Furse calls for regulators to intervene on vertical silos

Furse calls for regulators to intervene on vertical silos

London Stock Exchange (LSE) chief executive Clara Furse has called on the UK's regulators to act to prevent a "domino effect" of spreading anti-competitive behaviour in the exchange clearing business.

Writing for the Financial Times, Furse expresses concern over the way that some exchanges are introducing the so-called "vertical silo" model of clearing in Europe, where exchanges own their post-trade operations, thereby ensuring user lock-in from execution to settlement.

Furse criticises plans by US market operator IntercontinentalExchange (ICE) and Liffe - the London-based derivatives unit of Nyse Euronext - to establish their own clearing operations in London and distance themselves from their current supplier LCH.Clearnet.

She believes the European operators are looking across the pond to the experience of the Chicago Mercantile Exchange (CME), which owns its own clearer, and has been "hoovering up derivatives businesses, buoyed by a high price-earnings ratio, a function of its own position of dominance in US derivatives".

Earlier this year the US Department of Justice (DoJ) called for the separation of clearing and settlement services from futures exchanges after finding the current silo-based structure inhibits competition. The DoJ's call marked a turnaround by the department from its position last year when it approved, without any conditions, the merger between CME and the neighbouring Chicago Board of Trade.

Earlier this week the UK's Office of Fair Trading (OFT) submitted the results of an investigation into ICE's plans to set up a clearing house to the UK Treasury. Furse says a decision whether to refer the issue to the competition commission is "pivotal and will reverberate far beyond the ICE market".

Furse says if UK competition authorities provided strong direction on leaving derivatives clearing and trading open to competition, "it would prevent the domino effect we see in Liffe's pursuit of its own defence".

Furse also argues that the trend towards silo-based structure is at odds with the European code of conduct" on clearing interoperability in the cash equities business.

The voluntary code was agreed by securities markets participants under the threat of legislation from the EC, which was concerned about the high costs of share trading across European borders.

However moves to test the new arrangements, notably by LCH.Clearnet, have had mixed results and earlier this year the London clearing house refused to allow Swiss rival SIS x-clear free access to the LSE's equity business in protest at barriers it is facing itself in Europe, particularly Germany and Italy.

But despite these issues LCH.Clearnet has won new business in recent months, most notably from Börse Berlin's Equiduct Trading platform. There have also been rumours that upstart exchanges such as Chi-X and Bats Trading could use LCH.Clearnet services in Europe. This prompted the LSE to state that it was examining "all options" for its own clearing arrangements, which include a review of its existing agreement with LCH.Clearnet.

Research released earlier this week by Celent suggests that the European code of conduct could have "limited effects" on the European post-trade infrastructure, with the exception of the reduction of post-trade fees.

The majority of requests made for interoperability will not succeed, says Celent, although the reasons for failure will not be technical but rather to do with non-viable business models and resistance from incumbents.

However the analyst does say that the code could lead to change in the post-trade infrastructure, either through vertical integration or consolidation, but the final outcome of the code "will take years to determine".

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