The US
In the view of the hedge fund group, the failure to
include a positive mandate for straight-through processing would undermine the
fundamental policy goals of clearing by impeding optimal risk management,
competitive liquidity and open access to the market. Given the benefits of
straight-through-processing, the MFA urged ESMA to ensure the same real-time
processing timeframe for all transactions submitted for clearing, regardless of
the execution method used or whether or not the transaction is subject to
mandatory clearing.
Further, in order to facilitate international harmonization of
regulations and to ensure full realization of the benefits of client clearing,
ESMA should draft standards on client clearing models that support
straight-through processing. The MFA noted that the CFTC has demonstrated its
support for straight-through processing by issuing final rules that minimize or
effectively eliminate the time between transaction execution and acceptance
into clearing and mandate straight-through processing for all derivatives
transactions regardless of the mode. The CFTC has noted that prudent risk management
dictates that once a transaction has been submitted to a clearing member or a
central counterparty, the clearing member or central counterparty must accept
or reject it as quickly as possible.
The MFA is concerned that, absent straight-through
processing, client clearing arrangements could impose barriers on the ability of
clients to access clearing and competitive execution. In particular, it is
important that such arrangements do not expose clients to the credit risk of
their executing counterparty, which would undermine the risk reduction purpose
of clearing. To address this concern, the MFA has consistently supported
straight-through processing of transactions to clearing. Straight-through
processing of derivatives transactions ensures that parties to derivative
transaction are informed in real-time whether the transaction has been accepted
for clearing. Once the transaction is accepted for clearing, the parties’
counterparty risk exposure is to the central counterparty rather than to the
other market participant.
Article 11 of EMIR sets forth requirements related to
mitigating risks of each non-cleared transaction, noted the hedge fund association, and
consistent with this risk mitigation element, the final regulations should mandate
the compression or effective elimination of the time between execution and confirmation
of clearing acceptance, as is the norm in other cleared derivatives markets, including
futures, equity options, and energy derivatives. Indeed, the MFA emphasized
that the final regulations should require straight-through processing and
clearing of derivatives transactions regardless of the execution method used by
the parties and whether or not the transaction is subject to the EMIR clearing
obligation.
More broadly, the MFA said that
straight-through-processing benefits all market participants by giving them
certainty of clearing immediately following execution, which in turn allows them to hedge more efficiently and
effectively manage risk. It is also an important factor in encouraging the
implementation of broad, mandatory clearing, noted the MFA, and is essential to
electronic trading, particularly central limit order book trading, since it is
not possible to enter into an electronic transaction on an anonymous basis
without both the immediate confirmation of the execution of the transaction and
its acceptance for clearing. Straight-through processing also promotes
accessible, competitive markets and access to best execution by
ensuring parties to a cleared transaction have immediate confirmation that they
will face the relevant central counterparty , thus eliminating the need to
negotiate individual credit arrangements with each of their counterparties, as
is required in bilateral derivatives markets.
The MFA fears that if a client faces any delay in a
central counterparty’s acceptance of any transaction for clearing it will
result in the client trading with fewer counterparties, and that this will, by
extension, increase concentration in the market, since it is typically the
largest dealers that pose lower long-term counterparty credit risk and with
whom clients are more likely to have in place bilateral master agreements.
Central counterparties have a strong interest in ensuring the solvency of
clearing members, posited the hedge fund association, thus straight-through
processing can broaden the number of suitable counterparties available and
increase competition among them.