The road less travelled

The road less travelled

The authorization journey for SIX x-clear, the SIX Securities Services CCP, is (almost) over. The European Commission has recognized Switzerland’s supervision of CCPs as equivalent. Market participants will now be able to use SIX x-clear to clear standardized over-the-counter derivative trades as required by EU legislation.

Central counterparties (CCPs) do pretty much what it says on the tin: act as a principal to both sides of a trade or contract, that is to say the buyer to every seller and the seller to every buyer. The G20 has encouraged the use of CCPs since the financial crisis to reduce risk in derivatives trading.

Models, however, vary. In order for SIX x-clear, the SIX Securities Services CCP, to provide cross-border services from Switzerland within the European Union (EU), it requires authorization from the European Securities and Markets Authority (ESMA). A prerequisite for acquiring authorization is to have an ‘equivalent’ supervisory system in place. Since ‘equivalent’ is not the same as ‘identical’, there is a process to establish this.

The journey to authorization is now (almost) over. The road was long, but not particularly winding. In 2012 the European Commission asked ESMA to provide it with technical advice on the equivalence between the Swiss regulatory regime and different aspects of the EU regulatory regime. When it delivered its report a year later, ESMA noted that Switzerland was still in the process of finalizing its regulatory regime and therefore reserved judgment on certain aspects of equivalence.

The direction of travel was clear, however. ESMA noted that the Swiss financial supervisory regime was robust, with a track record of effective supervision of financial markets, including during the financial crisis. It advised the Commission to consider that CCPs authorized in Switzerland are subject to effective supervision and enforcement on an on-going basis and that the legal framework of Switzerland provides for an effective equivalent system for the recognition of CCPs authorized under third-country legal regimes.

The European Commission recognized Switzerland’s supervision of CCPs as equivalent in the mid of November 2015. FINMA, the Swiss Financial Market Supervisory Authority, described the recognition of equivalence as an important step towards ensuring effective, efficient and internationally agreed supervision of central counterparties and of financial markets in general.

Market participants will now be able to use SIX x-clear to clear standardized over-the-counter derivative trades as required by EU legislation, while the CCP remains subject solely to the regulation and supervision of the Swiss authorities. Importantly for customers, EU banks' exposures to SIX x-clear will also be subject to a lower risk weighting in calculating their regulatory capital.

Given that ESMA’s initial assessment released in 2013 was broadly favorable, SIX Securities Services has been looking forward to the latest announcement with some eagerness and welcomes the European Commission’s announcement.