05.18.2012
By Terry Flanagan

Clearing Houses Bolster Operations

Six months after the collapse of MF Global, clearing market participants continue to deal with the fallout.

“Since the default of MF Global, we have added things in the background that would have prevented something like that from happening,” said Steve Staszak, director of operations at CME Clearing during a Futures Industry Association conference in New York on Thursday. “There are now more checks, audits and reviews in place. We’ve been working very closely with regulators and CCPs in order to prevent something like this from happening again, but it’s still a work in progress.”

Fear in the markets returned in full force in November when MF Global filed for bankruptcy following a failed $6.3 billion bet on European sovereign debt. MF Global did not properly separate its customer accounts and borrowed cash from those accounts to cover losses on its sovereign debt bet. The firm confirmed to regulators that over $700 million in customer funds had been misappropriated.

“It’s surprising how everyone had a different meaning of segregated accounts,” said Thomas Hammond, present of ICE Clear U.S.

“There was a tremendous lack of education on what certain structures meant,” said Michael Cahill, president and chief operating officer of the Options Clearing Corp (OCC). “One of the lessons of this, regardless of the product or region, is that we need to educate people on what the risk truly is.”

While not as advanced as other segments of the capital markets, competition is rising in the clearing space, with many different providers of this integral service, including exchange operators CME and ICE, as well as independent organizations like the OCC and LCH.Clearnet.

“We need different models, it’s not one size fits all,” added Cahill.

Clearing has become the next frontier for exchange groups looking to expand their operations as the core trade matching business becomes increasingly commoditized. NYSE Euronext plans to build out its own European derivatives clearing house in London, while retaining the services of LCH.Clearnet for the purposes of cash equities transactions.

With upcoming regulations in the U.S. and Europe set to route countless over-the-counter transactions to regulated trading platforms and to clearing houses, the biggest players are bolstering their clearing capabilities.

LCH.Clearnet, which is itself in the midst of a takeover from the London Stock Exchange, will look to acquire Nasdaq OMX’s International Derivatives Clearing Group, facilitating an expansion into the U.S. for the world’s largest interest rate swaps clearing house. The parties last month signed a non-binding agreement.

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