Netting the LSE's Tiff With Euroclear: Where's the Beef?
January 25, 2010
Is Euroclear UK& Ireland's fee for netting trades executed on the London Stock Exchange at the end of each day too high?
And is that why the London Stock Exchange is losing market share to alternative trading platforms?
That's what the LSE thinks. Result: Depending on what U.K. market players decide after a thorough review, the way LSE trades get cleared could change. Or not.
"Post-trade fees are a drag on our business," said Xavier Rolet, the LSE's new chief executive in November.
A sub-committee of the Association for Financial Markets in Europe (AFME), a U.K. market association with nearly 200 bank and brokerage members, has begun evaluating the current and alternative trade netting models for the LSE and their respective costs. The group will present its finding to the LSE by the end of February, says Jason Waight, director of product management at Euroclear UK & Ireland in London.
Possible recommendations include: maintaining the status quo; giving clients a choice of trade netting provider or migrating netting of trades to clearing service providers such as EMCF, EuroCCP or Cassa di Compensazione e Garanzia (CC&G), the last of which the LSE owns through its purchase of its parent Borsa Italiana in 2007. The London exchange is also in talks with financial services firm Fortis to buy its majority-stake in Amsterdam-based EMCF. Another London-based clearinghouse EuroCCP is owned by the U.S.' Depository Trust & Clearing Corp.
Here is the essence of the LSE's beef with Euroclear UK & Ireland. In November, Rolet accused Euroclear UK of charging excessively high fees to net transactions that are then sent to clearing houses, such as LCH.Clearnet which charges about 4.5 pence to clear a trade. According to Rolet, that meant the total cost of processing a trade executed on the LSE was far higher than on alternative trading systems using clearinghouses such as EMCF and EuroCCP. Those clearinghouses charge a single fee of about three pence per trade for netting and clearing services combined.
Whereas central depositories typically only settle transactions, Euroclear UK & Ireland also nets trades executed on the LSE for LCH.Clearnet or X-Clear to clear them. That means traders on the LSE pay two fees - one to net their trades and another to clear them. Once trades are netted by Euroclear UK & Ireland, they are sent to a clearinghouse such as LCH.Clearnet, which charges about 4.5 pence per netted trade to guarantee that the trades are settled. Euroclear UK & Ireland then settles the trades.
Euroclear UK & Ireland says that its average fee of 2 pence per trade for high-volume traders, includes trade netting and settlement as well as other services, such as collecting the U.K.'s stamp duty tax and reporting transactions to regulators; those services are not offered by the other clearinghouses. The more trades a firm executes on the LSE the higher the netting fees it must pay in aggregate, but Euroclear UK & Ireland offers a sliding-scale discount whereby unit fees decrease as volumes increase. The depository says it has cut its netting fees by about 70 percent over the past two years.
"For large orders on the LSE, post-trade costs account for two-thirds of the overall cost of trading on the exchange with trading fees accounting for the remaining third," says Hugh Brown, the LSE's manager of post-trade services.
