LCH.Clearnet Limited (LCH.Clearnet), working with Chi-X Europe Ltd, will launch a unique contract-for-difference (CFD) clearing service.
Investors will be able to benefit from clearing for European equity CFDs; a market that, in 2007 accounted for 30% of all UK equity transactions according to the FSA1.
The service, which is in line with the European Commission's aims to increase the proportion of cleared OTC contracts, will still enable investors to access the best market price for a trade and, in addition, to benefit from:
- Reduced counterparty risk - LCH.Clearnet becomes the counterparty
- Cost efficiencies - due to Straight Through Processing, reduced costs and the removal of the OTC give-up trade
- Margin efficiencies - cross margining with equities
- Financing and corporate actions management - centrally managed, reducing administrative costs and processing
It is anticipated that the service will be launched in the third quarter of 2010, subject to regulatory approval. It will initially cover UK blue chip equities and will be extended to further European markets shortly after launch.
To access the service, participants will execute their equity hedge, as now, with the broker sourcing the best price in the market. The broker will then register the equity hedge and associated equity CFD with Chi-X Europe's Chi-Clear CFD service, which automatically routes the CFD vs equity trade through to LCH.Clearnet's EquityClear CFD service. All combined trades will require offset allocation to LCH.Clearnet nominated finance firms.
This will enable standardisation of contracts, processes and rules for users. The centrally cleared CFD instrument will trade with all the standard CFD benefits, including the ability to long or short a position, leverage, infinite duration, stamp exemption and reduced settlement costs.
Wayne Eagle, Director, Equity Services, LCH.Clearnet Ltd said: "This new service will facilitate CFD and Equity trades to be matched against each other; it is a revolutionary step in trading and clearing. It brinnt brings central clearing and the associated risk management and processing benefits to the CFD market."
Commenting on the announcement, Alasdair Haynes, CEO of Chi-X Europe said: "We are delighted to work with LCH.Clearnet Limited to launch the Chi-Clear CFD service. This will complement the existing range of services to our participants. The combination of Chi-X pan-European liquidity and a Central Counterparty solution for CFDs will provide participants with additional choice in this important market segment."
 Financial Services Authority, "Disclosure of Contracts for Difference. Consultation and draft Handbook text". Nov 2007