LCH.Clearnet to Clear Contracts for Difference
January 10, 2011
Contracts for difference will be centrally cleared for the first time ever this week through an agreement between LCH.Clearnet, Europe’s largest clearinghouse, and multilateral trading facility Chi-X Europe .
The move, say LCH.Clearnet and Chi-X Europe, supports the goal of regulators to increase central clearing in OTC trades.
The service will begin with the most liquid U.K. stocks. Traders in the over-the-counter market will send transactions for confirmation to London-based Chi-X Europe, which will pass them on to LCH.Clearnet for final clearing in its EquityClear service. Currently, CFDs are cleared bilaterally between executing brokers and prime brokers.
CFDs allow investors to bet on shares or other assets without owning them. The securities are traded off-exchange and investors use the underlying stock to hedge their positions.
CFDs, which pay the holder the difference between the price of a stock at the beginning of the contract and at the end, are likely to be favored by long-only fund managers that have restrictions on the volume of OTC trades they can execute.
Regulators on both sides of the Atlantic have been pushing for more OTC contracts to be centrally cleared e cleared amid criticism of opaque financial products and excessive risk-taking in the wake of the financial crisis. Clearinghouses typically act as central counterparties to every buy and sell order thereby reducing the potential for a counterparty to either default on its obligation or go bust.
“In the same way as Chi-X Europe launched its cash equities market ahead of MIFiD’s transformation of the trading landscape, we hope centrally cleared CFDs will help address the European Commission’s aim of bringing more OTC trades on-exchange ahead of any regulatory imperative,” says Alasdair Haynes, chief executive officer of Chi-X Europe in a statement issued by LCH. Clearnet and Chi-X Europe on Monday. “This is an exciting new opportunity for us to expand our business into new areas.”
Chi-X Europe is widely considered to be the largest alternative trading platform to emerge in Europe following Europe’s adoption of the Markets in Financial Instruments Directive (MiFID) in late 2007.
