Clearing systems: Competition starts clearly


Peter Koh
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The main clearing houses in Europe have had a busy few years.

As well as slashing tariffs by about 50% over the past two years, they have been trying to get their systems to work with each other, motivated by the threat of legislation. More recently, however, they’ve taken the bold move of writing letters of intent to every major exchange in Europe to offer a competing clearing service.

The London Stock Exchange is the first exchange in Europe to announce its plans to offer users a choice of clearing houses. According to the LSE, at least four central counterparties (CCP) are expected to enter the UK market to compete against the incumbent LCH Clearnet. In order to facilitate competition between the clearing houses, the LSE has announced plans to introduce a routing facility to enable clients to send their orders to the clearer of their choice, after execution on the exchange.

The X-TRM router, as it will be called, will facilitate competition between the clearing houses by eliminating the need to carry out reconciliation work between the CCPs on a bilateral basis. In addition, the router will provide exchange-level netting services, reducing the total amount of trades needed to be sent to the clearing houses, a move that the LSE estimates could help users reduce their post-trade costs by 35%, equating to an annual saving of at least £25 million.

Clearing tariffs

Index (2005=100)

Source: Celent

"The EU’s code of conduct on clearing and settlement introduced by [EU internal market and services] commissioner [Charlie] McCreevy envisages a competitive and inter-operable post-trade environment," says Nic Stuchfield, director of post-trade strategy at the LSE. "This is already starting to take shape in our markets, where the move towards competition has reduced clearing fees by up to 75% for our largest customers, and there are now plans for at least five inter-operable CCPs. The X-TRM router will provide a simple mechanism to route trades to them, streamlining a huge amount of expensive and time-consuming reconciliation work at a stroke."

X-TRM is operated by Monte Titoli, which the LSE acquired as part of its merger with Bolsa Italiana, and is already in use in Italian markets.

Although competition might be good for their customers, it is less clear how much the clearing houses stand to gain, as lower prices are likely to be the main way of winning business.

"I’m not sure there will be enough volume to sustain five competing clearing houses serving the LSE," says Axel Pierron, an analyst at consultancy Celent. "Clearing is a volume game and if you divide the volume there may not be enough economies of scale to go around, especially as attacking another market may require the development of some infrastructure, processes or duplication of resources. In the long term, competition could lead to consolidation as a price war draws clearing houses together for greater economies of scale."

While competition in clearing is becoming a meaningful reality, with examples such as the European Multilateral Clearing Facility – run by Fortis to support Chi-X’s pan-European cash multilateral trading facility – already up and running, it could still take some time for competition to emerge on the settlement side.

Competition will be more difficult to establish in settlement in Europe because shares are supposed to remain in the local central securities depository of their country of issue. The European Central Bank, however, wants to create a central hub for settlement of securities transactions by 2013 that would effectively be an industry utility.