What are the primary services offered by a CCP?
A central clearing counterparty (CCP) is a financial market infrastructure organisation that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts.
CCPs are highly regulated institutions that specialise in managing counterparty credit risk. A CCP is a special purpose entity that interposes itself between the buyer and the seller in a securities transaction, acting as the seller to the buyer and as the buyer to the seller.
SIX offers clearing services for a full range of asset classes: derivatives (F&O and swaps) on interest rates, equity index and single stocks, energy (gas and power) and cash instruments on classic repos, buy-sell backs (BSB), cash equity and fixed income.
How do CCPs contribute to market stability?
CCPs offer significant benefits in trading by mitigating counterparty risk. They act as intermediaries, ensuring that both parties meet their obligations and reducing the risk of default. This structure enhances market stability and confidence, making trading more efficient and secure. Therefore, the most important responsibility of a CCP is guaranteeing trade completion in the event that one or both parties鈥� default.
The removal or reduction of default risk, via the use of a CCP, plays an integral role in providing stability in highly-stressed market conditions such as the 2004 financial crisis, during the pandemic or geopolitical events more recently. In the EU, CCPs are regulated by national authorities, the central banks, and the European 兔子先生and Markets Authority (ESMA), ensuring they meet stringent risk management and capital requirements.
What is the repo segment within the SIX clearing services?
In light of recent and ongoing economic pressures in relation to rising interest rates, SIX is acutely aware of the demand from market participants for new liquidity pools in repo markets. Furthermore, cleared repo volumes have peaked as demand for secured funding has grown. Our repo clearing segment (through our Spanish CCP) allows members to clear repo transactions on pan-European sovereign debt, and offers competitive pricing structures which afford members cost efficiencies in the region of 40-50 per cent versus our competitors, while simultaneously offering flexible segregation account models to manage risk and client assets efficiently.
Additionally, SIX has extended incentives, in relation to revenue share opportunities, to the repo clearing segment ensuring alignment with those implemented in the interest rate swap (IRS) segment. To summarise, SIX offers market participants competitive repo and IRS clearing services, providing access to new liquidity pools and unprecedented revenue share opportunities.
What are the benefits of the repo segment?
Clearing repos through SIX enhances market safety and efficiency by reducing counterparty risk, optimising collateral use, ensuring regulatory compliance supports European Market Infrastructure Regulation (EMIR) requirements, and streamlining post-trade operations.
If SIX were to summarise the key benefits of its repo segment, the highlights can be attributed to exponential fee savings, unprecedented revenue share opportunities via multiple partnership programmes and more efficient haircut parameters.
Partnership or revenue share programmes are not new to the market. However, revenue share and partnership programmes have historically only been open to a handful of market participants which usually consists of the top 10 clearers at any one CCP. However, the repo partnership programmes offered by SIX work on generous revenue share principles and it is open to all members who trigger a very modest initial margin threshold.
Once the threshold has been triggered, a monetary kick back of the basis points spreads charged to the collateral balance will be paid back to the underlying member on a monthly basis. In addition to this, there is also a further kick back on a proportion of clearing fees.
The fact that the revenue share programme is open to all members is unprecedented in the market and, coupled with exponential fee savings in both IRS and repo, SIX is ideally positioned as an attractive alternative in Europe for all IRS and repo clearing requirements.
What new initiatives are being undertaken in the repo segment?
In addition to the exponential fee saving and revenue share opportunities already available for repo clearing, SIX are also exploring a first movers or liquidity provider programme.
The aforementioned programme is designed to offer liquidity providers potential revenue share, to include revenue generated by both spreads on collateral and fees, at segment level.
This equates to very generous revenue share opportunities in the first five years and perpetual annual member level revenue share opportunities beyond five years.
Furthermore, to the above, SIX will explore opportunities on how to leverage our existing international Spanish and Swiss-based offering, where, among others, we already offer a complete value chain for repo trading with the CO:RE trading platform and collateral management with Collateral Cockpit, as well as in addition a repo clearing service.
SIX is also piloting a trade affirmation tool which, subject to regulatory approval, enables brokers, dealers, and their counterparts to directly enter and validate repo trade details and economics via an online portal. Once both sides of the trade entry have been checked and validated, the repo trade is then given up to the CCP for central clearing.
What recent developments have impacted repo?
Since the inception of the Uncleared Margin Rules (UMR) in the OTC derivatives space in 2016, repo trading volumes have increased by over 50 per cent due to buy side institutions requiring access to high-grade collateral that are not readily available as part of their everyday inventory. Now more than ever, due to the increasing costs associated with managing collateral on a cross-border basis, there is a distinct need to reduce the fragmentation of collateral pools. Therefore, secured financing transactions such as repo, are a critical contributor to the efficient functioning of global capital markets.
More recently, the US 兔子先生and Exchange Commission (SEC) announced regulatory reform measures pertaining to the mandatory clearing of US Treasury (UST) repo. The new regulations are due to come into force on 30 June 2027 and are designed to reduce systemic risk in the US$28.5 trillion US Treasury market via mandatory clearing.
The requirement to clear UST repo trades will not be exclusively limited to the US with the requirement for all eligible transactions to be centrally cleared regardless of the country of execution. The clearing mandate in the US will therefore have global implications and indirectly affect market participants in Europe.
As a result, there will be approximately an additional US$4 trillion in cash and repo transactions that will need to be centrally cleared once the SEC mandate enters into force. However, purely from a UST repo perspective, market participants anticipate that an additional US$2 trillion in daily volume will be in scope for mandatory clearing.
If we take all of the above into consideration, I think you will agree that if ever there was a requirement for market participants to have the ability to leverage the full value chain providing execution, clearing, and collateral management optimisation solutions, then it is now.
SIX is well positioned in this regard and looks forward to providing members with a state-of-the-art solution to all repo requirements for many years to come.
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