Eurex Lending CCP to close 11 February 2021Germany Reporter: Drew Nicol
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Eurex Clearing has confirmed plans to wind down its European securities lending clearing business by March due to insufficient volumes and unstable projected market interest amid resource draining regulations and a challenging market environment.
The closure will mean there will be no venue to centrally clear securities lending transactions in Europe from Q2.
The Lending CCP was formed in 2013 by the Deutsche Boerse subsidiary and covers global fixed-income securities, equities and exchange-traded funds in Europe. Among other benefits, it promised yield enhancement while reducing credit, counterparty and other risks.
Clearinghouses also offer the benefit of providing a single counterparty for all trades which alleviates the need to maintain numerous bilateral agreements, a task too burdensome for many buy-side members.
At its launch, the Lending CCP was welcomed by market participants and forged connections with several service providers including EquiLend and Pirum Systems. It also gained interest from the borrower community but struggled to win over lenders, with some notable exceptions including BNY Mellon and Morgan Stanley.
Despite many successes and developments to the offering, by 2020 lingering concerns with the value proposition, including high costs and a complex onboarding process, caused Eurex board members to reallocate resources to other repo products within its funding and financing segment.
SFT understands that Eurex spent most of last year communicating with clients that the securities lending CCP could close if prospects didn’t improve as business costs out-weighted projected returns.
Alongside the challenges of convincing buy-side firms to clear securities lending trades in the same way many already do for their repo activities, Eurex has cited external hurdles including new regulations, Brexit and the COVID-19 pandemic as driving down CCP adoption on the priority lists of potential clients.
The significant demands of re-platforming the CCP to the Eurex Clearing’s C7 engine added internal pressures.
Matthias Graulich, a member of the executive board at Eurex and chief strategy officer, tell SFT that although there was broad support for the service the timing was not right and trading volume had not hit "levels necessary to keep the business afloat".
Graulich adds that there may be greater demand to clear securities lending trades in the future but was unlikely to be in the near term.
Accordingly, stakeholders were informed in December of the board’s decision to discontinue the securing lending CCP from Q2.
Eurex’s counterparts that manage the pipes funnelling trades to the CCP are now working to unwind those positions in an orderly fashion.
Pirum Systems, which operates the CCP Gateway, states it is working with all parties to ensure a “seamless close-out” of open positions by 31 March.
Eurex is now understood to be focused on its numerous products centred on the more mature repo market, which is more aligned to a CCP model.
Eurex Repo's markets are by contrast thriving, recording a double-digit percentage growth in 2020 trading volumes compared to the year before.
The cleared repo market is expected to grow in both Europe and the US where stakeholders are pointing to the success of the Fixed Income Clearing Corporation’s sponsored repo programme which has bloomed in recent years and saw a significant spike in usage during the 2020 Q2 volatility.
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