London-based derivatives exchange Liffe is planning to enter the clearing business in a bid to fight off competition from Project Rainbow, the European exchange being set up by investment banks, according to a Bloomberg report.
The report - which cites "three people with knowledge of the talks" - says the Nyse Euronext unit is re-negotiating its existing contract with clearing house LCH.Clearnet.
Liffe wants to take over from LCH.Clearnet as central counterparty but continue to use the clearing house for other post-trade services such as trade guarantees and overseeing the fund covering members who default on trades.
The derivatives exchange is looking to become a central counterparty by the end of the year but needs approval from LCH.Clearnet and UK regulators, says Bloomberg.
The report points out that by controlling clearing, exchanges can make money and deter customers from closing outstanding contracts on other bourses.
The move into clearing by Liffe comes as the exchange face new competition from Project Rainbow - a pan-European derivatives market being set up by investment banks Barclays, Deutsche Bank, Goldman Sachs, JPMorgan, MF Global, NewEdge and UBS. The banks have reportedly approached LCH.Clearnet to act as clearing house already.
Two of Liffe's biggest competitors - Eurex and Chicago-based CME Group - already control their clearing operations. Furthermore, last year US market operator IntercontinentalExchange (ICE) disclosed plans to terminate its existing clearing agreements with LCH.Clearnet and establish its own operation in London.
However in the US The Department of Justice (DoJ) recently called for the separation of clearing and settlement services from futures exchanges after finding the current structure - where market operators own and control their own clearing operations - inhibits competition.
The DoJ says the control exercised by futures exchanges over clearing services "has made it difficult for exchanges to enter and compete in the trading of financial futures contracts".