Nasdaq OMX’s decision to buy a 22% stake in Fortis’s European Multilateral Clearing Facility (EMCF) appears to be a shift back towards the vertical exchange model, where exchanges own controlling stakes in clearing platforms. Some observers argue that this model is not necessarily in the best interests of users.
Diana Chan, CEO of pan-European clearing house EuroCCP, contends that the market is being divided into providers who see clearing as an opportunity to generate profits, and those who use low-cost clearing to win market share for their execution business.
“Trading platforms generating additional revenues and profits from clearing is a valid business model, but the economic benefit is for the platforms’ shareholders,” Chan told theTRADEnews.com “Users’ needs have been very clearly expressed in the past few years – Europe needs to be more competitive by driving down its clearing costs. There is a risk of misaligned incentives between the a trading platform that makes money from clearing, and trading firms who pay the fees and bear the exposure to the central counterparty chosen by the platform.”
EuroCCP is owned by the Depository Trust & Clearing Corporation (DTCC), the post trade services provider for the US market.
Chan advocates clearing services that are owned and operated by users, and where clearing is available at cost, describing this model as “the best hope for lowering the high cost caused by fragmentation in Europe.”
“Provided that governance is effective, the at-cost business model will continue to reduce costs for participants,” she said.
But not all are convinced that exchange ownership necessarily prevents clearing houses from offering a low-cost service. “If you follow EMCF’s series of price reductions since it came into the marketplace, it is clearly aiming to be competitive,” says Andrew Howieson, managing director of research and consulting firm Tabb Group Europe. “It is difficult to imagine someone wanting a shareholding in the company with the intent to reverse that situation.”
Howieson also does not believe that Nasdaq OMX’s purchase indicates that exchanges are increasingly interested in building their interests in the clearing business. “Overall trends, including the development of EMCF and EuroCCP, seem to argue rather against that,” he said.
As well as taking a stake in EMCF and launching a clearing service for its Nordic exchanges, Nasdaq OMX is also planning to launch a clearing operation for the US equities market to compete with DTCC. This follows the exchange group’s acquisition of the Boston Stock Exchange Clearing Corporation.
Elsewhere, however, the vertical exchange model is under threat. The Children’s Investment Fund, a shareholder of Deutsche Börse, is trying to force the German exchange group to split up, and potential sell its equities execution division to the London Stock Exchange.
Although it has taken a stake in EMCF, Nasdaq insists it has no intention of taking a controlling stake in the business, and keen to attract more participants to invest in the clearer. Investors could include banks, exchanges or MTFs. “We want a broad ownership structure and we want to create a leading cash clearing house,” Hans-Ole Jochumsen, executive vice president of Nasdaq OMX, told theTRADEnews.com last week.
Howieson suggests Europe is heading towards a competitive clearing model with interoperability between CCPs, pointing to the recent announcement by NYSE Euronext that its new MTF, NYSE Arca Europe, would use multiple clearers.
“We need to get to the point where the participating firm would be able to select its clearer regardless of where it executed its trade,” says Howieson. “That is still some way off, but there are signs that the thaw is beginning and there is going to be more interoperability between clearing houses.”