Pan-European clearing house LCH.Clearnet and multilateral trading facility Chi-X Europe will this week launch a contracts-for-difference (CFD) clearing service, designed to support the goal of regulators' to increase central clearing of over-the-counter (OTC) trades.
CFDs pay the holder the difference between the price of a stock at the start of the contract and at the end. They are favoured by some investors because they are exempt from stamp duty and do not require possession of the underlying equity, leading to reduced costs of trading compared to cash equities.
Currently, when trading a CFD, an executing broker would build a cash position in the underlying equity and give up this trade to a prime broker, which would write the CFD and pass it back to the investor.
Under the LCH.Clearnet and Chi-X Europe model announced today, the underlying equity trade will be passed to Chi-X Europe's CFD service in the form of a balanced CFD-versus-equity, which it would validate and then pass to LCH.Clearnet for central clearing.
The service will start with UK blue chip stocks, but will be extended to other UK stocks and European equities at a later date.
According to Roland Chai, senior manager, EquityClear, LCH.Clearnet, the service will be favoured by long-only asset managers that may have restrictions on the amount of bilateral or OTC trades they can undertake.
“Some long-only and pension fund managers have investment mandates that restrict their use of OTC derivatives,” Chai told theTRADEnews.com. “Having a contract that is traded on-exchange and centrally cleared allows a lot of funds to use CFDs where they couldn't previously. We will handle everything from corporate actions to closing out the position.”
“In the same way as Chi-X Europe launched its cash equities market ahead of MiFID's transformation of the trading landscape, we hope centrally cleared CFDs will help address the European Commission's aim of bringing more OTC trades on-exchange ahead of any regulatory imperative,” added Alasdair Haynes, Chi-X Europe's CEO. “This is an exciting new opportunity for us to expand our business into new areas.”
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