Global exchange group NYSE Euronext has taken another step toward offering a full range of trading services in Europe with the announcement of plans to launch dedicated clearing capabilities in the region by 2012.
The move signals the end of the relationship between NYSE Euronext and LCH.Clearnet, the group’s incumbent clearing house.
NYSE Euronext will build two clearing houses in London and Paris to complement its derivatives and cash equities trading business at a cost of around $60 million. The firm already operates four cash equities exchanges in Europe (Amsterdam, Brussels, Lisbon and Paris) as well as NYSE Arca Europe, a pan-European multilateral trading facility (MTF), Smartpool, a non-displayed liquidity MTF, and NYSE Liffe, its London-based derivatives exchange. NYSE Liffe started clearing its own London-listed derivatives in 2009, while outsourcing its banking guarantee and default management arrangements to LCH.Clearnet.
Under the new strategy, NYSE Euronext will take complete control of its entire derivatives and equities clearing operations. The clearing house in London will clear listed interest rate, commodities and FX products, while Paris will take responsibility for equities and equity derivatives.
According to NYSE Euronext, the decision will benefit customers via capital savings arising from the better distribution and aggregation of risk-correlated instruments across the two clearing houses and the reduction of technology migration friction, as both clearing houses will be developed from existing operational technology.
Following completion of the project, NYSE Euronext predicts it will gain $100 million per year of additional revenue from insourcing its cash equities and derivatives clearing and save significant costs by taking control of the derivatives functions currently operated by LCH.Clearnet.
The announcement builds on NYSE Euronext’s existing plans to be a ‘one-stop shop’ for trading and related services. The exchange group is in the process of migrating all of its US and European trading venues to its Universal Trading Platform, a single infrastructure and connection point for all of its platforms and products. Through the Secure Financial Transaction Infrastructure offered by its NYSE Technologies subsidiary, the firm also provides access to a wide range of third-party technology-based trading services.
“After an in-depth strategic review, we concluded that we should improve our clearing arrangements while maintaining our current regulatory relationships in Europe. This is an exciting and enterprise-transforming project that will greatly benefit our customers and further enhance the company’s presence in Europe’s two most important financial centres, London and Paris,” said Duncan Niederauer, CEO, NYSE Euronext. “After successfully commissioning our new mission-critical trading infrastructure, UTP, across all of our businesses globally, we are now committed to investing similarly in mission-critical post-trade infrastructure in Europe.”
The move brings NYSE Euronext’s exchange model closer to the vertical integration being pursued by other leading exchange groups operating in Europe. Deutsche Börse, for example, offers clearing capabilities for equities and its Eurex derivatives business via Eurex Clearing, as well providing cross-border post-trade services via Clearstream and pan-European trading through its Xetra International Market. Under chief executive Xavier Rolet, the London Stock Exchange (LSE) has indicated that it may extend the use of CC&G, the Italian clearing house it purchased as part of its acquisition of Borsa Italiana in 2007, as well as expand its derivatives capabilities. The LSE has also recently bought Turquoise, a pan-European MTF, and Millennium, an exchange technology provider based in Sri Lanka.
NYSE Euronext’s plans represent another challenge to LCH.Clearnet, which already has to share clearing business from the LSE with SIX x-clear, having previously been the incumbent. The firm was also subject to rival takeover bids in 2009 from Depository Trust & Clearing Corporation, the US post-trade utility, and a consortium of brokers including ICAP.
“We have enjoyed a long relationship with NYSE Euronext and are looking forward to continuing to work with them until the contracts end,” said Roger Liddell, CEO, LCH.Clearnet. “This is an important and exciting time for clearing with regulators and policymakers globally looking to clearing to reduce systemic risk. LCH.Clearnet is well placed to benefit from this. We shall seek to continue to diversify our revenues as we develop new exchange and OTC initiatives.”