One the face of it, LSEs bid, news of which was broken
last night by the Financial Times, makes sound commercial
sense. It will allow the exchange to lock in the revenues from
the international clearing house at a time when its interest
rate swap clearing business looks set to grow
At the same time it will enable the groups to launch
new products without the time delay that comes with awaiting
approval from the clearing house.
The bid was not a bolt from the blue, however, it marks a
significant about turn in the LSEs public statements over
the vertical silo, exchange owned clearing model.
This is Kevin Milne, director of Post Trade at the LSE,
speaking to Global Custodian magazine: We need to give
people and markets choice. We cannot operate vertical silos, in
which a trade idea goes in at the top, and a completed trade
comes out the bottom, and users cannot get out of the silo once
they are in it or into the silo unless they joined it at the
top...We do not want to build a vertical silo.
And Adrian Farnham, chief executive of Turquoise Derivatives
in an interview with FOW in June: We think that [a
horizontally structured, pro-competition clearing model] is a
much better model for customers compared to the narrow,
walled-in vertical silo model that exists today.
The LSE has a defence (and an ambiguous track record),
however. Back in 2010, Xavier Rolet declared the days of the
horizontal clearing model numbered adding that post
trade services represented the biggest challenge and
opportunity for the exchange.
It will be important to ensure that a vertical model
is not hermetically sealed and that users can enter or leave
the process at a time of their choosing, he said.
So it seems that LSE has a vision of an exchange-owned, open
clearing house. An interesting model and one that will attract
significance if Bats launches derivatives in Europe as is
expected once and if it completes its merger with Chi-X Europe,
which is under review by the UK competition
The timing of the bid is awkward for the LSE though coming
as it lobbies the EU to mandate strong conditions for a NYSE
Euronext and Deutsche Börse bid to go ahead and you
cant help but feel its hand was forced by the rival bid
Should the LSE succeed in its bid (and it warned this
morning it was a long way from the finishing post), it will
have the chance to put its money where its mouth is and expound
its vision of competitive clearing in Europe. If it fails in
its bid or fails to follow its ideologies with action, the
exchange will be exposed to charges of hypocrisy from its