Letters of credit (L/Cs) can feature in a new clearing and settlement system due to be launched during August.

European Central Counterparty Limited (EuroCCP) is expected to launch the system with 15 firms having gained approval as clearing participants.

Financial institutions

Participants include nine of the system's founding firms - Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, Merrill Lynch, Citi, UBS, BNP Paribas and Societe Generale.

The other participants in EuroCCP are ABN Amro, Barclays Capital, Credit Agricole Cheuvreux, Instinet, KAS Bank and Lehman Brothers.

Rigorous conditions

Because EuroCCP guarantees trades for its participants, the process of bringing in new participants involves an extensive review of potential firms to ensure they can meet their settlement obligations.

Participants must meet rigorous financial requirements, including minimum levels of capital and financial performance standards.

After being approved by EuroCCP risk and participation departments, each prospective participant firm must also be reviewed and approved by a committee of the board of directors as well.

L/C collateral

Participant firms are required to put up collateral with EuroCCP that can be used in the event a participant firm is unable to fulfil its settlement obligations.

Collateral can be cash, securities or L/Cs. The level of collateral is adjusted on a daily basis.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.