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Two derivatives trading rows, both involving LCH.Clearnet, Europe’s largest clearing house, look set to test the determination of the European Commission to open securities markets to more competition.
In both clashes – one involving the InterContinental Exchange (ICE) and the other involving Liffe – exchanges are moving to take control of their clearing and customers are threatening to take their respective cases to the European Commission.
The Commission has committed itself to competition in securities markets and has focused on the role of clearing – where bargains are matched and trades are netted off against each other to reduce cost and risk – as the key to reducing anti-competitive behaviour.
Many exchanges own their own clearer and have blunted competitors by blocking access to it. The Commission has brokered a voluntary code on “inter-operability” between exchanges, clearers and settlement houses.
So far it has focused only on cash equities. It recently undertook a consultation on extending that to derivatives, a move opposed by the European Federation of Stock Exchanges.
In the row over the ICE, which is planning to move clearing in-house and away from LCH, the matter is under review by the UK Office of Fair Trading. There are signs that the OFT, which has long been troubled by the competition issues raised by exchanges owning clearers, is studying the application closely. Two weeks ago, it sent out questionnaires to market participants querying the level of competition for the mostly widely traded ICE contracts in London.
If ICE forces customers to use only its own clearer, bankers say they will press the Commission to block the deal. Last week, in a separate initiative, Nymex launched a suite of products in direct competition with ICE that will clear through LCH.
Meanwhile, customers are also threatening to bring LCH to the attention of European authorities over a deal it tentatively struck with Liffe last week that would see the exchange take some of its clearing in-house but stop short of forming its own in-house operation and ending its relationship with LCH.
By Norma Cohen