FIA Project for European FCM Model Goes Live

The FIA-sponsored European Agent Trustee Model (EATM) has gone live at LCH for its SwapClear service, following a multi-year project between FIA, a consortium of bank clearing members, two European clearinghouses, and external counsel.

The EATM is a new client clearing model designed to broadly replicate the futures commission merchant (FCM) clearing model in the US, with the aim of increasing the clearing capacity of globally systemically important bank (G-SIB) clearing members. FIA stresses it is intended to co-exist with, rather than be a substitute for, other clearing models available in Europe.  

Five years in the making, the EATM has been created by FIA in collaboration with Bank of America, Barclays, Citi, Goldman Sachs and JP Morgan, as well as LCH Ltd, Eurex Clearing and Linklaters. It was initially designed for use with OTC derivatives, but FIA says it can be extended to exchange-traded contracts, subject to demand.  

The EATM has been developed under English law, with an equivalent structure currently being developed under German law. Under the EATM (English law), clearing members may enter trades with a CCP on behalf of their clients and hold those trades on trust for those clients. This differs from Europe’s predominant ‘principal model’ in which clearing members act as financial intermediaries between their clients and the CCP.   This means, FIA says, that under the EATM, a clearing member is party to one transaction – the client transaction with the CCP, whereas under the principal model, it is party to two transactions – one with the CCP and one with the client.  

“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,” says Walt Lukken, FIA president and CEO. “The EATM provides welcome capacity for clearing services at a time of unprecedented growth in our markets.” 

The EATM replicates many features of the US FCM clearing model and was made possible by significant developments and improvements in the understanding of the legal underpinnings of the US version. “It has historically been difficult to design a clearing model outside the US that substantially replicates the US FCM clearing model, due to some uncertainty about the legal basis of that model,” says Mitja Siraj, FIA’s vice president of legal, Europe. “Recent legal memoranda prepared for FIA and ISDA by external counsel have provided more clarity and enabled the articulation of the legal relationships underlying the US FCM clearing model.

“This has made it easier to reverse engineer that model,” he adds. “What has been a statutory construct unique to the US legal system has now been replicated through different arrangements that are referred to as agent-trustee structures outside the US.” 

Now live with LCH, FIA says Eurex Clearing is in the process of implementing the same model and will inform market participants once it has been completed. Both CCPs also intend to implement the EATM in due course for Germany-based clearing members.  

FIA adds, however, that while 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. It has also been designed to ensure there is minimal disruption to existing CCP operations, processes and rules.

“Today’s launch of the new EATM model reflects a long-term coordinated effort among the FIA, consortium members, and CCPs to create future OTC clearing capacity in EMEA. The EATM model combines access to European segregation models and rulesets with the capital efficiency of the US agency model, offering our clients further optionality,” says Helen Gordon, global head derivatives clearing product, JP Morgan.