London-based derivatives exchange Liffe has confirmed plans to establish its own clearing house and says it will renegotiate contract terms with its current supplier LCH.Clearnet.
Reports surfaced in February that 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.
In a statement, Nyse Euronext-owned Liffe says the board of LCH.Clearnet has approved plans to renegotiate its contract as the exchange looks to create a new central counterparty (CCP), called LiffeClear. LCH.Clearnet will continue to provide risk management and guarantee functions for the market.
Liffe says the move will put it on a "level footing" with other futures exchanges - such as Eurex and CME Group - that own and operate their own clearing operations. The vertically integrated model furnishes a lucrative new revenue stream and also makes it difficult for customers to close outstanding contracts using other exchanges.
"The direct relationship that LiffeClear will give us with our clearing customers will enable us to invest in additional post-trade services. We are looking forward to concluding our negotiations of a new mutually beneficial relationship with LCH.Clearnet," says Hugh Freedberg, group EVP and head of global derivatives at Nyse Euronext.
Confirmation of the move comes after the London Stock Exchange (LSE) confirmed that it had been approached by the banks involved in Rainbow about the possible sale of its EDX derivatives business, which, it is thought, would become the basis of the Rainbow platform.
The move to set up its own clearing operation is, in part, an attempt by Liffe to fight competition from Rainbow.
Rainbow has approached LCH.Clearnet about providing clearing services for its new platform. This will make it possible for the new exchange to attract liquidity as brokers will be able to open a contract on one exchange and close it on the other, which would pose a serious threat to Liffe's business.
Reports suggest that Rainbow's backers could appeal to UK and European authorities if the deal between Liffe and LCH.Clearnet is formalised before the new exchange launches.