London Exchange Linking to Multiple Clearinghouses
LSE is ramping up clearing competition with new routing service
February 11, 2008
The London Stock Exchange (LSE) has raised the stakes in the European post-trade processing industry with the announcement that it will route executed trade orders to whichever clearinghouse its member firms select. LSE this month began allowing trades to settle through Switzerland's SIS x-Clear service in addition to London-based LCH.Clearnet.
LSE director of post-trade strategy Nic Stuchfield says that at least four more central counterparties (CCPs) will enter the U.K. market in the "near future" to compete with LCH.Clearnet, which was created in 2003 through the merger of the former London Clearing House and Paris-based Clearnet.
"Our long-standing policy of competition has greatly contributed to a reduction in clearing fees by up to 75 percent for our largest customers since our original clearing announcement 18 months ago," said Stuchfield. "We are working within the [European Union Code of Conduct] to accommodate requests made by these other clearinghouses."
LCH.Clearnet, SIS x-Clear, Germany's Eurex Clearing and Italy's Cassa di Compensazione e Garanzia (CCG) are all seeking to expand beyond their home markets. In August, LCH.Clearnet asked the German and Italian exchanges for access to their trading platforms.
LSE acquired CCG along with parent Borsa Italiana last year. LSE's X-TRM routing service, used by electronic bond trading platforms MTS and BrokerTec, is operated by Monte Titoli, the Italian central securities depository (CSD) that is also a subsidiary of Borsa Italiana.
Stuchfield noted that LSE has not received a request for connectivity from the Depository Trust & Clearing Corp.'s (DTCC) EuroCCP unit. The umbrella organization for U.S. depository and clearing services recently resurrected the dormant EuroCCP to provide clearing services for Turquoise, the U.K. multilateral trading facility backed by nine banks and anticipated to begin operations in September.
DTCC officials declined to comment but sources in London said that EuroCCP cannot request a link to the London exchange until it gains recognition from the U.K.'s Financial Services Authority.
LSE is the second European exchange to allow trades on its platform to be cleared outside its home market. Switzerland's virt-x did so in 2003 when it permitted trades to be cleared through LCH.Clearnet. However, regulators were not able to persuade market infrastructures to agree to voluntary guidelines for competitive policies or face oversight until the European Union's code of conduct on clearing and settlement was introduced in November 2006.
LSE said in May 2006 that it would allow clearing through SIS x-Clear, but that link did not go live until this month due to delays in software changes at the Euroclear U.K. & Ireland central depository.
Though the EU guidelines do not require market infrastructures to automatically grant equal access, they do let an exchange, clearinghouse or depository deny access if another entity has done the same.
LCH.Clearnet in August announced that it had committed to fee reductions totaling 30 percent of net revenue by 2009. Eurex Clearing, the Deutsche Borse's clearing arm, on Jan. 31 said it will cut clearing fees 25 percent--the following day, SIS X-Clear stated that it will reduce its fees by an average of 47 percent.
While LSE is fostering competition among clearinghouses, it could also end up vying against some of their services in providing its members with the ability to net transactions through X-TRM. In the U.K., unlike the U.S. and the Continent, the operational work involved in clearing--netting--is carried out by the central depository rather than the clearinghouse, which assumes the risk of guaranteeing completion.
