EMIR regulations, view from a clearing house and exchange

1. Workshop EMIR and the new challenges
View from a clearing house and exchange
Dr. Thomas Siegl | 13.12.2012

2. About ECC
International network of partners and products
Belgian Power Futures
Phelix Futures & Options
Dutch Power Futures
French Financial Power Futures
Dutch (TTF) Natural Gas Futures
German Natural Gas Futures
UK Power Futures
EUA , CER, EUAA & ERU Futures
Coal Futures API 2 (ARA)2
Coal Futures API 4 (Richards Bay)2
French Natural Gas Spot
French Natural Gas Derivatives German Natural Gas Spot
Dutch Natural Gas Spot
UK Natural Gas for OTC Clearing
Emission Spot Contracts (EUA,
EUAA)
German Power Spot
French Power Spot
Austrian Power Spot Hungarian Power Spot
Swiss Power Spot Trilateral Hungarian Power Futures
Market Coupling EMCC, CWE
Austrian Natural Gas Spot
Austrian Natural Gas Derivatives)
2API 2 and API 4 are used under license from Argus Media Limited/The McCloskey Group Limited.
Coal Futures All copyrights and database rights in the API 2 and API 4 indices belong exclusively to Argus Media
API 4 (RB, South Africa)2 Limited/The McCloskey Group Limited. All rights reserved.
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3. ECC Overview
Network of Partners and Clearing Member
ECC’s Network of Partners
6 Parnter Exchanges
15 Clearing Members
306 Non Clearing Members
24 Countries and Customers
18 TSOs
Per 16 October 2012
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4. EMIR implementation - High degree of uncertainty
Common position with market participants
Currently it is still unclear how ESMA will determine the contracts falling under the
mandatory clearing obligation:
• How will classes of financial derivatives be concretely defined?
ESMA information requests are very detailed, however the relevant attributes
already differ significantly between different maturities of a product
• Classification of financial instruments with physical delivery? Non-EU CPPs?
The definition is not final in MiFiD/R II and EMIR.
• The level of standardization can easily be influenced in practice.
With minor changes of contract specifications, the clearing obligation can
potentially be avoided.
• Consideration of proportionality of margin obligation to risk avoided?
How will EMSA apply this consideration?
Further uncertainty concerning the national implementation of the EU rules:
• e.g. German „Nachteilsausgleichspflicht“ in the EMIR Implementation Law
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5. EMIR preparations – maximize customer benefits
via focusing on energy/power markets
Efficient margining saves capital costs
• ECC optimized the margin methods in 2011, offering optimal cross commodity
margin credits; further improvements will be implemented on an ongoing basis;
significant enhancements are in preparation for 2014.
• ECC is preparing the acceptance of EUA collateral; ECC has petitioned for
improvements of EUA within the EMIR implementation laws.
Unification of today‘s distributed power clearing environment
• Already today ECC widely covers the European map with exchange partnerships.
• ECC is „interoperable“ with certain CCPs: Keler CCP and EUREX Clearing
• EEX/ECC expand clearing offering with an extensive OTC clearing product set
• Cost savings through unified clearing conditions (legal cost), cross margining and
netting (collateral and liquidity cost), simplified operations, …
Joint clearing for derivatives and spot markets incl. 24/7 intraday
• Offsetting effects and use of spot-market know-how for derivatives markets
e.g. optional change from financial to physical fulfillment.
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6. EMIR preparations – maximize customer benefits
via state-of-the-art CCP functions
Efficient interfaces
• EEX: access via EUREX (+connected ISVs) and Trayport as standard systems,
ComXerv as a specialized spot market system
• ECC: EUREX-Clearing, EFET.net eXRP, Trayport ClearingHub, Trade
Repositories
Network: client membership, clearing member
• Already today ECC widely covers the European map for power, gas and CO2
• Clearing members are the main specialized clearing banks; further clearing
members in the pipeline for approval
• Extension of the membership base is also driven by the widened product offering
of power for Europe
Risk Management also in the context of the increased concentration to CCPs
• Individual portability and segregation already available today using back-up
clearing members and collateral path-through concepts
• Market participation in risk governance by establishment of a risk committee:
independent supervisory board members, clearer and client representatives.
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7. OTC Clearing implementations
Product design considerations:
Standardization of product specifications
OTC derivatives
Clearing Non Clearing
Exchange traded* No similarity to exchange
look-alike derivatives derivatives
Requirements for cleared Requirements for cleared Requirements for bilateral
exchange derivatives OTC derivatives OTC derivatives
Clearing obligation and standardization are influencing the risk management for
OTC derivatives. Different risk management requirements are set for OTC and
exchange derivatives by the ESMA technical standards (ETS) with a material
impact for collateral requirements. OTC derivatives with a high degree of
standardization leading to risk characteristics similar to exchange traded
derivatives are treated as exchange derivatives.
*exchange traded refers to Art. 1 No. 14 MiFiD and includes trading on regulated markets in third countries
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8. OTC Clearing implementations by the exchange
Consequences of standardizations
Exchange traded and
exchange look-alike OTC Other OTC derivatives
derivatives
• confidence level 99% • confidence level 99,5%
• holding period 2 days • Holding period 5 days
The degree of standardization (comparability of risk characteristics to
exchange traded products) has direct implications to risk management
and therefore to the level of CCP required collateral. Standardization
therefore to be preferred from the CCP and market point-of-view.
Holding period of 2 days is a new standard => lower holding period
parameters of other clearing houses no longer permissible => level
playing field.
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9. OTC Clearing implementation by the exchange
Expansion of product list to allow improved Cross-Margin and
simplification of clearing processes
Nordic Power
Cleared Power
today Futures
(System price)
Cleared Power
tomorrow
PXE - New Partner
Exchange Polish
Power Futures
Spanish Power Futures Romanian
Power Futures
Portuguese Power EUR-Coal for
Futures dark spreads
Italian Power/Gas Futures
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10. Preparations of market infrastructure
Straight-Through-Process for Broker OTC Registration
Order Order
Member A Broker Member B
Trade
OTC Clearing
STP Interface
Permission for Permission for
Auto-Take-up EFET.
Tray Auto-Take-up
net
• Always port • Always
• AutomaticExecution eXRP • AutomaticExecution
• ManuallyConfirmed • ManuallyConfirmed
Auto- Auto Auto-
Portfolio A Portfolio B
Take Up Reg.&Give-up Take Up
Accept Accept
Clearing Clearing
Member Member
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11. Conclusion
Market participants and CCPs operate under a high degree of uncertainty
regarding the upcoming rules
• Early preparation for upcoming rules: optimize cross margining, European
coverage by introducing OTC product bundles and new partner exchanges
• Importance of a CCP industry/regional footprint: both counterparts of a to-be-
cleared trade must have access to the same CCP
Awareness for margin efficiency as an important customer value
• Prerequisite: methodology and coverage of the required product set
• Importance of the acceptable collateral, e.g. EUA as collateral
• ESMA Technical Standards achieve a level playing field by setting minimum
parameters
Protection of cleared customer positions is essential
• Usage of segregation and portability of customer positions
• Unified rules improve operational setup: one central counterparty serving multiple
exchanges
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