Eurex Clearing is finally going live with a counterparty service for securities lending transactions in European equities, exchange-traded funds and fixed-income securities executed between borrowers and lenders bilaterally.
The clearinghouse subsidiary of Eurex, which claims to be the first in the securities lending market to allow fund managers to become direct participants, will implement the service on a limited basis on November 22 to help member firms deal with the operational complexities of using a central counterparty service.
That accommodation works through a "special lender license" which would not require the fund manager to post either collateral or contribute to Eurex Clearing's default fund. However, according to marketing information distributed by Eurex Clearing, the "lender license" does require the fund manager to be a supervised firm in a country within the European Union, Switzerland or "other countries." Eurex Clearing did not specify which countries.
Clearinghouses act as counterparties to trades to eliminate risk exposure related to the possible default or financial failure of one of the two firms. While they are common in the equities area and gaining momentum in the swaps market they are still in their infancy in the securities lending market. The NYSE Euronext-owned SecFinex, for one, was shuttered in November 2011 due to insufficient traction for its central clearing model. At the time SecFinex officials did predict that central clearing could become more popular with the implementation of the Basel III Accord and other European legislation.
Eurex Clearing is following what the London-based securities lending and borrowing trade group International Securities Lending Association has called a full-service model whereby lenders and borrowers manage their securities lending and borrowing positions. They can do so either directly with a clearinghouse, in which they are members, or through separate clearing members. Such a model does allow financial firms to reduce their use of credit lines and widen the group of counterparties doing business by sticking a clearinghouse as a middleman. However, according to ISLA, principal intermediaries, such as borrowers, are more likely to benefit than lenders. In addition, the operational complexities of dealing with a central clearing model will likely limit participation of fund managers.
Broker-dealers and prime brokers, acting on behalf of hedge fund clients, are the most likely to borrow securities while institutional fund managers are likely lenders. Those lenders often rely on their custodian banks to do the work for them.
In a statement, Eurex Clearing says it has partnered with the triparty collateral management services units of international securities depositories Euroclear Bank and Clearstream Banking Luxembourg and financial technology vendor Pirum Systems. "Our set-up will enable customers to make use of their existing connectivity to these dynamic service providers for trade and collateral management and take the benefit of substantial improvements to the current market by delivering significant capital and operational benefits to all participants," says Thomas Book, a member of Eurex's executive board in charge of clearing services. London-based Pirum, a well-known player in the securities finance software market, is helping financial firms link to the new service.
Eurex Clearing says that the new clearing service will initially be effective only for German and Swiss equities as well as exchange-traded funds. Corporate actions such as cash dividends, distributions and mandatory reorganizations can also be processed. Next year, the service will be expanded to European government bonds and corporate bonds as well as equities from Belgian, French, Dutch and UK equities. Processing of corporate actions will be extended to enhanced automation of exchange offers, repurchase offers, tender and buy-back offers and Dutch auctions.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)