SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

MAIN PLAYERS AND ARRANGEMENTS

Figure 27: Automatic trading systems market share in the European repo market as at December 2009

27.5%

ELECTRONIC REPO TRADING

DIRECT 54%

18.5% VOICE-BROKERS

Source: 18th ICMA survey, March 2010

2.3.2

Central Clearing Counterparties (CCPs)

As displayed in figure 28, a CCP can interpose itself between the parties involved in a repo or securities loan transaction, that is to say between the seller and the buyer or between the lender and the borrower.

Figure 28: Illustration of an arrangement with a CCP

Bilateral trade

PARTY B

PARTY A

- Bridge

Trade with a CCP

2.3

CCP

PARTY A

PARTY B

In clearing a trade, the CCP becomes couterpart to, and responsible for, the corresponding trade obligations arising from the original bilaterally negotiated trade. This principle is know as novation, this is the same role that the clearing house performs for the clearing members of derivatives exchanges. The CCP calculates exposure and calls margin in order to protect itself from market and credit risks.

Copyright CACEIS, 2010

In Europe, two principal CCPs are present in the repo market:

> LCH.Clearnet, with its RepoClear service introduced in late 1999 which offers multi- lateral netting facility for European government and non-government debt repos and cash bond transactions; > Eurex Clearing, a subsidiary of Eurex Repo created in 2005, which offers CCP services for all Eurex Repo euro-denominated trades. With regard to securities lending, SecFinex launched with LCH.Clearnet in mid-2009 a CCP serv- ice dedicated to loans made on equities of the Euronext zone. It should be noted that this initia- tive has met little commercial success so far, with only a few members at the time of writing.

Today CCPs are far from enjoying a significant market share in the securities finance markets and are the hottest point of debate in the industry.

Securities Lending & Repo markets | page 41