In Europe we are blessed (If that’s the right word) with many Clearing Houses. We are told that this provides competition and drives down prices while producing an environment for innovation. Can anyone point out where any of these benefits are accruing?
Where is the proof that investors are getting a better economic deal and what was the most recent innovation from a Clearing House?
In fact the fragmented structure of Clearing Houses in Europe is an historic remnant of the previous century and most of the Clearing Houses have no real part to play in the future. Even if one assumes that this fragmented clearing house structure does provide
competition then the costs are still far too high. As the costs of fragmented collateral bounce around clearing houses until it finds its needed home. This not just once a day but is a continuous race round the clearing house track as margining and risk management
requirements demand that positions and counterparties are fully collateralised and margined.
Margining is equally fraught, with initial and variation margin management a whole industry on its own, bearing all the associated costs. The inability to cross margin and utilise multiple asset classes effectively burden financial services firms and guess
what the cost load is ultimately laid at the feet of the investors.
Arguably risks are increased with a fragmented Clearing House structure but some would argue the opposite and say concentration risks are the worry point. This particular argument looks at odds when the USA structure with the DTCC is used as a benchmark.
Big in the USA and with high levels of concentration appears to have the benefit of lower costs and total security. The very thing we are told that Europe gets with it’s all over the place clearing house structure
The truth is that despite interoperability and other measures to maintain the status quo consolidation into no more than two clearing houses is inevitable. Join in the discussion with top market practitioners at the next
Post Trade Forum debate on the 17th April hosted by the London Stock Exchange.
Blog updated: 29 May 2015 14:01:45