Nordic Clearing Battle Hots Up

Terry Flanagan

The move towards a competitive cash equities clearing model in Europe edged a step closer this week when Nordic exchange Burgundy added a third clearer to its ranks and, in so doing, piled the pressure on rival regional venue Nasdaq OMX Nordic, which earlier this year pulled out of plans to adopt a similar model.

European regulators gave a cautious green light to expand competitive clearing, also known as interoperability, in July 2011, despite some reservations over systemic risk, and since then the uptake has been mainly from alternative trading venues such as Bats Chi-X Europe, UBS MTF and Turquoise. Many of these exchanges offer traders a choice of as many as four clearers.

Incumbent domestic exchanges, which traditionally operate an exclusive relationship with a clearer—leaving brokers with no choice as to who they clear with—have been slow on the uptake although the London Stock Exchange has offered two-way clearing interoperability since 2008 while Germany’s Deutsche Börse last month said that it was “open” to allowing third-party clearers access to its cash markets following an internal investigation.

The incumbent exchanges, generally, have been loathe to free up access to other clearing houses in the cash equities market, which would allow market participants to net and cross-margin trades between venues, thus cutting costs. Interoperability would also push down overall clearing costs. Clearing costs are still considerably higher in Europe compared to the U.S..

Burgundy, which is regulated by the Swedish Financial Supervisory Authority, and offers trading in 1,200 securities in Denmark, Finland, Norway and Sweden, has become the first trading venue in the region to offer multilateral interoperable central counterparty clearing. Burgundy members can now opt to clear their trades through EuroCCP, the pan-European cash equities clearing house owned by the Depository Trust & Clearing Corp, Swiss clearer SIX x-clear or the incumbent clearer EMCF, which is based in the Netherlands.

High-frequency traders are also targeting the Nordic markets in ever greater numbers after new fiber optic cables were laid between London and Stockholm last year.

“We have listened to our customers who told us they wanted to be able to choose who they clear with,” said Olof Neiglick, chief executive of Burgundy. “We expect interoperable clearing to push down overall clearing costs, which is great news for all equity traders operating in the Nordics.”

Diana Chan, chief executive of EuroCCP, added: “Our partnership with Burgundy marks another step to ensuring genuine competition exists in the clearing of Nordic securities. Today’s announcement is particularly significant for the Nordics as Burgundy is introducing effective clearing choice with multiple CCPs in the region.”

In March, Nasdaq OMX Nordic postponed plans to join the growing list of European exchanges to offer customers a choice of clearing house just weeks before it was meant to go live, citing regulatory concerns. The group’s Nordic business, which operates seven Nordic and Baltic exchanges, said it was delaying the introduction of competitive clearing.

“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. There needs to be clarity and a level playing field in this area, before we can introduce interoperability.”

Nasdaq OMX Nordic is likely to make its position known on interoperability later this year.

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