Nasdaq OMX Muddies Clearing Waters

Terry Flanagan

Nasdaq OMX has postponed plans to join the growing list of European exchanges to offer customers a choice of clearing house, citing regulatory concerns.

The group’s Nordic business, which operates seven Nordic and Baltic exchanges, says it is delaying the introduction of competitive clearing, also known as interoperability, in its cash equities markets past its original start date of next month.

“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.

“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 [European Market Infrastructure Regulation]. There needs to be clarity and a level playing field in this area, before we can introduce interoperability.”

Alternative trading venues and traders have been behind the drive for interoperability, which offers traders a choice of who processes their transactions, cutting the cost of post-trade services. But progress has been slow as regulators have been concerned with associated systemic risks.

Europe’s incumbent exchanges are also under increasing pressure to allow interoperability but are loath to lose the lucrative revenues on offer from clearing. Many incumbent exchanges offer ‘vertical silo‘ models where exchange operators control both the trading of derivatives and the clearing of them—locking out competitors and keeping contracts in-house.

As the core business of share trading for incumbent exchanges has took a battering from competition from new trading venues and falling volumes, and with the G20‘s drive to have the $700 trillion global over-the-counter derivatives market pushed on to exchanges and cleared by a central counterparty by the end of this year, clearing houses have become a key battleground in the exchange space due to the potential revenues on offer.

Emir is being brought in to protect against the potentially catastrophic effects of a big default, as all trades are set to be monitored, and the rules are similar to those adopted in the U.S. under the Dodd-Frank Act.

It is the first steps Europe has taken since the global financial crisis to put down concrete laws to monitor this previously unregulated sector that accounts for roughly 95% of all derivatives trades.

The European Securities and Markets Authority, a pan-European regulator, is responsible for implementing the European response. It is currently preparing a consultation paper, followed by a final public consultation, before it will submit the final version to the European Commission for endorsement to meet the G20’s year-end deadline. But marathon negotiations and delays have plagued Emir and some critics believe it may prove impossible to pass Emir into law before the end of 2012.

Nasdaq OMX was set to join the UBS MTF, Turquoise, Burgundy and Chi-X and Bats in introducing competitive clearing from next month as regulators have slowly being allowing these exchanges to introduce interoperability. Nasdaq OMX said it had gained the required regulatory approvals to go ahead with the move but wanted to wait to see the final outcome of Emir and other upcoming European regulation, such as the revised Markets in Financial Instruments Directive, before committing to anything.

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