LCH.Clearnet goes into huddle on new Esma CCP rules
28 September 2012 | 1759 views | 0
The European Securities and Markets Authority ("ESMA") and the European Banking Authority ("EBA") have now both published the advice which they have provided to the European Commission in connection with new technical standards for the regulatory requirements for European central counterparties ("CCPs") under the European Market and Infrastructure Regulation ("EMIR").
The announcements mark the end of the ESMA/EBA consultation process on the draft technical standards and their recommendations have been put forward to the European Commission. The European Commission now has a period of three months to endorse these recommendations before finalising technical standards which will govern the regulatory capital requirements of European CCPs in the future. The new recommendations differ considerably from the initial proposals published in March 2012.
These proposed regulatory changes come at a time of rapid development within the financial services industry and, in particular, the capital markets infrastructure sector. On-going regulatory developments and an industry increasingly focused on transparency and risk management are driving new regulatory requirements for central and client clearing, including in OTC derivatives, which LCH.Clearnet Group Limited ("LCH.Clearnet") expects to lead to an increase in demand for its multi-asset CCPs and enhanced post-trade, risk and collateral management services.
As outlined below, LCH.Clearnet has exhibited a strong financial and operational performance. It also has a successful track record of managing clearing member defaults and continues to manage its potential exposures effectively through margin calls, member-financed guarantee funds and a series of default waterfalls. The new recommendations will impose new capital requirements for both LCH.Clearnet Limited and LCH.Clearnet SA in 2013.
The new recommendations would, if adopted in the current form, require, among other things:
• the capital of any European-based CCP to be at least equal to the sum of (i) its gross operational expenses for winding-down or restructuring over an appropriate time span, subject to a floor of six months and (ii) the capital required to cover overall operational and legal risks, credit, counterparty credit and market risks stemming from certain activities and business risks;
• any European CCP to o notify its regulator if it holds less than 110% of its capital requirement; and
• any European CCP to hold an additional amount of its own resources equal to 25% of its capital requirement, which it must use before using the default fund contribution of non-defaulting clearing members to cover losses arising from the default of a clearing member.
In addition, EMIR provides that a CCP's cash deposits placed with financial institutions shall be subject to collateralised arrangements. In the advice relating to this requirement, ESMA has proposed that 95% of such deposits must be collateralised with debt instruments meeting certain conditions regarding, among other things, liquidity and credit and market risk. LCH.Clearnet is already in compliance with this recommendation.
Although the ESMA/EBA recommendations are finalised, their precise application remains subject to discussion with the relevant regulators. If the new recommendations are adopted in the current form, LCH.Clearnet Group currently estimates that it will increase its regulatory capital by approximately €300-375 million which it intends to have in place during the first half of 2013 in order to comply with the new regulations in advance of applicable regulatory deadlines.
LCH.Clearnet will consult its core shareholders regarding the capital requirements and is confident that it will comply with the new regulations. LCH.Clearnet will work in close cooperation with its board and members to assess the impact of the recommendations with a view to ensuring that it can continue to deliver an acceptable return on its capital employed for the benefit of its current and future shareholders.
LCH.Clearnet, in accordance with its ongoing business strategy, continues to implement further product growth and geographic expansion, develop new trading venue relationships, and expand its client clearing and risk management services, while continually reviewing its pricing and expense base. Any future business plans and financial projections will take into consideration the finalised implications of the capital requirements referred to above. In addition, LCH.Clearnet expects to further strengthen the growth of its leading clearing businesses, following significant regulatory changes requiring additional OTC instruments to be cleared through a CCP.
LCH.Clearnet has performed strongly with unaudited total revenues of €247.0 million and unaudited EBIT (excluding non-recurring expenditure) of €86.2 million at 30 June 2012, increases of 28% and 74% vs. the same period in 2011, respectively.
At 30 June 2012, LCH.Clearnet had an unaudited total capital ratio of 25.2%, €6.0 billion in default funds and €93.3 billion of collateral in respect of initial margin and default funds.
LCH.Clearnet has continued its strategy of expanding its multi-asset clearing offering, and recently successfully launched ForexClear, which exceeded $200 billion notional of cleared FX Non-Deliverable Forward contracts within six months.
In August, LCH.Clearnet completed the acquisition of International Derivatives Clearing Group in the U.S. The transaction, subject to regulatory clearances, will provide LCH.Clearnet with a U.S. domiciled CCP in order to further enhance the range and choice of its clearing solutions in the U.S. and facilitate its cross-product margining initiative with New York Portfolio Clearing, the Depository Trust & Clearing Corporation and NYSE Euronext.
LCH.Clearnet continues to build on its recent momentum, including:
• the successful implementation of its Transformation Plan to address increased competition and the current regulatory environment;
• the hiring of key new senior management, with a continued focus on risk management and control; and
• is well positioned to benefit from expected growth in clearing listed and OTC products, as well as in risk and collateral management services.
London Stock Exchange Group plc ("LSEG") transaction update
Following the announcement on 9 March 2012 of LSEG's recommended cash offer for a majority stake in LCH.Clearnet, completion of the transaction is targeted for the fourth quarter of 2012, subject to regulatory and other approvals, including competition clearances. The transaction has received competition clearance from the Spanish competition authority.
LSEG today announced that it continues to seek opportunities to accelerate its diversification and growth, particularly in the post-trade sector, as well as develop deeper relationships with customers and other trading venues, and that the combination with LCH.Clearnet continues to meet those strategic objectives whilst maintaining a user-governed, open access and non-discriminatory service provider model. LSEG also announced today that whilst it is confident in its ability to make a capital contribution, it is in discussions with LCH.Clearnet regarding the potential financial implications of both ESMA's / EBA's recommendations and the measures LCH.Clearnet is exploring to ensure it can continue to deliver an acceptable return on its capital employed.
Further updates will be provided, as required.