DerivSource Senior Writer Lynn Strongin Dodds looks at the legal differences between the US and European models.
The FIA-sponsored European Agent Trustee Model (EATM) has been five years in the making and while it may be designed to broadly replicate the US’ futures commission merchant (FCM) clearing model, there are distinct differences.
The EATM was developed in collaboration with the Bank of America, Barclays, Citi, Goldman Sachs and J.P. Morgan, LCH Ltd., and Linklaters as external legal counsel. It was initially designed for use with OTC derivatives, but could be extended to exchange-traded contracts, subject to demand.
The model, which was developed under English law, is intended to co-exist with, rather than be a substitute for other clearing models available in Europe. This means that LCH Ltd’s SwapClear service, which has gone live with its EATM, can offer the service to their clients, irrespective of their clients’ location. An equivalent structure is currently being developed under German law.
While The EATM mirrors many features of the US FCM, the most notable difference is that under the new version, clearing members may enter trades with a central clearing counterparty (CCP) on behalf of their clients and hold those trades on trust for those clients. They in turn gain a beneficial interest in the CM’s claims against the CCP. By contrast, in the US there is no such contractual trust.
The EATM also diverges from Europe’s predominant principal model in which clearing members act as financial intermediaries between their clients and the CCP. The clearing member is party to two transactions – one with the CCP and one with the client – whereas in the EATM version, a CM is party to one – the client transaction with the CCP.
According to a London Stock Exchange Group spokesperson, one of the main drivers is that reporting rules for global systemically important banks require clearing brokers to separately report activity under the European principal model versus that under US model. The volumes reported in each category are subject to different treatment, with principal model activity at a disadvantage in that it gives rise to a double counting. The US model activity does not bear this disadvantage.
Walt Lukken, FIA president and CEO echoes these sentiments. “By effectively removing the double-counting, the EATM will help increase the capacity of clearing members offering client clearing in Europe through cost savings and efficiencies,” he adds. “The EATM provides welcome capacity for clearing services at a time of unprecedented growth in our markets.”
One of the reasons that it took so long for the EATM to come to market was the uncertainty as to the legal basis of the US model. This needed to be resolved before Linklaters, and the FIA could proceed forward. The EATM model is also complex, requiring extensive legal analysis by each of the FIA, participating clearing members and LCH, as well as creation of a new template FIA client clearing agreement and LCH rulebook amendments.
Although LCH and Eurex Clearing have been involved in the project from the start, the EATM is designed to be CCP-neutral and can be offered by any European CCP. The German clearinghouse is in the process of implementing the same model and both CCPs also intend to roll it out for Germany-based clearing members in the foreseeable future.
