Ulf Noren, global head of sub-custody at SEB, talks to AST about the
introduction of CCPs within the Nordic market
Image: Shutterstock
AST: Before the financial crisis, what was the attitude of Nordic
providers towards a CCP?
Noren: If you go back several years, the attitude to CCPs was negative to neutral. The general opinion was that we had a modern and cost efficient system and if you were a direct member on the exchange and the CSD then you were fine.
That attitude remained until the Lehman default and the collapse of the Icelandic banks. It’s where the concern started to take hold over the risk of bilateral settlements.
AST: What drove the creation of the CCP?
Noren: There were two prime drivers. The first was to reduce the risk profile of the market, and the second was the requirement to avoid the exponential cost following increasing growth.
The market driver for the CCP came from regional banks who brought the issue up with the industry associations in the region. The stock exchanges were also influential, the OMX Group felt the competition from other exchanges as a result of Mifid would increase the pressure from trading participants to have a CCP.
AST: What was the timeline for its development?
Noren: The discussions started slightly in advance of the crash in 2008, and by 2009 the CCPs were ready in Denmark, Sweden and Finland, with EMCF becoming the market CCP of the national exchanges. It went live in Norway in 2010, with the appointment of Oslo Clearing.
Once the decision was made, the process went fairly smoothly. But there was some criticism of the plan - it’s human nature. There was a reluctance in some parts - the smaller banks and broker dealers felt the investment level was too high, and they’d need to work to a completely different understanding of risk. There was also a fear amongst the smaller players that access to securities lending would be restricted and that demand for collateral would be extensive. For small players operating in the bilateral environment, the costs of using a CCP complicate matters - there are now fewer broker-dealers as a result of the introduction.
AST: What’s been the attitude of local and international players since its introduction?
Noren: If you look at the larger investment banks and broker dealer companies, the response has been universally positive. It’s difficult to compare with previous years because of the financial crisis but all in all the total volumes have risen and we still have many competing agents.
AST: How do you think it’s working now? Are improvements necessary?
Noren: There are always improvements to be made and the CCPs are looking at where they can build on what they’ve done. At the moment there is one CCP for three markets and Oslo Clearing in Norway. In addition there’s Euro- CCP with Turquoise. So three major CCPs in the market, which could cause some issues, especially in terms of interoperability when and if it comes around.
AST: What will the future bring for the back office in the Nordics?
Noren: It’s an interesting question. If you look at the European CCP environment you can see it’s a fragmented world. We have seen some consolidation efforts being made but there has been no fall in the number of CCPs - in this part of the world a number of CCPs have been added but none have fallen off. Consolidation is needed and will happen, if for no other reason than the complications surrounding interoperability.
And when you look at a CCP, the risk models are extremely difficult and complicated. There is not the full transparency that will allow us to conclude they are robust enough. We need more transparency and more assimilation in risk models. The other factor is that because more OTC transactions are going on CCPs, there will be higher volumes and more complexity. This means that the importance of CCP’s in the context of financial stability will also increase.
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