News that NYSE Euronext is planning to build their own Clearing House for derivatives and is very interesting and a possible indictment of the quality of choice of alternative Clearing Houses in the market. It was obvious that there would be some moves by
NYSE Euronext away from LCH.Clearnet as soon as the London Stock Exchange Group increased their holding becoming the largest shareholder. At the moment they only intend building a clearing house for derivatives, leaving cash equities at LCH.Clearnet. Will
this remain a long term arrangement is anyone’s guess.
We can assume NYSE Euronext looked closely at existing clearing houses for derivative clearing and concluded none met their needs.
What does this say about the fragmented market for clearing houses creating choice and competition? Obviously in NYSE Euronext eyes, not a lot!
We can clearly see a pattern emerging now with three top Stock Exchanges all moving into the vertical silo model. This is a direct reversal of ten years ago when the vogue was for a horizontal model, offering a choice of clearing house to customers of Stock
Exchanges. The Deutsche Börse of course has never deviated from its vertical structure, as it produces huge returns and of course cements the relationship with its users.
Where does this leave the many clearing houses that are unaffiliated? Interoperability offers a way of maintaining their business but for how long? The more logical conclusion is that clearing house consolidation will be accelerated. Could this mean that
all the remaining clearing houses will come together to offer an independent fourth choice to the market? Interoperability would make that a possibility. On paper at least but then again, logically it’s unlikely, but expect further consolidation at the Exchanges
end, which will percolate down to the Clearing House.
The NYSE Euronext decision looks like the market is moving into a new phase and this could be vitally important with the impact of OTC entering Exchanges and Clearing. Certainly those who expressed concerns around the ability of the balance sheets of clearing
houses in accommodating OTC should be somewhat relieved, by having a tight vertical silo of powerful Stock Exchanges. Now we see the first laws passed forcing OTC onto Exchanges and into clearing houses but what does it all mean and what path is being laid?
The future of clearing in Europe and Clearing House risks will be debated at the next
Post Trade Forum on the 17th April at the London Stock Exchange.