NYSE Euronext has unveiled its clearing strategy for Europe, promising greater cost efficiencies from the consolidation of its derivatives clearing function and suggesting that it could finally be ready to embrace post-trade interoperability in equities.
The exchange group, which runs European markets in Amsterdam, Brussels, Paris and Lisbon, has said it will renew its contract with LCH.Clearnet for clearing equity trades in Europe but plans to end its relationship with the Anglo-French central counterparty for derivatives traded on its NYSE Liffe market. LCH.Clearnet will also no longer clear the derivatives contracts traded on NYSE Euronext’s domestic markets.
For equities, NYSE Euronext said it intends to negotiate a new long-term arrangement with LCH.Clearnet’s French arm that would replace the existing contract that is due to expire in 2013.
This decision, said the firm, would help preserve and strengthen Paris’s position in the European financial markets and respond to client demand to clear cash markets horizontally, allowing for economies of scale. It is believed that NYSE Euronext will wait until the finalisation of new European regulations – including the European market infrastructure regulation and MiFID II – which include provisions for open access to post-trade infrastructure before committing to an interoperable clearing model.
The London Stock Exchange, which completed its purchase of LCH.Clearnet on 9 March, said in a statement that it welcomed NYSE’s European clearing strategy. The LSE has consistently affirmed its support for an open European clearing infrastructure but has yet to follow in the steps on multilateral trading facilities (MTFs) including BATS Chi-X Europe and its own MTF Turquoise in extending offering clearing choice beyond its existing arrangements with LCH.Clearnet and SIX x-clear.
Derivatives consolidation
In derivatives, NYSE Euronext will bring banking, guarantee and default management – services currently performed by LCH.Clearnet – in-house to NYSE Liffe Clearing summer 2013, transforming it into a recognised clearing house. The move is anticipated to generate cost savings of US$30 million for the firm. Products traded on NYSE Liffe include FTSE-based and Libor instruments. Non-Liffe derivatives, i.e. those traded from Amsterdam, Brussels, Lisbon and Paris, will from Q1 2014 transfer to the enlarged NYSE Liffe Clearing CCP, subject to regulatory approval. Trading of continental derivatives will remain unchanged.
NYSE Euronext said the aggregation of derivatives clearing would offer users operational savings from the use of a single technology platform and common operating procedures and margin offsets across highly correlated products.
“Our clients have long asked for a consolidation of clearing arrangements and the strength of our European derivatives business allows us to deliver meaningful benefits for them in the form of capital efficiencies and savings,” said Duncan Niederauer NYSE Euronext CEO. “Formalising these steps now and communicating them clearly to our customers will allow them to more effectively plan their capital allocation needs and will enhance their operational stability in a highly competitive and fluid environment.”
The group will also use its clearing revamp to seek new post-trade revenue opportunities, including in OTC clearing. The European market infrastructure regulation include new requirements for the exchange-trading and clearing of many instruments that are currently traded over-the-counter. The rules are due to come into force by the end of this year.
But an analyst note from private German bank Berenberg doubted whether the strategy would be sufficient to support its OTC ambitions.
“NYSE’s ambitions to clear OTC derivatives might suffer due to its late entry as a derivatives CCP,” read the note. “Also, in its pursuit of a vertical structure, it could struggle to garner the vital broker support.”