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Tradeweb and EuroCCP announce collaboration to clear European ETFs


Electronic marketplace Tradeweb Markets Inc and Europe’s largest equities clearing house EuroCCP have announced a strategic collaboration to facilitate central counterparty clearing for European ETFs.

Adriano Pace, head of equities (Europe) at Tradeweb explains that the ecosystem for trading ETFs in Europe has been quite different from trading cash equities.
“In Europe, there are lots of different venues and execution methods for cash equities,” Pace says. “The buyside investor typically uses a broker dealer to access liquidity on regulated venues, which are often tied to their own clearing firms.
“However, it is a different landscape in ETFs, which have been principally trading through the OTC market either via a phone call between the buyside and the sellside or through a request-for-quote (RFQ) platform like Tradeweb.”
In these instances, the process involves a known client trading with a known liquidity provider. “At Tradeweb, we’re trying to be innovative by reducing the gap between exchange and non-exchange trading, and combining the safety of central clearing with the benefits of the RFQ protocol,” Pace says.
In a centrally cleared workflow, each participant is linked to a general clearing member, which acts as a buffer between the end client and the clearing house. EuroCCP, for example, is tasked with enforcing its own rules on settlement timing and can commercially penalise a firm that is late in delivery.
“In contrast, the current bilateral model allows for more discretion when handling any settlement delays between a buyside client and a dealer; however, new regulations are on the horizon for non-exchange markets,” Pace says.
2020 will see market participants subject to new Settlement Discipline procedures, including cash penalties for settlement fails and mandatory buy-ins, under the European Central Securities Depositories Regulation (CSDR).
By offering access to central clearing and settlement services via EuroCCP within the trading workflow, Tradeweb will help clients navigate these new rules and mitigate counterparty risk for clearing participants, Pace says.
“One year ahead of the new rules, we are focused on getting our clients ready for the impending changes with a lot of foresight.” The new workflow enhancement on Tradeweb will be up and running by the fourth quarter of 2019.
“We are already talking to lots of buyside participants,” Pace says. “Announcing the new functionality before it goes live provides us with more time to onboard clients, and to guide them through the process of tweaking their post trade protocols.” 
In addition to improving efficiency, this new method of trading could lower costs for Tradeweb’s European clients, as a CCP workflow allows participants to benefit from intraday position netting, something not typically available when settling bilaterally, Pace says. He believes this could open the door to new users of ETFs, particularly more retail type accounts that haven’t historically traded on RFQ platforms. 
“Previously, these users would have had to be signed up with each liquidity provider,” he explains. “But now from the buyside point of view, there is more of an opportunity to interact with non-papered dealers on an RFQ platform.”
Similarly, sellside firms would no longer have to onboard clients with the same amount of documentation, so Pace believes that this might even lead to the business expanding its liquidity pool.

Tradeweb has enjoyed huge growth in its ETF trading platform since launch in Europe in 2012 and its US ETF trading platform in 2016.  In August 2019, Tradeweb announced July trade volumes in European ETFs had risen by 55.2 per cent Y-O-Y to reach USD1.5 billion per day.  As of June 30, 2019, over 60 per cent of European ETF transactions were processed via Tradeweb’s Automated Intelligent Execution Tool (AiEX).

August saw European ETFs rise 107.2 per cent YoY to a record daily volume of USD1.9 billion while US ETFs increased 66.2 per cent YoY to USD3.2 billion average daily volume.
Meanwhile, EuroCCP CEO, Cécile Nagel (pictured), commented on the new deal, explaining that the deal with Tradeweb comes from a three-way conversation between themselves, Tradeweb and BlackRock.

For cash equities EuroCCP is the biggest clearing house in Europe, with the broadest coverage, covering 38 venues across the continent, Nagel says.

“We have been working in conjunction with BlackRock and other participants in the ETF ecosystem on a number of industry initiatives to make the European ETF industry more efficient,” Nagel says.

“For us, ETFs are an interesting asset class which will grow and expand,” she says. “We think from our own analysis that about 70 per cent of the ETF market in Europe is traded OTC or on platforms like Tradeweb or Bloomberg and not cleared, which means that compared with the US market, it is hugely inefficient and fragmented.”

Nagel believes that the ETF industry in Europe is just beginning to see a need for more efficiency and to improve transparency. “With Tradeweb, we have started to see the opportunities for more transparency and we bring netting and operational efficiencies.”

EuroCCP has had a number of discussions with its clearing members and is also talking with the buyside, asset managers and investors.

“It’s early days and there is more education to do, but it’s very encouraging,” she says. “It’s too early to say how this and other initiatives we are working on are going to translate in terms of volumes but ETF clearing will grow as people see the benefits.”

A final comment from Jason Warr, head of global markets at BlackRock iShares supports the initiative. “Introducing CCPs to ETF trading on Tradeweb’s RFQ platforms is an important market structure enhancement, improving the clearing, settlement and utility of ETFs,” he says.

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