By Huw Jones
LONDON (Reuters) - Clearing house EuroCCP said it needs a 1.5 billion euro (1.27 billion pounds) loan to fix "liquidity weaknesses" identified by regulators.
Cboe, the largest pan-European stock market, said on Dec. 10 it had agreed to acquire the remaining 80% of EuroCCP for roughly 36 million euros. The U.S. exchanges operator already owned 20% of the Netherlands based clearer.
Cboe said it planned to fund the deal with cash, pending receipt of regulatory approval and an "arrangement of a supporting liquidity facility at the EuroCCP clearing entity level".
It gave no further details at the time but EuroCCP's annual report, published after the takeover was announced, underscores how important the loan is for EuroCCP, which accounts for 30% of European share clearing.
A stress test of clearing houses undertaken by the European Union's European Securities and Markets Authority (ESMA) identified weaknesses in the liquidity risk management framework when faced with extreme stresses, EuroCCP said in the report.
"As part of the transaction, EuroCCP and Cboe are advanced in putting in place a committed credit facility of up to 1.5 billion euros to ensure EuroCCP meets all relevant (liquidity) requirements", EuroCCP CEO Cecile Nagel said in the annual report.
"This facility is an important part of a number of new tools and procedures to strengthen our liquidity risk framework, which are expected to be implemented in early 2020 – subject to regulatory approvals."
EuroCCP had committed to resolving the issue by the end of 2019.
"Given the progress that has been made and the complexity of the matter, regulators have agreed to a later date for solving the liquidity issue," it added.
Costs from the loan means that EuroCCP "may be loss-making for a limited period of time" but that it was still a "going concern" due to surplus capital and was "confident" of obtaining regulatory approval.
"In addition, Cboe, as the proposed acquirer of EuroCCP’s entire share capital, will guarantee payment of scheduled interest and fees payable under the loan agreement," the annual report said.
($1 = 0.8937 euros)