General Regulation

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Financial markets & infrastructures Clearing house

Supervision of the clearing house

Published on May 30, 2013

The AMF takes part in supervising the French clearing house alongside the Autorité de Contrôle Prudentiel (ACP) and the Banque de France. Clearing has been regulated at European level since the adoption of a regulation on OTC derivatives, central counterparties and trade repositories accompanied by technical regulatory standards established by the European Securities and Markets Authority (ESMA) and adopted by the European Commission.

Clearing houses play a major role in the operation of financial markets by providing a guarantee in the event of the failure of a financial intermediary that is a clearing member. Clearing houses thus contribute to the stability of the financial system and the reduction of systemic risk.

Authorised by the ACP

Under Article L. 440-1 of the Monetary and Financial Code, the clearing house must have credit institution status and be authorised as such by the ACP.

Operating rules approved by the AMF

The clearing house must adopt operating rules that are submitted to the AMF for approval. These rules cover membership requirements, the guarantees that must be provided and the procedure for managing the failure of a clearing member.

Under Article 541-7 of its General Regulation, the AMF issues professional licences to those responsible for overseeing clearing, members and compliance.

Clearing house tasks

Through a mechanism known as “novation”, the clearing house interposes itself between buyers and sellers, acting as seller to each buyer and buyer to each the seller. More specifically, the clearing house interposes itself between clearing members, which are financial intermediaries that are required to perform settlement and delivery after trades. It therefore takes on the risk of failure of one of the counterparties by substituting for it. If the clearing member fails to deliver the securities, the clearing house will, after issuing a reminder, acquire the securities instead of the member in order to deliver them to the non-defaulting party. It provides a reciprocal guarantee to the seller. If a clearing member becomes insolvent, the clearing house will take on all of its obligations.

LCH.Clearnet SA, France’s clearing house
LCH.Clearnet SA is France’s clearing house. Established in 1969 under the name Banque Centrale de Compensation SA, it clears Euronext’s continental cash and derivatives markets (including French cash markets Eurolist and Alternext and derivatives markets MATIF and Monep). It also clears bond markets (MTS, EuroMTS, BrokerTec) and transactions in Credit Default Swaps (CDS).

To manage this counterparty risk, the clearing house calculates and collects margins from clearing members. These are intended to cover the risk of loss if the member is unable to deliver securities or pay amounts owing. If margin calls prove insufficient, the clearing house may tap into a default fund set up with financial contributions from clearing members. These two mechanisms ensure that the clearing house is financially sound.

The clearing house may also simplify settlement by calculating an overall net position for trades on a market that it clears. Working by clearing member and security, it determines the balance to be delivered or received by the member. A single settlement instruction is then issued, no matter how many trades are executed over the course of the trading day, considerably reducing settlement flows.

Obligations of the clearing house

The clearing house records transactions executed on the regulated market or multilateral trading facility that it clears. It calculates the margin that members are required to post and issues margin calls.

It must also monitor positions. In the event of a failure by a clearing member, that is, if the member fails to make margin payments or is the subject of insolvency proceedings, the clearing house will automatically close out its positions or transfer to another member the clients’ positions of the defaulting clearing member, along with corresponding collateral.

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Legal information
Head of publications: The Executive Director of AMF Communication Directorate.
Contact: Communication Directorate – Autorité des marches financiers 17 place de la Bourse – 75082 Paris cedex 02