06 May 2011

WSJ: Clearing sector draws EU scrutiny

A debate has emerged over whether the clearing market is hobbled by a major flaw: European clearing houses usually face limited competition from other companies, giving them what critics say is monopoly power.

The European Commission has long been an advocate of making the clearing sector more open to competition. It has proposed measures that would require clearing houses to share data with potential competitors and take other steps to promote competition, first for cash securities trading, and then possibly for derivatives trading.

But the Commission's proposals may be pushing against the prevailing trend in the industry: taking clearing in-house. The London Metals Exchange this week said it is considering setting up its own clearing house, possibly endangering a contract that London-based LCH.Clearnet has with the exchange to provide clearing services. NYSE Euronext last year said it would end its contract with LCH.Clearnet and set up its own clearing houses to handle derivatives trades in London, and equities trades from its exchanges in Paris, Amsterdam, Brussels and Lisbon.

The Commission's plans have prompted particularly strong opposition from German and French officials, who argue that requiring clearing houses to establish links with competitors risks having problems in one clearing house spread to others. But others say domestic politics are also at work: exchange operator Deutsche Börse owns Eurex, which provides exclusive clearing services for trades on Deutsche Börse exchanges, while NYSE Euronext is looking to establish its own clearing houses. Deutsche Börse executives say commission officials, not its customers, are pushing for exchange-owned clearing houses to open their trading to competitors. Customers prefer clearing services to be integrated, they say.

"Fees for clearing services have been significantly reduced in recent years," said Stefan Mai, Deutsche Börse's head of EU regulatory affairs. "That proves competition is working." Another potential threat to competition in the sector is Deutsche Börse's plan to buy NYSE Euronext. If the merger is approved, the combined company would clear 95 per cent of Europe's exchange traded derivatives. Deutsche Börse officials argue that exchange traded derivatives, which make up less than 20 per cent of the total global derivatives market, should be considered along with the over the counter market, where the two companies are much less dominant.

The Commission last week raised questions about ICE Clear's dominance in the European CDS market, saying it would investigate whether agreements the clearing house has with nine investment banks are improperly encouraging them to avoid using ICE Clear's competitors.

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