Liffe will finally join rival exchanges by conducting its
own clearing after re-negotiating its terms with LCH
The exchange is to create LiffeClear, which will enable it to
clear its own trades. LCH Clearnet will, however, continue to
provide Liffe with risk management and guarantee functions at
an outsourced fee. As a result, LCH Clearnet will no longer
receive clearing fees from its members. It is unclear how much
the new arrangement is worth for either party.
Out of the larger derivatives exchanges Liffe is alone in not
conducting its own clearing. While the exchange argues that the
move will allow it to compete on a level footing with
other futures exchanges that own their own clearing
houses, others have been quick to note that the exchange
is going against the grain of what regulators would prefer as
an ideal clearing structure.
The move, which has been long expected by the industry, comes
at a controversial time for exchanges and clearinghouses. ICE
Futures is in the middle of divorcing itself from LCH Clearnet
to set up its own clearinghouse. This has sparked an inquiry by
the UKs Office of Fair Trading (OFT) because some members
do not think they should be forced to move their clearing
elsewhere. The US Department of Justice (DoJ) also spoke out
against vertical clearing and its anti-competitive
Liffe has seemingly pulled in the opposite direction to
where others are pushing, said one observer. Given
the European code of conduct, OFTs inquiry into ICE Clear
and its possible anti-competitive nature and DoJs recent
criticism of the vertical silo structure, it seems odd that
Liffe would decide to make this move right now.
Others pointed out potential hazards of the new
Some market participants have concerns over
LiffeClear, said Anthony Belchambers, chief executive of
Futures and Options Association. Some of these are legacy
concerns inherited from the same issues over ICE Clear. The
lack of clearing choice and concerns over market impact are
Belchambers added that there was some unease over the impact on
clearing fees. Liffe has a lot of market power and could
increase fees, certainly. However, it is early days and the
final shape and structure of the new arrangements and who has
authority over what are largely unknown, so it is perhaps too
early to make a judgement call on the proposal.
Another source questioned the rationale behind LCH
Clearnets decision to hand control over to Liffe.
LCH will obviously lose clearing revenue, but of course
will make some of that back through its outsourcing fee to
Liffe. Perhaps by letting Liffe restructure its agreement this
way it gives LCH the ability to integrate another exchange.
Maybe it has in fact struck a deal with Rainbow and this will
pave the way, he speculated. Otherwise it could be
suicide for LCH.
The same source also said that he understood why Liffe has
struck the deal. Its a strategic move that needed
to be made. In order to protect revenue and the franchise, it
needs to be seen to be doing this.
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