By nature, clearinghouses have often idled away in the background while the exchanges and/or brokerages grab the glory along with the lion share of headlines, attention and accolades. This year has started somewhat differently. Yes, we have seen a couple of FCMs undoubtedly having their names and their more notorious employees name’s dragged through the mill, but now it seems is the time for the clearing fraternity to enter the stage.
By nature, clearinghouses have often idled away in the
background while the exchanges and/or brokerages grab the glory
along with the lion share of headlines, attention and
accolades. This year has started somewhat differently. Yes, we
have seen a couple of FCMs undoubtedly having their names and
their more notorious employees names dragged through the
mill, but now it seems is the time for the clearing fraternity
to enter the stage.
In the past two months, LCH Clearnet alone has been pivotal
to the direction of a number of exchanges and start-ups.
To start with, there was the back turn which allowed
European Climate Exchange to trade its CER futures contracts on
ICE Futures platform through LCH Clearnet. Previously the
clearinghouse had refused to play ball given its tempestuous
relationship with the Atlanta-based energy exchange and its own
move into clearing. This proved to be the impetus for LCH
Clearnet to link arms with New York Mercantile Exchange and
promise the launch of competing ICE contracts delivered into
Europe through the New York exchange and cleared through LCH
Clearnet. This way, clients that have criticised how much time,
effort and money it will take to connect up to a new clearing
system in the shape of ICE Clear Europe will be given the
opportunity to continue to be cleared through their tried and
trusted LCH Clearnet, while trading look-a-like contracts. An
incentive of a fee discount will probably be an added plus for
Liffe is another exchange that has contributed to LCH
Clearnets tribulations this year. In particular, Liffe
and the new wannabe exchange which has been going under the
assumed name, Project Rainbow. Rainbows attempts to
launch rival products to those traded on Liffe, and
subsequently have them cleared through LCH Clearnet, rattled
Liffe to the point of piling pressure on the clearinghouse not
to act as the start-up exchanges clearer.
Subsequently there have been a number of suggested moves
that will keep LCH Clearnet busy for pretty much the rest of
Firstly, there are reports that ICE and Liffes
clearing structures are to become the subject of an
investigation by Brussels authorities as they could
ICE clients will not have a choice other than to switch its
open interest and back office connections to ICE Clear Europe
from LCH Clearnet in July if it receives the all clear from the
regulatory watchdogs. LCH Clearnet argues that the customer
should have the choice of where they can clear their
Liffe, meanwhile, could be on the verge of stirring a
hornets nest. Its reticence over Rainbow has only
exasperated sources to come out of the woodwork and try to shed
light on how they see things panning out between LCH Clearnet
and Project Rainbow.
Speculation has it that Liffe could be dragged through the
European courts accused of impeding competition, though neither
side could confirm this. Another, intriguing possibility is
that Liffe is on the verge of buying up LCH Clearnet. A move as
such would definitely see off any possibility of LCH Clearnet
However, a few points do stand in the way of this happening.
For starters, while Liffe does hold an ownership stake of 17.8%
while the rest is shared among other exchanges, with 67.6%
being held by clients. These stakeholders are the same as those
that make up Rainbow. It is very unlikely that these will
therefore be willing to sell their holdings to the exchange it
is looking to duel with. The remaining 14.6% is held by
Liffes holding will decrease even further come 2009 as
it completes its share buy-back agreement with LCH Clearnet.
Following this move, the exchange will only hold a 5% stake in
The move to buy out LCH Clearnet also appears ill-timed
given Department of Justice (DoJ)s condemnation of
vertical silo structures back in February. And although DoJ has
no jurisdiction over European set ups it would seem peculiar
for Liffe to head in that direction, other than in a display of
desperation and panic over the possible threat of Rainbow.
And given Liffes executive director, Garry Jones
comments in Boca Raton in March, it certainly appeared that
this was the way it was looking to turn: From our
perspective, as a global exchange we do not own our clearing
vehicle in the same ways as some others do. We are trying to
improve that situation, Jones said at the time.
Whatever the decision Liffe makes there can be no denying
that clearing will not remain in the background given that
controversy always makes front page news.
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