European Clearing Battle Hots Up

Terry Flanagan

Burgundy, the Nordic multilateral trading facility, has become the latest venue to open up to full interoperability as the ‘vertical silo’ clearing model comes under renewed attack in Europe.

From May 11, its customers will be able to choose between Dutch clearer European Multilateral Clearing Facility and Six x-clear, the Swiss facility.

“This is an important strategic milestone for our clients as we are the first Nordic exchange that offers choice in the increasingly important clearing landscape,” said Olof Neiglick, chief executive of Burgundy, which offers trading in over 1,200 securities in Denmark, Finland, Norway and Sweden.

“In the last three years we have seen a radical transformation in the way equity trading takes place, resulting in lower transaction costs for investors. Now we are taking the next step by introducing competition also for the clearing part.

“Deregulation and competition are the main drivers behind service improvements and price cuts in any market–this is also the case for Nordic securities trading as the industry matures.”

Clearing has become a key battleground between European exchanges. Most of the major legacy exchanges have their own clearing houses—the so-called vertical silo model— where trades made on an exchange are automatically channelled to a bourse’s own clearing house and they are loath to open up to other entrants.

But the alternative pan-European venues, such as Chi-X Europe, Turquoise and UBS MTF, as well as Six Swiss Exchange, Switzerland’s principal stock exchange, have been pushing for a competitive clearing model in cash equities, known as interoperability, with European regulators now cautiously backing their plans despite some reservations concerning associated systemic risks. Many of these exchanges offer traders a choice of as many as four clearers as the costs of clearing are reduced.

The London Stock Exchange has also offered customers a choice of two clearers since 2008, but it is an exception among many of Europe’s incumbent venues with the bourses fighting hard to prevent a more horizontal, or interoperable, approach.

“There is going to be legislation that enforces some kind of horizontal clearing,” one European exchange executive told Markets Media. “Some exchanges may have to accept trades from other venues.”

It is thought that up to 60% of Europe’s trading flows are expected to be fully interoperable before the end of the year.

However, two months ago, Nasdaq OMX Nordic, an operator of seven Baltic and Nordic exchanges, decided to postpone its decision to allow interoperability in its cash equities markets and is waiting on the final outcome of the European Market Infrastructure Regulation (Emir), the regulation that will decide on the matter which is due to become law at the beginning of next year, before committing to any new clearing model.

“Nasdaq OMX has strived to pursue a competitive cash clearing model since 2009, when we first announced our intent,” said Hans-Ole Jochumsen, president of Nasdaq OMX Nordic, at the time. “We are convinced that it will act to drive liquidity and lower investor costs, thus benefiting our clients and the European capital market as a whole. However, there is still uncertainty regarding the detailed requirements for interoperability even though there is a political agreement regarding Emir. There needs to be clarity and a level playing field in this area before we can introduce interoperability.”

Meanwhile, it has been reported that the main German exchange, Deutsche Börse, is planning to let third-party clearers access to its cash trading market. This is a shift in its approach from the vertical silo model and could hasten the onset of full interoperability across all European exchanges.

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