CCPs Expand for Buy-Side Participation: Analysis of Eurex’s ISA Direct and CME’s Direct Funding Participation Models

Finadium
October 2016

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As banks grapple with managing regulatory costs, and buy-side firms express concern about counterparties, both Eurex and CME have rolled out models for buy-side firms to have direct credit exposure to central counterparties (CCPs) without a clearing firm. This move is exceptional because it breaks down traditional barriers in the value chain between these CCPs and the buy-side. At the same time, Eurex and CME have worked to keep clearing firms actively engaged in the process, meaning that direct clearing models do not disintermediate clearing firms but rather keep them central to the transaction.

The main benefit of direct clearing for the buy-side is eliminating exposure to the bankruptcy of a clearing firm. There may also be greater liquidity, better pricing or both for cleared products, as well as access to two-sided markets for financing activities. For banks and clearing firms, direct clearing may offer a reduction in capital costs as a result of credit exposure to their buy-side clients and an increase in netting opportunities. This would increase the attractiveness of CCPs even more than the Basel Committee’s 2% risk weighting for Qualifying CCPs.

This Finadium report presents the direct clearing plans of Eurex’s ISA Direct and the CME’s Direct Funding Participant model. We look at who wins and who loses in these models, impacts on the sell-side and how the evolution of direct clearing may impact collateral, repo and clearing services.

This report is part of the Finadium Executive Briefing series, providing briefings and analysis to the financial markets industry.

This report is 15 pages with 3 exhibits.

TABLE OF CONTENTS
■ Executive Summary

■ What is Direct Clearing?
– Do Clearing Firms Benefit?

■ Comparing Eurex’s ISA Direct vs. CME’s Direct Funding Participant (DFP) Program

■ Implications for Securities Finance

■ About the Author

■ About Finadium

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