A new business, dubbed Rainbow, designed to rival Liffe is
considering clearing its business through Eurex after Liffe
prevented LCH Clearnet from entering into discussions
concerning the project.
The move has also prompted speculation that Liffe might decide
to buy back LCH Clearnet in full.
Project Rainbow has been in development since mid 2007 and
comprises a group of large derivatives trading houses. While
still in its embryonic stages, Project Rainbow has already
encountered difficulties. FO Week has learnt that the
London-based clearinghouse was contacted by the hopeful bank
consortium, to discuss providing clearing for the new set-up.
Given LCH Clearnets potential loss of yet more business
in the wake of ICE Futures decision to set up its own
clearinghouse, it agreed to talk. However, when Liffe caught
wind of the plans it pressured LCH Clearnet into abandoning
talks. It has long been rumoured that Liffe has considered
setting up its own clearinghouse away from LCH Clearnet.
Liffes intervention has left Project Rainbow considering
its alternatives, which include clearing through Liffes
arch rival Eurex. The Clearing Corporation has also been
rumoured as a potential partner.
LCH Clearnets precarious position has meant it has been
weighing up its own options, a source said.
The source explained that, alongside the probable loss of ICE
Futures passing through the clearinghouse and any threat that
may have been made by Liffe, LCH may be considering being
cannibalised by the exchange.
By the end of 2008, Liffe will hold a 5% stake in LCH Clearnet,
following a repurchase agreement whereby LCH Clearnet agreed to
repurchase over 26m ordinary shares held by Euronext Liffe at
The clearinghouse said at the time of agreeing the buyback that
it believed a number of potential developments in the exchange
and clearing markets could pose significant threats to its
clearing volumes and revenue streams. These included
clearing-driven mergers between exchanges, new or potential new
entrants in its market-space and the development of alternative
trading platforms, which may attract liquidity from its
That it is possibly considering being swallowed whole again by
Liffe could indicate how much it fears for its survival
independently, a source said.
The emergence of Project Rainbow has become crucial to the
future of LCH Clearnet which also clears London Metal Exchange,
part of London Stock Exchange and EDX, all of which could be
affected if it were to fall under Liffes ownership.
If Project Rainbow did see its planned contracts cleared
through Eurex it would come as a kick in the teeth to Liffe.
That would be even more galling than having a rival
contract cleared through LCH. Having a rival contract cleared
through a rival exchange, that will hurt, said one
A second member of the Rainbow project highlighted that
Liffes behaviour towards LCH Clearnet was
The issue of building barriers so high so as to protect a
franchise and prevent competition is something that should be
looked at closely, he said suggesting that the UKs
office of fair Trading and or the European Union could become
involved if it was believed that Liffe was preventing
LCH Clearnetss decision to turn its back on the
project because of Liffes pressure resulted in a final
warning shot towards the clearinghouse by one of the sources
close to Rainbow. Liffe applying pressure is one thing.
Those of us involved in this project are also LCH shareholders
and own a lot of open interest. We could similarly apply some
sort of pressure, he said.
Both Liffe and LCH Cleanet refused to comment.