European Central Counterparty Limited (EuroCCP), the European subsidiary of The Depository & Trust Clearing Corporation (DTCC), says today it has the capacity to process for all the multilateral trading facilities (MTFs) that have appointed Fortis Bank's subsidiary European Multilateral Clearing Facility (EMCF) as their central counterparty.
"Our approach to risk management is based on over 30 years' of DTCC experience in handling some difficult credit situations as a critical market infrastructure. We exist to improve efficiency and reduce risk for the financial markets. Our industry owned, industry governed, at cost business model ensures that our very high safety standards are not compromised by profit-seeking behaviour. Not only in times like these but also for the ultimate safety of the financial system, what the market needs is an independent, focused central counterparty that is properly managed as befits a critical market infrastructure." said Diana Chan, Chief Executive Officer.
Although EuroCCP is the latest central counterparty to start business in Europe, it is fully backed by the know-how, technology and business continuity arrangements of its parent company DTCC. EuroCCP is governed by a board of directors comprised of 9 major global and European financial institutions, 3 public interest directors and 2 management representatives.
"We have proven with our faultless implementation of Turquoise that we have excellent operational capability. All our Clearing Participants are extremely satisfied with our performance and the smooth implementation of a complex deal," said Trevor Spanner, Chief Operating Officer. “Our technology has the capacity to process up to 280 million sides of trades daily. The combined volume of all European stock exchanges and MTFs is less than 10 million sides.”
A central counterparty (CCP) provides the guarantee to trading firms that their trades will settle at the price agreed. In order to provide this guarantee, the CCP calculates its potential exposure to honour the trades if a clearing participant defaults, and collects collateral from the participant. The risk to clearing members is that the cash collateral given to the CCP is exposed to the failure of the bank parent. Securities given to a bank as collateral, even if they could be reclaimed, could be temporarily frozen if the bank goes into administration or liquidation.
"A central counterparty's core competence is how it manages risk, so that a sufficient amount of collateral is collected from clearing participants. This goes way beyond applying a hair cut, or marking open positions to market. A sophisticated risk management engine is very complex and expensive to build and maintain. It is not a business that could be run by a bank that has allocated 2 people to manage the risks assumed by a CCP it owns," said Michael Kopcak, Risk Manager. "When Lehman Brothers International (Europe) went into administration, our steady-handed approach ensured an orderly and safe close out of its open positions. A CCP that lacks any experience in handling a default could take actions that increase its exposure and those of its remaining participants," he added.
