Central Clearing…for Bonds!?

This news item in Finextra, clearly the product of a press release from NYSE Euronext, has got me all hot under the collar and forced me out of hiding.

I know other systems are working on this, EuroTLX for example, tie up with Borsa Italiana from memory. Naturally the other two Cassiopeia Bond Exchanges (Galaxy, MTS Credit) must also be working away on this. I understand why all 3 are, less so EuroTLX, because without it how do you differentiate yourselves?

The merits of the Cassiopeia project could take up another post – personally I think it is doomed to fail, or at best one may survive, I mean how will these exchanges function in a crisis like 2008-09? Which is what they are supposedly designed for! But lets look at the specifics of this “news” items and specifically the reasons why a CCP for cash bonds is so important.

1. Mitigation of counterparty risk – eh? Ever heard of DVP (delivery versus payment) and T+3 or sooner, the number of counterparts is far, far more diverse than in IRS or CDS…is this really a problem?
2. Benefit from STP – what? this doesn’t existing on platforms such as Broketec, Tradeweb etc? Of course it does! It exists today!
3. Regulator demands to bring clearing to OTC products – yes…OTS DERIVATIVES! Not cash bonds! This point is, in my view, misleading at best.

Intuitively you can see some benfits of CCP in cash bonds, maybe it opens the market place to more participants who are unable to particpate due to credit issues (again is this really a big problem?). However bonds are already expensive enough to settle, adding a CCP including initial and variation margins plus all the work required in terms of IT resource…given how cost conscious most Banks are at the moment…

Anyway, my 2cents worth, feel free to disagree, but make sure you say why!

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