By Huw Jones
LONDON – Euronext said on Tuesday it has changed how it calculates risk in government bond trades in the first step of what it hopes will transform the European exchange into a regional clearing house on par with rivals like the London Stock Exchange and Deutsche Boerse.
Euronext bought the Milan exchange last year from the London Stock Exchange and has begun using its clearing arm CC&G, now rebranded Euronext Clearing, to build a pan-European clearing house that can offer cross-border savings.
It dovetails with European Union efforts to build a deeper, more autonomous capital market.
Clearing ensures a trade is completed even if one side of the deal goes bust, critical for keeping markets stable and a moneyspinner for exchanges.
Euronext said that from Monday, Euronext Clearing started applying a method known as VaR to determine how much margin banks and brokers must post against their Italian, Portuguese, Spanish and Irish government bond trades.
VaR is increasingly used by the world’s top clearing houses for at least some of their products, replacing the MVPSPAN methodology which the Italian clearer had been using for bonds.
Savings for customers using this more precise margin calculation will be “sizeable”, said Anthony Attia, global head of post trade and primary markets at Euronext.
“Having VaR is more reliable for us in order to capture the different risks and at the same time it should generate efficiencies and more accurate level of margin,” Attia said.
VaR will be rolled out for stocks clearing next year, with derivatives added in 2024, when all transactions on Euronext markets will be covered and in the same default fund.
“At that moment will probably be one of the first ones to have 100% VaR,” Attia said.
Euronext has already said it would stop using LSEG’s Paris-based clearing house for derivatives trades by 2024, and switch to Italy.