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Euronext takes first step to a European clearing house
Global Banking & Finance Review®
Company
By Huw Jones
LONDON (Reuters) – Euronext said on Tuesday it has changed how it calculates risk in government bond trades in the first step of what it hopes will transform the European exchange into a regional clearing house on par with rivals like the London Stock Exchange and Deutsche Boerse.
Euronext bought the Milan exchange last year from the London Stock Exchange and has begun using its clearing arm CC&G, now rebranded Euronext Clearing, to build a pan-European clearing house that can offer cross-border savings.
It dovetails with European Union efforts to build a deeper, more autonomous capital market.
Clearing ensures a trade is completed even if one side of the deal goes bust, critical for keeping markets stable and a moneyspinner for exchanges.
Euronext said that from Monday, Euronext Clearing started applying a method known as VaR to determine how much margin banks and brokers must post against their Italian, Portuguese, Spanish and Irish government bond trades.
VaR is increasingly used by the world’s top clearing houses for at least some of their products, replacing the MVP SPAN methodology which the Italian clearer had been using for bonds.
Savings for customers using this more precise margin calculation will be “sizeable”, said Anthony Attia, global head of post trade and primary markets at Euronext.
“Having VaR is more reliable for us in order to capture the different risks and at the same time it should generate efficiencies and more accurate level of margin,” Attia said.
VaR will be rolled out for stocks clearing next year, with derivatives added in 2024, when all transactions on Euronext markets will be covered and in the same default fund.
“At that moment will probably be one of the first ones to have 100% VaR,” Attia said.
Euronext has already said it would stop using LSEG’s Paris-based clearing house for derivatives trades by 2024, and switch to Italy.
(Reporting by Huw Jones, editing by Ed Osmond)
Value at Risk (VaR) is a statistical measure used to assess the risk of loss on an investment. It estimates how much a set of investments might lose, given normal market conditions, over a set time period.
Margin is the amount of money that an investor must deposit with a broker to cover potential losses on a trade. It acts as a security for the broker.
Cross-border trading refers to the buying and selling of financial instruments across different countries, allowing investors to access international markets.
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