— Eurex, Caja Madrid Move Helps Allay Stringency Test Fears

LONDON (MNI) – Caja Madrid earlier this month became the first
Spanish institution to join Eurex Repo and also Eurex Clearing, passing
its stringent membership criteria, Market News International
understands.

The fact a Spanish counterparty has been accepted into Eurex Repo
is likely to help soothe market fears ahead of the EU’s banking sector
stress-test results, which are due to be published on July 23. To date,
Spanish institutions have been regarded as amongst the most vulnerable
to financial turmoil arising from the credit squeeze on European banks.

To the fore are market concerns that some institutions in the
Spanish banking sector may be hiding losses on property loans and also
losses in various government bond holdings. For Caja Madrid, these
concerns surfaced back in May when it said that it was going to miss
E1.12 million in interest payments on residential mortgage-backed
securities (RMBS), due to soaring defaults on the underlying home loans.

Caja de Ahorros y Monte de Piedad de Madrid or “Caja Madrid”, one
of Spain’s leading savings banks, becomes a “Direct Clearing Member”
(DCM) of Eurex Repo, the trading platform and central (clearing)
counterparty for fixed income assets. The membership also allows Caja
Madrid to act as a intermediary with other domestic companies so that
they can finance their Spanish Treasury Debt positions, something it
could not do that until now.

The move will certainly help allay market fears over Caja Madrid’s
financial health. In order to become a DCM, it was necessary for the
bank to pass several criteria, both in terms of the size of its balance
sheet and operating capacity. In addition, it also has to provide a
“clearing fund contribution” as laid down by the clearing house and
regulators.

According to Eurex, it has “some very rigorous risk systems in the
calculation of margins and collaterals that each member must deposit, in
order to cover any type of bankruptcy that a company, which uses the
clearing house can suffer”. Currently, the capital requirement for a DCM
is E17.5 million, with a clearing contribution of a minimum E1.0
million, a Eurex spokesman said.

Caja Madrid, is currently in the process of creating a large
financial group with Bancaja, by taking over five smaller cajas, and
once this is done it will become Spain’s third-largest bank, behind
Banco Santander and BBVA, with E340 billion in assets.

Underlining the scale of the potential risks from holding eurozone
government debt, analysts estimate total exposure of banks in the four
most troubled eurozone countries at more than E200 billion. This figure
far exceeds the ECB’s current bond purchase scheme, which currently
stand at some E60 billion.

A total of 91 European banks are currently being “stress-tested”,
representing 65% of the EU banking sector. However, there is already
some skepticism in the market about whether the tests will be tough
enough to offer reassurance to markets.

However, the advantage Caja Madrid has, is that its membership to
Eurex Repo may temper market fears of any potential counterparty risks,
one of the downsides of a less-than-glowing report from the stress
tests, as membership guarantees payments between parties and offers
members financing in better market conditions.

According to Caja Madrid, its membership of Eurex Repo offers
advantages to the Spanish market overall, as it allows them to
act as an intermediary with other domestic companies, so that they can
easier finance their Spanish Treasury positions.

But, there will obviously be no formal ties to Eurex for the other
Spanish institutions conducting client business through Caja Madrid.

Even this, Caja Madrid says, is a step forward, as no Spanish
intermediary has been able to offer this service before.

Eurex is one of Europe’s leading derivatives exchanges, with 235
member companies and is part of the Deutsche Boerse Group. Market News
International is a wholly owned subsidiary of Deutsche Boerse AG.

–London newsroom: 00 44 20 7862 7494; email: nshamim@marketnews.com

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