OTC Derivatives, Stock Lending Expansion for LCH.Clearnet
September 22, 2008
LCH.Clearnet unveiled major initiatives in two sectors last week, announcing plans to offer a single clearing platform for most over-the-counter and all listed derivatives and central counterparty (CCP) services for stock lending platform SecFinex.
The new derivatives service will consolidate three LCH.Clearnet systems currently used for multiple exchanges and add OTC contracts to the mix. Mumbai-based Tata Consultancy Services (TCS) is working with LCH.Clearnet on the platform-Synapse Clearing Technology-which is based on an existing TCS offering. Equities contracts will remain on a legacy clearing system.
"Our agreement with Tata allows us to enhance its TCS Bancs Market Infrastructure system with functionality in the exchange-traded and OTC derivatives space and have the final say how it is marketed," said LCH.Clearnet deputy account executive Rory O'Brien, who is heading up the project. In June 2009, the London Mercantile Exchange (LME) will become the first venue to use the platform, although no timetable has been set for others such as the Hong Kong Mercantile Exchange.
LCH.Clearnet says it will take a conservative approach to providing CCP services for credit default swaps (CDS), opting not to clear for contracts with less-than-ideal risk profiles.
According to O'Brien, Synapse will help the London- and Paris-based clearinghouse benefit from cost and operational efficiencies by bringing together several systems. It will also help the clearer avoid potential competitive constraints by regaining the intellectual property rights (IPR) for its clearing platform. The IPR for one of the three current systems is held by Clearing Corp. (CCorp), while LCH.Clearnet owns the rights for the platform used for LME trades. O'Brien declined to identify the party that holds the IPR for the third platform.
For TCS, the deal is its first venture in OTC derivatives and expands its reach in developed markets. Its Bancs offering has 11 customers including depositories and clearinghouses in Kuwait, Russia, the Philippines, New Zealand, Morocco and Saudi Arabia; Switzerland's SIS SegaIntersettle uses it for registrar services. The platform will also be used by inter-depository venture Link Up Markets. "It is designed to be a high-performance, flexible and scalable solution and intended to offer next-generation functionality," said Ramgopal Vivekanand, director of capital markets infrastructure for TCS. "We are now looking at the road map for how it can be adapted for the OTC market."
A Derivatives Future
The OTC clearing initiative comes as LCH.Clearnet faces hiccups in its longstanding relationship with the London Stock Exchange (LSE). Earlier this year, the London exchange said it is reviewing its options, prompting speculation that it will set up a new CCP or use another clearinghouse such as Cassa di Compensazione e Garanzia, which it inherited through its 2007 acquisition of Borsa Italiana. O'Brien declined to comment on LSE's decision but said the future of LCH.Clearnet is in derivatives rather than the equities market, which is driven by volume and quickly becoming commoditized.
However, LCH.Clearnet could face stiff competition in establishing CCP services for credit derivatives, which U.S. and European regulators are promoting. CCorp, which recently had its launch pushed back from this month to first-quarter 2009, is backed by many of the industry's biggest dealers, as well as Eurex and IntercontinentalExchange (ICE). The Chicago-based company will provide central counterparty and clearing services for all CDS contracts registered with the Depository Trust & Clearing Corp.'s Trade Information Warehouse.
