LCH.Clearnet Gives Banks Foothold In European CDS Clearing
February 13 2009 - 4:17PM
Dow Jones News
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.)