Chi-X Australia will be unable to reduce clearing fees for members after the Australian Treasury deferred clearing competition in Australian equities for two years. However, clearing competition for derivatives will be permitted.
The decision, announced on Monday, was made based on cost implications for the industry and will apply only to equities, leaving potential clearers, including Anglo-French clearing house LCH.Clearnet, free to establish clearing operations for the more lucrative market of OTC derivatives contracts.
Scott Riley, founder of clearing consultancy Lambda Clearing Designs and former Chi-X Europe executive, was tasked with exploring initial clearing options for Chi-X Australia before its 2011 launch. He said the announcement would reduce competition and reflected the level of market share the alternative venue had cornered.
"I think this decision reflects the sensitivity Australian brokers have to the cost of competition," said Riley. "For example, one headline cost to the industry has been the A$28 million cost recovery for ASIC [Australian Securities and Investments Commission] for the supervision of market fragmentation." He indicated that current market volumes throw into question the benefits that brokers have so far seen from this.
"While there is a strong rhetoric and appetite for clearing competition, the materiality and cost of competition give rise to a period - hopefully a short one - of hiatus," he said.
Chi-X Australia has traded Australian equities since October 2011 and in January claimed 11.01% of market share in S&P ASX 200 shares with A$7.4 billion traded according to figures from Thomson Reuters Market Share Reporter. This means a clearing house looking to compete with the ASX for equities would target only 11% of ASX clearing and settlement revenue.
Last year, according to ASX figures, the exchange gained A$46 million from clearing and A$42 million from settling equities. Riley believes 11% of this - just over A$9.6 million - is insufficient to attract a competitor, unless regulators mandated interoperability, which is not currently on the agenda.
LCH.Clearnet applied for a licence to establish a clearing and settlement facility for equities and derivatives and has stated it will press ahead with plans to clear some Australian swaps.
"Clearing OTC derivatives would be much more attractive to LCH.Clearnet because they carry the momentum of G20 regulatory reform and represent more of a plug-and-play solution than a built-it-from-scratch solution," commented Riley, who has worked for the clearing house as director of sales and marketing.
Speaking to The TRADE late last year, Peter Fowler, CEO of Chi-X Australia said the introduction of a multi-market environment has necessitated a number of regulatory changes in Australia, which would eventually cover competition to clearing.
"We believe competitive pressure should be introduced in areas other than trading and are pushing very hard to encourage alternatives in the clearing space," Fowler said, adding that settlement infrastructure should have controls over pricing and access if run by a for-profit organisation.
LCH.Clearnet has applied to market regulator the Australian Securities and Exchange Commission to establish clearing and settlement business for Australian derivatives - both listed and OTC - and announced last year it will extend its interest rate swaps clearing service SwapClear to the Australian market. The ASX also plans to clear these contracts this year.
The Treasury decision was based on advice from the Council of Financial Regulators, a body comprised of the country's main financial regulatory agencies. As part of the decision, the ASX was tasked with composing a code of practice to ensure transparent and fair access to ASX clearing infrastructure in the future.