Industry association to probe exchange clearing

Industry association to probe exchange clearing

The Futures and Options Association (FOA) is to probe plans by IntercontinentalExchange (ICE) and Liffe to establish clearing houses in Europe as part of a larger investigation into the exchange clearing business in the region.

The London-based trade body has recruited consultancy Oxera to conduct a four month survey of "a broad cross-section of market participants and organisations involved in the listed derivatives market on the impact of exchange-integrated clearing".

The FOA says the focus of the inquiry will be on the advantages and disadvantages of exchange-integrated clearing. The research will also focus on "whether or not there is any identified adverse impact on market competition" from moves by exchanges to launch clearing operations and whether or not "interoperability is a practical way forward".

Steve Sparke, chairman of the FOA says many market participants are uncomfortable with the "pricing power and lack of competition" that an exchange's ownership of the open interest in derivatives contracts can bring. But the same market participants have struggled to agree on a model that they would like to see promoted.

"One of the purposes behind the survey is to define 'interoperability' and whether it is a practical 'deliverable'," says Sparke. "The survey will bring us closer to defining a competitive model for the future that the market participants can start to promote."

"Whilst the FOA recognises that exchange-integrated clearing has the capability of delivering operational benefits and enhanced revenues for an exchange, it also raises considerable and legitimate concerns over its impact on competition in the market," adds Anthony Belchambers, chief executive of the FOA.

The FOA says the survey has been prompted by market concerns over moves by US market operator ICE and Nyse Euronext-owned Liffe to launch European clearing operations.

Liffe has disclosed plans to open its own clearing house and renegotiate its existing agreement with LCH.Clearnet. The London-based derivatives exchange is looking to create a new central counterparty (CCP), called LiffeClear. LCH.Clearnet will continue to provide risk management and guarantee functions for the market.

Meanwhile last month ICE received FSA approval to establish its own London-based clearing operation - called ICE Clear Europe - which is expected to commence operations in July 2008.

This prompted the UK's Office of Fair Trading (OFT) to call for feedback from "interested parties" on whether it should launch a competition investigation into clearing and settlement in the derivatives market.

Although the competition watchdog approved ICE's clearing house plans, the OFT said that "some competition concerns have been expressed about clearing and settlement".

Earlier this year London Stock Exchange (LSE) chief executive Clara Furse criticised moves by ICE and Liffe to set up their own clearing operations and distance themselves from LCH.Clearnet.

Furse voiced 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 - and called on UK regulators to act to prevent a "domino effect" of spreading anti-competitive behaviour in the exchange clearing business.

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