NYSE Euronext has announced that it intends to spend $60 million to build two new clearing houses, in London and Paris, to be operational by the end of 2012, bringing in-house the clearing of cash and derivative contracts currently undertaken by LCH.Clearnet.
(This time, NYSE Euronext is being careful to give LCH.Clearnet full notice of termination of its contracts, 30 months in the case of LCH.Clearnet SA in Paris. In 2009, NYSE Euronext paid LCH.Clearnet €260 million for early termination of its contract.)
The move underscores the recent trend by exchanges to create vertical silos where possible. (In the case of the French market, this move technically re-creates a vertical silo, since Clearnet was actually a subsidiary of Euronext before it merged with LCH.)
The obvious exception to this trend – for the moment – is the London Stock Exchange Group. Its Italian wing, Borsa Italiana, owns its own clearing house, CCG. But the LSE in London was for a long time an advocate of the separation of trading from clearing. (There were some trenchant speeches on this subject from Don Cruickshank, then Chairman of the LSE, in the early 2000s.) Indeed, it is almost unique among national exchanges in offering a choice of clearing houses, LCH.Clearnet in London or SIX x-clear in Switzerland. How much longer will they maintain this position, when they see the rest of the Europe switching to internal clearing? Xavier Rolet has now been quoted as saying that the LSE cannot continue to rely on an external supplier for clearing. And if they move, it seems the most likely option would be to build their own clearing house (after all, they now own an IT company, MillenniumIT).
So much for the conventional wisdom – only a few years ago – that the next step for Europe was to move to a single clearing house!
Where does this leave competition? As we observed in March, in Europe there is an almost complete split between the post-trade arrangements for MTFs and for national exchanges. This will get worse with the move by NYSE Euronext (and more so, if the LSE follows). The clearing houses that serve the MTFs – EMCF, EuroCCP, LCH.Clearnet and x-clear – are all working towards interoperability. This would enable a bank to trade across multiple trading platforms that use different CCPs, but centralise its clearing in its preferred CCP. Putting this into place has been held back by the need to convince regulators that the process is sound, but it seems likely to come soon.
However, a glaring absence from the discussions are the clearing houses owned by exchanges. Most notably, Eurex Clearing appears to have no interest in interoperating with anyone, making a mockery of the idea of interoperability. The NYSE Euronext makes no reference to its new clearing houses entering into interoperability arrangements with other clearing houses.
Where does this leave LCH.Clearnet? It would be left with hardly any exchange-clearing business: only the London Metal Exchange and shared access to the LSE’s domestic equity clearing (for the time being) and some MTFs. However, it has a strong position as one of the first clearing houses to clear OTC derivatives. In this context, it could even make a virtue of its independence from any exchange to position itself as a specialist OTC clearing house.
Will it actually happen? Teasingly, the announcement from NYSE Euronext contains the sentence “NYSE Euronext also remains open to discussions on any potential restructuring of LCH.Clearnet Group Ltd, and/or its subsidiary companies.” Could the whole affair just be a manoeuvre to get a better deal out of LCH.Clearnet? Could they be interested in buying back Clearnet, once it has no business left, thus neatly bringing the wheel full circle?
Finally, who benefits? It is notable that S&P has downgraded NYSE Euronext and put LCH.Clearnet on credit-watch for a possible downgrade, so apparently both businesses become more risky as a result. NYSE Euronext has stated that it expects to generate at least $100 million (€125 million) of revenues from clearing in 2013. LCH.Clearnet generated €220 million of clearing fees in 2009. Will the reduction in fees paid to LCH.Clearnet offset the new fees paid to NYSE Euronext?