As rival pan-European clearing house EuroCCP claims it is soaking up market share for trades executed on BATS Chi-X Europe, EMCF has struck back with a new pricing scheme that it says is the cheapest in the world.
From 1 March, EMCF will charge participants clearing more than 2 million trades per day €0.001 per trade for all of their business across markets that they clear. EMCF is also reducing settlement costs in Dutch, French, Swiss, UK and Irish markets and says that it expects to further reduce post-trade costs for the ULK and Ireland in due course by using its own direct membership with Euroclear UK and Ireland.
“EMCF aims to offer the lowest clearing fees in the world,” said Hugh Brown, director of UK markets, EMCF. “We believe that European market participants can gain from cheaper clearing fees – cheaper even than the US.”
Previously, EMCF offered a fee of €0.005 for ‘large participants’, i.e. those that cleared more than 500,000 executions on average per day. Some market participants remain sceptical of the broader benefits of the new pricing from EMCF, noting that even top five brokers across the venues covered by the latest price deal are only executing in the region of 350,000+ trades per day in current market conditions. The number of lit trades executed across blue-chip indices in France, Switzerland, UK, Ireland and the Netherlands reached 2.49 million on 29 February.
The latest reduction in pricing by EMCF represents a renewed effort to bolster the clearing house’s position, which has been undermined by the arrival of four-way interoperable clearing on multilateral trading facilities (MTFs) Chi-X Europe and BATS Europe in January. The two venues completed a merger in November 2011, but retain separate order books.
Interoperability allows trading members to choose which central counterparties (CCPs) they wish to use, enabling brokers to reduce their costs and potentially pass on savings to institutional investment clients. The four-way arrangement on BATS Chi-X Europe allows market participants to clear through Anglo-French CCP LCH. Clearnet, Swiss clearer SIX x-clear or EuroCCP, the European arm of US clearer the DTCC in addition to EMCF, which was the incumbent clearer. Independent studies have consistently shown the US to be the cheapest market to clear and settle equity trades.
The two clearers EMCF and EuroCCP have a long-standing history of competition. EuroCCP currently claims that it has cleared 40% of trades executed on BATS Chi-X Europe since it launched four-way interoperability, based on BATS Europe’s own data. Market participants have been able to elect a preferred CCP on BATS Europe since September, but full four-way interoperable clearing has only been available since January.
According to Diana Chan, CEO, EuroCCP, the switchover of clients is driven by factors other than pricing, citing the firm’s at-cost business model. “Our board is composed of our users,” she said. “We are not out to maximise profits at all costs – instead, we work as a user collective.”
EMCF, majority owned by ABN AMRO Clearing Bank, says that its latest fee equates to a lower rate than the clearing and netting fee for the same amount of business in the US, which would represent the culmination of a drastic reduction in European clearing fees over the last five years.
According to Thomson Reuters, clearing costs in Europe had fallen to ten times those levied in the US by the summer of 2010, from 100 times in 2006.
“EMCF has the advantage of running a low-cost model,” said Brown. “We have only 35 staff and we are not carrying any legacy systems. That enables us to really keep costs down. We have also negotiated proactively with settlement agents to reduce the settlement fees for our customers.”
A turning tide
Up to 60% of Europe’s equity trading flows are expected to be fully interoperable before the end of the year. In addition to existing arrangements between the London Stock Exchange (LSE) and SIX Swiss Exchange, which have offered the choice of SIX x-clear and LCH.Clearnet since 2008, the LSE’s Turquoise MTF launched the first phase of its own interoperability scheme in November. Turquoise added LCH.Clearnet to its existing clearing arrangement with EuroCCP and intends to offer further choice in due course.
UBS MTF already offers fully interoperable clearing, while Nasdaq OMX Nordic – which runs domestic Swedish, Danish and Finnish markets – and Scandinavian MTF Burgundy will follow suit with their own full interoperability programmes in the spring. SIX Swiss Exchange, which shares a parent with SIX x-clear, is also engaged in discussions to add EMCF and EuroCCP to its post-trade options.
The ability to offer cheaper clearing was one of the decisive advantages that helped Europe’s MTFs gain market share from the incumbent exchanges in the years since MiFID established competition between trading venues in 2007. Using newer, smaller clearers such as EMCF and EuroCCP, the MTFs carved out a substantial portion of Europe’s liquidity for themselves. As of 29 February, BATS Chi-X Europe currently has 24% market share of equity trading in Europe, according to figures provided by Thomson Reuters.
Although the entry of new clearing providers lowered clearing fees, direct competition between CCPs has taken longer to establish. Regulatory concerns over systemic risk and the resilience of CCPs in the event of a default held up interoperability during much of 2011. The difficulty was eventually resolved by a deal in which Europe’s would-be interoperable CCPs agreed to set aside margin against each other, in specific external accounts reserved for the purpose.
Even so, not all of Europe’s trading venues offer full interoperability. NYSE Euronext and Deutsche Börse have yet to offer interoperable clearing at all, while the LSE only offers two options.
“Interoperability is in its infancy,” said Brown. “As customers become used to consolidating their clearing needs, we believe the pressure on other European markets to open up to interoperability will only increase. Customers will demand that choice, and the vertical siloes will have to open up to competition.”