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The evolution and organization of CCPs

The history of clearing houses, providers of central counterparty (CCP) clearing services, can be traced back to more than 100 years ago when earlier clearing houses cleared the commodities derivatives in local markets. For example, London Clearing House (LCH) was established to clear commodities contracts in London in 1888 while ICE Clearing U.S. (InterContinentalExchange) was founded in 1915 as the New York Cotton Exchange Clearing Association.

Clearing houses later expanded their business to offer CCP service for more asset classes and into different regions, mostly through mergers and acquisitions. LCH and Clearnet SA, which was formed in 1969 to clear Paris commodity contracts, merged in 2003 to become LCH.Clearnet Group. It now clears exchange traded and over-the-counter (OTC) derivatives and other securities worldwide. ICE Group acquired Clearing Corporation[1] in 2009 to provide the risk management framework, operational processing and clearing infrastructure for ICE Clear Credit and ICE Clear Europe. CDCC (Canadian Derivatives Clearing Corporation) is the product of a merger between Montréal and Toronto options clearing houses in 1977 and recently launched a fixed-income CCP service in addition to its derivatives clearing business.

Given the constant expansion into new geographies and asset classes, and from exchange traded products to OTC markets, the organizational structure of CCPs has evolved in tandem. One organizational model observed by some clearing houses is to structure the business as a matrix of geographies, products and markets. For example, LCH.Clearnet Group comprises of subsidiaries in New York, London and Paris. The group also covers and supports as diverse products as:

  • Centrally Cleared Contract for Differences (ccCFDs)
  • Commodities
  • Credit default swaps (CDS)
  • Derivatives, energy, equities, fixed income, freight, foreign exchange and interest rate swaps (IRS)

Eurex Clearing is another example where dedicated teams serve different markets and products: Eurex Exchange, EurexOTC Clear, Eurex Bonds, Eurex Repo, Securities Lending, Frankfurt Stock Exchange, Irish Stock Exchange, European Energy Exchange and Eurex/KRX (Korea Exchange) Link.

Another CCP model that exists is to have different regional subsidiaries focus on domestic markets with products dedicated to that market, while leveraging the experience and possibly the infrastructure of other subsidiaries. For example, CME Group offers OTC commodity and financial products clearing in the United States via Clearport®,[2] while CME Europe Clearing House, based in London, not only offers OTC commodity derivatives available for clearing through CME Clearing U.S. but also other products of particular interest to users in Europe and other areas outside the U.S., while leveraging CME Clearport®.

A third model falls in between, where the clearing house is structured mostly by geography with a focus on the clearing offering in the domestic market while also having subsidiaries focused on specific products. A good example is ICE Clearing. It has four major divisions, three of which focus on the regional markets it serves: ICE Clearing U.S., which serves the agricultural, currency and equity index markets of ICE Futures U.S.; ICE Clearing Europe, the clearing house for ICE's energy and emissions markets in Europe;[3] and ICE Clearing Canada, serving the agricultural markets of ICE Futures Canada. Another division, ICE Clear Credit, is dedicated to North American credit markets, leading the clearing business in CDS.

In addition, CCPs exist that focus on only one region or on a selected few types of asset classes. The organizational structure for these CCPs is simpler and usually based on one instead of multiple dimensions. For example, in the United States, FICC (Fixed Income Clearing Corporation) is dedicated to clearing fixed-income products and consists of two main divisions — the Government Securities Division (GSD) and the Mortgage-Backed Securities Division (MBSD). In Canada, CDCC only serves the Canadian financial market and is structured to offer services in derivative products, both exchange traded and OTC, and fixed-income products, with integrated teams in Montreal and Toronto to serve members.

What types of experiences have you had with the different CCP models? Join the discussion.

Next week, the CCP blog series will look at the CCP regulatory environment and how the oversights are applied.

[1] Clearing Corporation was founded in 1925 as the Board of Trade Clearing Corporation, one of the world’s oldest independent clearing houses.

[2] CME ClearPort® is a set of clearing services open to OTC market participants.

[3] ICE Clear Europe also provides clearing services for European credit default swaps, with a separate clearing function, rulebook, membership and risk management model for the energy clearing function.



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