MEFF, the Spanish futures and options market, has formally filed a proposal to establish a central counterparty clearing house (CCP) for repos on government bonds, with the aim of commencing operations before the summer.

A central counterparty occupies a central position between two parties to a contract, assuming the rights and obligations of each of the parties and thus becoming a counterparty to both of them.

MEFF has been acting as a central counterparty for futures and options since it was founded in 1989. MEFF's accumulated experience has contributed greatly to paving the way for this new project, which is a natural extension of its activities over the last fourteen years.

José Massa, Chief Executive of Grupo mF, of which MEFF forms a part, commented:

"We are delighted that the change in the law now permits us to respond to client demand for a central counterparty. Risk management is more important than ever for our members and clients, and this move further develops MEFF's strategy of responding to our members' requirements for enhanced quality services at the lowest possible cost. Within Europe, CCPs in other markets were all originally futures clearing houses which expanded into this activity, so it is very natural that MEFF is now establishing a central counterparty in Spain."

In the initial stages, MEFF will operate as a central counterparty for the Spanish government debt market, beginning with repos and then adding outright spot trades. For repos, the central counterparty will guarantee that, on maturity of the repo, each of the parties receives the securities or cash originally agreed upon. In the case of outright spot trades, the clearing house will cover the risk between the trade date and T+3, when the trade is actually settled. For this purpose, as in the case of futures, the clearing house requires that participants provide guarantees.

The Spanish government bond repo market currently trades approximately EUR25 billion between account holders at the Central de Anotaciones (CADE, now integrated into IBERCLEAR).

Of that total, the electronic platform SENAF (which is part of the mF Group, along with MEFF and AIAF) processes about EUR1.8 billion per day. The remainder is traded via brokers or directly between parties.

Trades on SENAF will be registered directly with the central counterparty, and other trades may be registered on request. In all cases, the central counterparty may reject a transaction if it considers that the risk exceeds the established limits.

Cooperation with IBERCLEAR

The Spanish repo market is one of the most efficient in Europe, due to the efforts of the Bank of Spain and CADE. MEFF's CCP plan was developed in close cooperation with IBERCLEAR (CADE) to take advantage of their accumulated experience and ensure that the CCP provides a real improvement in efficiency for the system as a whole.

To ensure this, IBERCLEAR and MEFF will sign an agreement to regulate relations between them. The agreement provides that communications will be conducted via the IBERCLEAR network to take advantage of existing infrastructure, and to minimise the alterations to the market's current modus operandi.

The CCP plan, which was approved by MEFF's Board in December, was made possible by Spain's new Finance Law, which expressly allows the creation of central counterparty clearing houses, and also provides that the governing bodies of futures and options markets can perform this function.

The Finance Law provides that each central counterparty must operate under a Regulation which it drafts itself, and which must be approved by the Ministry of Economy, following consultation with the Comisión Nacional del Mercado de Valores, the Bank of Spain and the autonomous regions of Spain which have devolved powers to regulate securities markets.

In accordance with this requirement, MEFF has formally filed the draft regulation for approval, with a view to commencing operations as a central counterparty before the summer.

MEFF's strategy

The central counterparty plan presented by MEFF is yet another step in the company's development strategy, which is focused on providing services to its members and responding to their demands for greater quality at the lowest possible cost. This project would not have been possible without the support received from the market members.