As Anglo-French clearing house LCH.Clearnet attracts more customers to its derivatives clearing service, the risk looms it will lose a major customer with NYSE Euronext looking to launch its own full-service London-based derivatives clearer.
By June, State Street Global Markets has revealed it will join SwapClear, LCH.Clearnet’s global OTC interest rates swaps clearing service.
In annual filings this week, LCH.Clearnet disclosed that during 2011, SwapClear grew steadily to US$283 trillion in notional principal outstanding. Average daily volumes rose year-on-year by 30% to 1,930 trade sides and 25 new members were added, bringing the service’s total membership to 61. Over a million trades were cleared in Europe and the US, where in March the US Futures Commission Merchant (FCM) model was launched.
“Our membership will provide our institutional investor clients with a key venue for clearing the multiple swap products now being brought into a cleared environment under the emerging regulatory changes in Europe and the United States,” said Clifford Lewis, executive vice president and head of State Street’s exchange business, on announcement of the move to SwapClear.
In December, LCH.Clearnet enhanced its US SwapClear service to accept a broader range of collateral for initial margin, offering increased connectivity and variable notional swaps.
LCH.Clearnet has stated repeatedly it is moving further towards a multi-asset strategy that decreases its reliance on the commoditised listed derivatives and cash equities markets.
But the collapse of a proposed merger of rivals NYSE Euronext/Deutsche Börse has dramatically changed the landscape for clearing in Europe. Last week, NYSE Euronext announced it would expand its Liffe Clearing business to become a full-service clearing house for swaps, in-sourcing the risk management activities for its derivatives market NYSE Liffe. These activities are currently executed by LCH.Clearnet.
In May 2010, NYSE Euronext had already signalled it would withdraw its business from LCH.Clearnet over the next few years, setting up cash equities clearing in Paris as well as a London-based derivatives clearer. But while the Deutsche Börse merger was on the table, NYSE Euronext said it would extend its contract with LCH.Clearnet until December 2013 for cash equities and June 2013 for non-Liffe derivatives.
Regulatory change in the form of the European market infrastructure regulation’s G20-mandated compulsory clearing of OTC derivatives has also impacted London-based clearing houses such as LCH.Clearnet, with the potential of business moving elsewhere. And fresh threats have come from other European institutions as well.
The European Central Bank revealed in July it wants to move into the euro-zone all central counterparties that clear more than 5% of euro-denominated instruments.
The UK last month filed a second challenge with the European Court of Justice in an attempt to block the ECB’s plans.
Britain contends the move breaches a key tenant of the European single market – the right to free movement of capital and services. In September, the British government began initial court proceedings against the ECB.
Last week LCH.Clearnet said it was expecting to soon make an announcement about on-going merger negotiations with the London Stock Exchange.