NYSE Euronext Clear In Its Plans

Terry Flanagan

NYSE Euronext has become the latest European exchange develop its clearing business, as more activity is likely to be forced through clearing houses following post-2008 financial crisis regulations.

Following the failed merger earlier this year with Deutsche Börse, NYSE has decided to set up its own clearing model. Deutsche Börse forces customers to use its own Eurex Clearing system, which generates huge revenues for the parent company.

Clearing, especially in London, has become a priority for many of the world’s leading exchanges. IntercontinentalExchange, through ICE Clear Europe, and CME Group, with CME Clearing Europe, are using the UK capital to expand into Europe. While the London Stock Exchange (LSE) is in exclusive talks with LCH.Clearnet, an Anglo-French clearer based in London, which acts as the main clearing house for the UK exchange, about taking a controlling stake. Until now, the LSE had been an anomaly among Europe’s incumbent exchanges with no clearing house.

“Our clients have long asked for a consolidation of clearing arrangements and the strength of our European derivatives business allows us to deliver meaningful benefits for them in the form of capital efficiencies and savings,” said Duncan Niederauer, chief executive of NYSE Euronext. “Formalizing these steps now and communicating them clearly to our customers will allow them to more effectively plan their capital allocation needs and will enhance their operational stability in a highly competitive and fluid environment.”

NYSE Euronext, which plans to invest $85 in the project, is consolidating all of its derivatives clearing on to a single clearing house, NYSE Liffe, to be based in London, and expects it to be fully operational in two years. It is terminating its previous deal with LCH.Clearnet but its cash equities markets will continue to be cleared by the Anglo-French clearer.

“LCH.Clearnet will work collaboratively with NYSE Euronext, clients, market participants and regulators to ensure a smooth transition and continuation of clearing services,” said Ian Axe, chief executive of LCH.Clearnet. “We wish NYSE Euronext every success in its clearing strategy and look forward to continuing to serve NYSE Euronext as a key long term client and clearing member in cash equities.”

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 over-the-counter 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 in the exchange space due to the potential revenues on offer.

Nearly all of the major European exchanges have their own clearing houses—the so-called “vertical silo” model—where trades made on the exchange are automatically channelled to a bourse’s own clearing house. Positions in the same clearing house can be offset, cutting the amount of collateral a trader needs.

But the alternative venues, such as Chi-X Europe and Turquoise, and the SIX Swiss Exchange, have been pushing for a competitive clearing model in cash equities, known as interoperability, with European regulators now cautiously backing their plans. Many of these exchanges offer traders a choice of as many as four clearers as the costs of clearing are reduced.

However, earlier this week Nasdaq OMX Europe, 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, due to become law at the end of the year, before committing to any new clearing model.

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