EMCF - New data centres

Nordic case study
EMCF implements CCP clearing in Nordics

In late 2008 Nasdaq OMX took the decision to launch mandatory central counterparty clearing (CCP) services in an effort to boost trading volumes of equities on its exchanges in Copenhagen, Helsinki and Stockholm. While local market participants had used bilateral settlement for years, large international investors were not allowed, or not willing, to trade on the markets until a safe and reliable system including CCP clearing, was established. The collapse of Lehman Brothers just months before had highlighted the urgent need to mitigate counterparty risk. Other attempts in previous years to introduce CCP clearing in the Nordic markets, had failed for various reasons.

In October 2009, EMCF (European Multilateral Clearing Facility), currently Europe's largest cash equities clearing company, launched full CCP services throughout the Nordic region.

The size of the challenge of this project, cannot be overstated. "This is the first time ever, worldwide, that three markets have implemented counterparty clearing simultaneously,"said Hans-Ole Jochumsen, president of Nasdaq OMX Nordic. The extremely abbreviated time period -- about one year in total -- was also challenging. "The Nordic equity markets have taken a quantum leap from bilateral clearing to central counterparty clearing in record time,"he added.

Willem Mooijer, Director of Sales & CRM of EMCF, heavily involved in the project for EMCF, from its inception to its successful conclusion, said: "For some participants it was a monumental project. They found it really challenging. But we were able to assist them and guide them throughout and everyone made it through in the end."

EMCF and Nasdaq OMX were able to eventually turn the tide of sentiment by fully involving market participants in each stage of the process. "We started with organising monthly meetings and we expanded that to include individual meetings," said Mooijer. "At the highpoint of the project, we conducted approximately 20 meetings a month with the 35 market participants involved. These visits went a long way in smoothing out the difficulties and misunderstandings about the process. More importantly, they allowed EMCF to help the players prepare for the dramatic changes with regard to IT, risk management and procedures."

Some of the changes the market participants sought and received in the course of negotiations represented a huge departure for EMCF. "Normally we use settlement agents, but the local banks wanted us to establish direct access to the local CSDs (central securities depositories) and Central Banks," said Mooijer. The change meant EMCF would have to go through membership procedures to join the local CSDs. This was not an easy or quick process.

Another massive challenge was the documentation. All participants involved wanted to influence the legal documents that would govern the system. EMCF had therefore to negotiate with legal working groups representing the participants and take their concerns into account. This resulted in a thorough revision of the rule book and regulations,"said Mooijer. Other issues, such as the demand by the market players to have local custodians for placing collateral to cover margin requirements, proved troublesome due to peculiarities of local law. In fact, throughout the process there were numerous legal obstacles, all eventually overcome by the close cooperation of EMCF, Nasdaq OMX, local regulators and the local market participants.

In the first test phase, which started in June, EMCF was able to identify and resolve a number of teething problems, such as issues with settlement instructions. By the time the second test phase began in August, most problems were resolved and by the final test phase in September, most things where running smoothly. The launch in October went ahead without any major hitches.

At the end of the day, Mooijer believes the vast majority of participants, the exchange and the regulators are happy with the result. The market is now more attractive to international investors and the exchange is reaping the rewards. Today, depending on the market, between 80% and 98% of the exchange transactions are CCP cleared.