A new clearinghouse for credit derivatives planned by London-based LCH.Clearnet highlights the reluctance of European banks to cede the market to exchanges on both sides of the Atlantic.

LCH.Clearnet announced Friday that it will launch a new Europe-focused clearing service for credit default swaps by the end of the year, staking out ground in a $30 trillion market that is being pursued by NYSE Euronext (NYX) and Deutsche Boerse's (DB1.XE) Eurex unit in Europe, and derivatives exchanges CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE) in the U.S.

LCH.Clearnet's planned credit derivatives clearing service will be operated by Paris-based bank LCH.Clearnet SA, which is regulated by the French central bank.

Clearing trades, in which a central counterparty serves as the buyer and seller to every transaction, has become a lucrative business that exchanges are increasingly looking to bring in-house.

In the wake of the credit crisis, the profile of clearing trades has risen as market participants and exchanges alike seek to apply the central counterparty model to over-the-counter products like credit derivatives, in an effort to reduce risk in bilateral trades.

But banks, among the biggest participants in credit derivatives markets, remain wary of exchanges' internalization of clearing functions, which has been perceived as pushing trading fees higher.

LCH.Clearnet currently is partnered with NYSE Euronext in clearing credit default swap index trades on the exchange's BClear platform. That service went online in late December, but has yet to see any activity as market participants work on connectivity and systems integration.

However, NYSE Euronext plans to transfer clearing of its derivatives products to its new LiffeClear clearinghouse when that operation rolls out in the next few months; under the new agreement, LiffeClear will serve as central counterparty, with LCH.Clearnet continuing to handle risk management and day-to-day clearing processes.

Meanwhile, Eurex anticipates launching its own Europe-based CDS clearing service by the end of the first quarter, initially focusing on euro-denominated index products.

Atlanta-based ICE is also targeting the European credit derivatives market, with a plan to clear credit default swaps through its existing European clearinghouse, ICE Clear Europe. ICE is in discussions with the Financial Services Authority and other European regulators about the plan, according to a person familiar with the matter.

"It's natural that there will be this kind of competition," said Henry Hu, a law and finance professor at the University of Texas, of LCH.Clearnet's entry to the CDS clearing race. "Just as there's competition in terms of clearinghouses in the U.S., the Europeans have for quite some time been interested in providing a European alternative."

LCH.Clearnet, which is three-quarters user-owned, is also at the center of a contest over its future ownership. The U.S.-based clearing firm Depository Trust & Clearing Corp. last fall announced a merger between the two clearing firms, but in early February a consortium led by U.K.-based interdealer broker Icap PLC (IAP.LN) appeared, preparing a counterbid that could top DTCC's offer.

A merger between DTCC and LCH.Clearnet would create the world's largest processor and guarantor of equity, bond and derivatives trades, which would also see LCH.Clearnet transition from a for-profit entity to a DTCC-style utility and provide lower fees to members, according to executives of the firms.

But a potential Icap-led counterbid, which would keep control of LCH.Clearnet in Europe, has been seen by some market participants as a defensive move by European banks and dealers looking to secure control of the institution.

A similar Europe-U.S. schism has arisen on the regulatory front, with the European Commission and the European Central Bank pushing for locally based clearinghouses for credit default swaps. U.S. regulators, meanwhile, favor clearinghouses based on American soil.

Market participants have signaled their interest in a clearing solution for credit markets.

Credit derivatives traders surveyed by risk-management- technology firm Sophis said earlier this month that they plan to direct at least 50% of their CDS transactions onto central clearing platforms.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

(Serena Ng and Adam Bradbery contributed to this article.)