Eurex has gotten two key aspects right in their new CCP for securities lending. These important details have eluded other CCPs, notably the OCC in its provision of CCP services to AQS.
According to a recent article by FS Research, Eurex’s new CCP service for securities lending makes the beneficial owner the relationship holder with the CCP. This puts a clearing bank out of the picture, unlike in the US where Dodd-Frank mandates that an OTC derivatives trading firm have not one clearing agent but two (one principal and one for back-up). As agent lenders maintain control of the account for their beneficial owner clients without having to share their data with a third party, this removes a key obstacle from using the service.
Eurex has also worked it out to avoid beneficial owners having to post initial or variation margin for their securities loans over the CCP, instead allowing a pledge from a tri-party collateral provider.
Although counterparty risk is thought of these days as a lesser concern in securities lending, with collateral risk being a more serious issue, Eurex Clearing has worked out a viable, low cost way for beneficial owners and their agent lenders to participate in thew new CCP with minimal data exposure and reasonable costs. Eurex gets an A for a job well done on these points.