primary memberships to many CCPs will prove costly. Moreover, most local banks do not have the scale of international business to become members of more established clearings, such as the London Clearing House, which requires members to provide prices for derivatives positions in the event of one of its members defaulting.

Large dealers grumble about the cost of operating on multiple CCPs, which have yet to establish clear portability of positions. They are also unsure about how much they should charge local financial institutions to access their clearing services.

Nevertheless, while many conversations are taking place, few dealers can name any clients in the region, despite dozens of requests for proposals being out in the market and regional financial institutions in some jurisdictions – such as Australia – being keen to have a US and European bank provider to ensure they leave their regulatory options open.

However, the emergence of a small group of dealers securing access to central counterparty clearing for themselves as well as for the wider financial community may raise concern with some supervisors. While global banks are still fighting to keep derivatives regulation at bay, it has become clear to bankers running these organisations that controlling the gateway to clearing in addition to trading is likely to bring its own rewards.

Christopher Jeffery, editor

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