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LCH.Clearnet suspends interoperability work as watchdogs probe risks

30 October 2009  |  8501 views  |  1 caution!

LCH.Clearnet has suspended plans to begin offering clearing services across a range of execution venues next week due to regulatory concerns about systemic weaknesses in clearing house interoperability arrangements.

The London-based clearing house alerted the market to the problems in a letter to shareholders in which it said regulators had expressed concerns regarding "inter-CCP margin requirements".

"It has not yet been possible to obtain full details of the concerns and the regulators are, for now, reviewing the agreements," the letter continued. "Until regulatory 'non-objection' has been obtained, it will not be possible to offer clearing services on an interoperable basis to any further trading venues."

LCH.Clearnet was to begin offering clearing services to Chi-X, Bats, Turquoise and Nyse Arca after agreeing interoperabilty deals with their respective central counterparties. The agreements formed a central plank of the European Commission's plans to harmonise clearing and settlement across the eurozone and thereby reduce cross-border trading costs.

However, watchdogs in the UK and Holland are understood to have raised objections about the potential for contagious counterparty default in the event of the failure of one of the linked clearing houses.

Jan Booij, chief executive of EMCF, told the Wall Street Journal: "There were discussions last week between the UK and Dutch regulators. The Dutch regulator objected to the central counterparties' risk model, which involves unlimited liquidity risk between the CCPs. In theory, the model means that one CCP could put the other in default if it could not cover its collateral obligations."

Comments: (1)

A Finextra member
A Finextra member | 31 October, 2009, 15:26

Without knowing the details for sure i can only guess at the problems. However surely any concerns over margin arrangements between clearing houses could be solved by standarising the margin conditions. Perhaps the EU should provide a clearing house for clearing houses . A sort of clearing house of last resort?

In any case the EU market desperatly needs to tidy up the clearing house picture as with so many trading venues the likely rather than possible default of major firm could have a disastrous systemic impact. Hopefully this situation with LCH will be recitified soon and interoperability will move forward  

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