The battle for Euronext’s clearing: a tale of two CCPs

Following the exchange’s decision to migrate its clearing operations, LCH SA and EuroCCP are lacing up for battle. The question is, who will be preferred?

The race to be Euronext’s preferred clearing counterparty is hotting up, with two main contenders EuroCCP and LCH SA, LSEG’s Paris based clearing arm, preparing for war.

Euronext moved to break off its 10-year deal – originally due to expire in 2027 – with LCH SA in November after announcing its plans to move its clearing operations to Italy. The move followed its acquisition of Borsa Italiana and the bourse’s clearing house CC&G – now rebranded to Euronext Clearing.

Currently, Euronext Clearing only clears for Euronext Milan, however, the exchange operator has confirmed plans to expand coverage to all of its venues, subject to regulatory approval, meaning it will replace LCH SA as the primary CCP for Euronext’s markets.

The exchange operator is looking to migrate its cash equities business to Euronext Clearing by the end of next year, The TRADE understands. The first termination window for the listed derivatives LCH SA contract is in January 2023 with a one-year notice and a six-month migration period meaning the first time Euronextcan migrate these flows will be June 2024.

When cash equities flow migrates at the end of the year, LCH SA will ask for a preferred clearing link to Euronext markets, The TRADE understands. However, EuroCCP who has also had a clearing relationship with Euronext since 2017, is also gearing up to become the exchange operator’s preferred clearing partner of choice.

LCH SA and EuroCCP will therefore be in direct competition with one another to win the business of the some of the largest markets in the Bloc.

“It’s a matter of winning the battle in market share,” said one source familiar with the matter.

The preferred clearing model allows a CCP to connect to a trade feed at an exchange for a fee. Both EuroCCP and LCH SA intend to offer their services to Euronext in this capacity, however, it is widely known that using multiple preferred clearing houses makes it harder to gain market share as the preferred CCP must have been selected by both the buyer and the seller to oversee a transaction. When this does not occur, the primary CCP assumes responsibility for it.

“Before Mifir and Mifid II, some venues wouldn’t necessarily open up trade feeds to preferred clearing houses because they most likely owned a CCP that’s in a vertical silo. What preferred clearing allows us to do is get access to that venue – albeit we don’t interoperate with the primary CCP,” EuroCCP’s head of commercial and business development, Tim Beckwith, told The TRADE.

“This reduces the probability of a cleared transaction because you need lots and lots of clearing members to join in for the service.”

EuroCCP claims to have seen 233% growth on its cleared volumes across the Euronext markets in Paris, Amsterdam, Lisbon and Milan, reaching 15 million transactions this year to date and with plans to grow this number further.

However, with so many Euronext clearing members already connected to LCH SA on the back of its multi-year deal – it currently claims to oversee 90% of Euronext’s total clearing market share  – continuation and consolidation could play into the hands of LSEG’s Paris based clearing house.

LCH SA and Euronext declined to comment.

Brexit significantly fragmented the clearing landscape and UK-based CCPs have subsequently continued to grapple with EU regulators over their equivalence in the last few years. Originally granted an 18-month temporary equivalence post-Brexit due to expire in June, LCH, ICE Clear Europe and LME Clearing were all awarded another temporary three-year equivalence earlier this year, due to expire in June 2025.

The move was designed to reduce European institutions’ reliance on them without a cliff edge deadline and is expected to impact the market share of UK-based CCPs.

“As a result of that [temporary equivalence] banks were looking at the risk of having EU clearing with a UK CCP and the impact it could have had on interoperability,” added Beckwith. “They’re trying to de-risk that migration by moving flow to us now and we believe that’s one of the key elements of our preferred clearing growth.”

According to Euronext’s first quarter results, Euronext Clearing revenues reached €2 million for derivatives, €5 million for equities and just over €2 million for bonds.

Its future market share and revenues are dependent on whoever is left standing between LCH SA and EuroCCP. As both clearing houses throw their hats into the ring, there’s just one question that remains, who will participants prefer?

Update – Please note that the 233% growth figure referenced by EuroCCP represents an increase in its market share (based on daily traded volumes) on Euronext markets in Amsterdam, Brussels, Lisbon and Paris from 2% at the start of the year to an estimated 17.87% as of 22 July, 2022, based on Cboe Global Markets data.