14 July 2014

The Trade: Open access brings new clearing efficiencies

The major point of contention arises within this requirement, as many of Europe’s largest CCPs are owned by stock exchanges, which could be forced to provide clearing for competing venues. Major players such as Eurex, CME and Intercontinental Exchange operate a vertical silo, in which contracts are traded and cleared at the same exchange. The new regulations pose a threat to that model through open access and open the playing field up to new venues in the market.

On the one side, the exchange-operated CCPs argue that the regulations are a blatant attempt to break up their vertical models and would discourage investment, infringe on intellectual property and put them at a competitive disadvantage with their US counterparts. On the other hand, new exchanges competing with the incumbents, along with horizontal models such as LCH.Clearnet, welcome the decision claiming it will drive innovation and open up competition in the market, providing investors additional savings.

Another worry from regulators is that risk has been transferred onto the clearing houses. The effect of a CCP defaulting would be disastrous as all OTC products now move toward clearing, with new collateral rules coming into force. Interoperability among CCPs would mean that if an exchange or clearing house went bankrupt, the choice of clearers would allow another CCP to fill the void. The changes have allowed room for margin offsets and collateral efficiencies.

The rules could also see the emergence of smaller competitors in the markets with the likes of Nasdaq OMX NLX, which was set up in direct competition with the interest rate incumbents last years, benefiting from open access. Additionally, if NLX could cross-margin against LCH.Clearnet’s OTC positions then it could be in line to attract more futures participants away from the major players, which currently dominate the market.

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