With European regulation that will push over-the-counter derivatives trades on to exchanges starting to appear on the horizon, a handful of the region’s leading clearing houses are battling it out to become market leader in one of the three main OTC asset classes—credit default swaps (CDS).

Anglo-French clearer LCH.Clearnet is the latest to stake its claim and attempt to garner a significant share of the nascent European CDS clearing market with the launch of its international CDSClear service, an extension to the established domestic French offering launched in March 2010.

“The CDS market opportunity is significant and this launch both augments our offering and is a major step forward,” said Ian Axe, chief executive of LCH.Clearnet.

Clearing, especially in London, has become a priority for many of the world’s leading exchanges. The US-based exchange giants IntercontinentalExchange (ICE), through ICE Clear Europe, and CME Group, with CME Clearing Europe, are using the UK capital to expand into Europe.

And following the failed NYSE Euronext-Deutsche Börse merger earlier this year, NYSE has decided to set up its own $85 million clearing house, NYSE Liffe Clearing, which will become operational some time in 2013, to tap into this booming market just as the European regulations are set to come into force, while the German exchange group will continue to use its Eurex Clearing business.

“Look at most of the major exchanges—they have control over their clearing capability,” one European-based exchange executive told Markets Media.

“It’s not so much a revenue generating opportunity, clearing charges are a lot less than trading charges; at the end of the day, margin is netted out and returned to clients so its not really a money making business.

“It’s more of a utility business but the importance of having your own clearing house means that you can launch more products more quickly and you are not waiting in a queue behind other exchanges or other customers.”

The region’s other major exchange, the London Stock Exchange, does not currently possess a clearing house but is confident of tying up a deal to take a controlling interest in LCH.Clearnet that acts as the main clearing house for the UK exchange.

LCH says the launch of CDSClear is being backed by 10 institutions—BofA Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and UBS—many of the world’s largest derivatives dealers. CDSClear clears 129 different types of credit default swap contracts.

“In this evolving regulatory environment, the expansion of CDSClear is a positive addition to the infrastructure of the world’s credit markets,” said Niall Cameron, managing director, global head of credit trading at HSBC in London.

In the US, the Dodd-Frank Act that mandates clearing by investment banks of interest rate swaps, CDS and foreign exchange derivatives—the three main OTC asset classes—is set to come into force this September. Europe is lagging slightly behind the US but hopes to have its version of Dodd-Frank, the European Market Infrastructure Regulation, in place by the start of 2013.

“This latest development in CDSClear complements our existing interest rate swap and foreign exchange OTC offerings enabling LCH.Clearnet to offer clearing services across the broadest range of OTC derivative asset classes and geographies in the market,” said Axe at LCH.Clearnet.

Clearing is a crucial part of the post-trade process that helps guarantee securities and derivatives trades are completed even if one party defaults. And with the G20‘s drive to have the $700 trillion global OTC derivatives market pushed on to exchanges and cleared by a central counterparty by the end of this year, to safeguard the financial system against large defaults, clearing houses have become a key battleground. A CDS is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event.