This page intentionally left blank Clearing Services for Global Markets Clearing forms the core part of a smooth and efficiently functioning financial market infrastructure. Traditionally, it has been provided by clearing houses, most of which today act as a ‘central counterparty’ (CCP) between the two sides of a trade. The rapid growth of cross-border trading has sparked discussion on the most efficient industry structure – particularly in Europe and the USA. At the heart of this discussion lies the question of whether the implementation of a single clearing house creates greater benefits than a more competitive but interlinked market structure. This is the starting point for this book, which analyses the efficiency of clearing and clearing industry structure. Along with clear-cut definitions and a concise characterisation and descriptive analysis of the clearing industry, the book determines the efficiency impact of various cross-border integration and harmonisation initiatives between CCPs. This serves to identify the most preferable future structure for the clearing industry. Tina P. Hasenpusch works for Barclays Capital in London. Prior to her career at Barcap, she completed her PhD in Banking and Finance at the European Business School in Germany with a summa cum laude. Tina also worked in the Trading and Clearing Market Development depar tment of Eurex, the world’s leading derivatives exchange and clearing house. Her research focus and expertise are in the fields of securities and derivatives trading, clearing and settlement systems. Advance praise for Clearing Services for Global Markets ‘The book features three real-world case studies br inging clearing to life. It is a thorough and insightful exposition of clearing and a must-read for anyone interested in the subjec t matter.’ PAUL J. BRODY Chief Financial Officer of Interactive Brokers Group and Timber Hill LLC, and Board Member of the Options Clearing Corporation ‘Only few academic contributions have been published on clearing and no compre- hensive and readable standard literature exists. I can definitely see this book filling the void in becoming a standard work on clearing.’ ORLANDO CHIESA Senior clearing house expert ‘This book’s unique character and contribution result from an unprecedented number of interviews and feedback sessions with academics and industry experts. The list of these people truly reads like the “Who’s Who” of the der ivatives world. This book is essential for anyone with an interest in clearing issues.’ DENNIS DUT TERER Independent clearing consultant and former President and Chief Executive Officer of the Clearing Corporation ‘I don’t know of anyone who hasthought as deeply and written asthoroughly about the key issues related to clearing as Tina Hasenpusch. Anyone interested in the mysterious but critically important process of clearing, especially in the issues that arise as markets and clearing become more global, should read this book.’ MICHAEL GORHAM Industry Professor and Director of the IIT Stuart Center for Financial Markets and co-author of Electronic Exchanges: The Global Transformation from Pits to Bits ‘This is a great piece of work! It becomes the textbook for anybody interested in the process of clearing trades. It is extremely well researched and written.’ CHRISTOPHER K. HEHMEYER President and Chief Executive Officer of PensonGHCO, founding partner of Golden- berg, Hehmeyer & Co., former Chairman of the Board of Trade Clearing Corporation and Director of the Chicago Board of Trade ‘If anyone ever had doubts about how exciting clearing could be – this book will change your thinking. You will find that, despite its scope, it turns out to be a surprisingly fun read.’ DAVID KRELL Co-founder of the International Securities Exchange ‘Tina Hasenpusch has taken a view of the complex world of securities and derivatives clearing and provided her readers with an analysis of uncommon transparency. The analysis is based on diligent fact-gathering structured with a logical vision of the broadly defined market. Her message is delivered with both clarity and grace.’ JAMES J. MCNULTY Director of NYSE Euronext, Director of ICAP Plc and former President and Chief Executive Officer of the Chicago Mercantile Exchange ‘Ms Hasenpusch’s book dares to go where others have not and provides an innovative insight into the economics of clearing, using real-world examples. Executives of exchanges, clearing organizations and banks should be interested in this scholarly work, as should relevant national authorities and central banks.’ JOHN MCPARTLAND Financial Markets Advisor to the Federal Reserve Bank of Chicago, and international clearing and settlement consultant ‘This book is a joy to read. Ms Hasenpusch has a gift for explaining difficult concepts. She makes it remarkably easy to deep dive into the world of clearing.’ OTTO E. N ¨ AGELI Managing Partner of OEN Consulting, former Deputy Chief Executive Officer of Eurex, and Member of the Executive Board of SWX Swiss Exchange ‘This book is very timely and well worth reading, given the many changes afoot in the areas of exchange regulation and clearing.’ HARVEYL.PITT Chief Executive Officer of Kalorama Partners and former Chairman of the Securities and Exchange Commission ‘Particularly in the light of recent market dislocations, clearing is critical for the assurance of a healthy functioning of the financial markets. This book will have an enormous audience.’ MARK SPANBROEK Partner of a privately held electronic trading firm Clearing Services for Global Markets A Framework for the Future Development of the Clearing Industr y Tina P. Hasenpusch CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK First published in print format ISBN-13 978-0-521-51871-0 ISBN-13 978-0-511-63510-6 © Tina P. Hasenpusch 2009 The views expressed by research participants in interviews are their own and do not necessarily represent the official stance of their organisation. The interviewees are not associated with the final conclusions of this study. The findings of this study thus do not necessarily reflect the views of the individuals interviewed in the context of this study. Any proposition that is forwarded is arrived at through a rigorous, independent academic methodology. The findings of the book do not necessarily represent the official stance of Barclays Capital. The International Capital Market Association’s sponsorship of this publication aims to promote research and the continuing development of the market. ICMA did not exercise any editorial control over this publication and as such the findings do not necessarily reflect the official stance of the Association. 2009 Information on this title: www.cambrid g e.or g /9780521518710 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Published in the United States of America by Cambridge University Press, New York www.cambridge.org eBook ( NetLibrar y) Hardback This book is for my beloved parents, Heike Maria and Bruno Hasenpusch With love and gratitude [...]... debate over the future of clearing The International Capital Market Association (ICMA) 1 Introduction Very definitely there is a whole host of topics related to clearing I believe that clearing is a topic that has always been regarded as sort of an operational thing The exchanges’ matching engines have had the glamour But I think in the long run the value added of clearing exceed the value-added of matching!1... types and categories Transaction costs in the Value Provision Network Categorisation of direct transaction costs Categorisation of clearing- related cost of capital Categorisation of clearing- related risk management costs Categorisation of clearing- related information technology costs Categorisation of clearing- related back -of ce costs Classification of network strategies between clearing houses Classification... Multilateral Trading Facility not applicable National Association of Securities Dealers National Association of Securities Dealers Automated Quotation System non -clearing member National Futures Association number Norwegian Futures and Options Clearing House National Securities Clearing Corporation New York Board of Trade New York Clearing Corporation New York Mercantile Exchange New York Stock Exchange... Frankfurter Allgemeine Zeitung futures commission merchant Federal Reserve Bank Federation of European Securities Exchanges Futures Industry Association figure Futures and Options Association Futures and Options World Financial Services Authority Financial Services and Action Plan Guarantee Fund for Danish Options and Futures Frankfurter Wertpapierb¨ rse o Guarantee Clearing Corporation Global Clearing. .. Institutional view on clearing 40 Microeconomic benefits of CCP clearing 43 Asset class view on the value-added of CCP clearing 48 The Value Provision Network of clearing 51 Typical clearing member types classified by their business focus 53 54 Classification of regionally active clearers (CMPR /CMAR ) Classification of regionally-to-globally active clearers 55 (CMPR-G /CMAR-G ) Classification of globally active... The Global Clearing Link concept (Phases I to III implemented) Interviewees’ assessment of the Global Clearing Link Assessment of economies of scale and scope in the Global Clearing Link Deriving the Global Clearing Link’s net supply-side scale effects Typified assessment of the Global Clearing Link’s positive and negative network effects The Global Clearing Link’s net demand-side scale effects The Global. .. matching!1 Clearing is often regarded as less glamorous than the creative and headlinegrabbing business of trading,2 but it constitutes the core of modern financial market infrastructure.3 Clearing services not only benefit individual market participants, but markets as a whole by increasing their efficiency Actually: ‘this dimension of financial markets is fundamental for the proper functioning of the whole... private benefits in the context of CCP consolidation Structure of Chapter 8 Interviewees’ assessment of cross-margining agreements Interviewees’ assessment of clearing links Interviewees’ assessment of the suitability of clearing links to integrate the European clearing industry Organisational and corporate structure Eurex Clearing AG Three-phased implementation approach of the Global Clearing Link The. .. necessary precondition for the efficient functioning of financial markets These services are also considered indispensable for economic growth and financial markets integration.11 ‘From a market perspective, their importance derives from the fact that clearing and settlement costs can be viewed as a subset of transaction costs These are the costs faced by an investor when carrying out a trade Expensive and... provide valuable comments and feedback I am also beholden to Prof Dr Patrick van Cayseele for readily sharing his insight on the network economics of clearing I want to express my appreciation to Jan Kurek, who was always there to step in at the last minute to save the day when any IT-related troubles, viruses, bugs 1 Note that, again, these individuals are not associated with the final conclusions of this . setting 16 2 .1 Definition of clearing 17 2 .1. 1 Process view 18 2 .1. 2 Functional view 19 2 .1. 2 .1 Basic clearing services 20 2 .1. 2 .1. 1 Trade confirmation 20 2 .1. 2 .1. 2 Transaction/position management 21 2 .1. 2 .1. 3. financial markets. This book will have an enormous audience.’ MARK SPANBROEK Partner of a privately held electronic trading firm Clearing Services for Global Markets A Framework for the Future Development of. of clearing costs to clearing members 13 5 5 .1. 1 .1 Cost awareness 13 6 5 .1. 1.2 Monitoring of all-in costs 13 9 5 .1. 1.3 Employment of a cost management system 14 0 5 .1. 1.4 Ability to assess relevance