Some 40 months after the London Metal Exchange put out a
short, cryptic statement that it was thinking about bringing
clearing inhouse and cutting off LCH.Clearnet, the Hong Kong
Exchanges and Clearing-owned exchange did exactly that on
LME Clear is a boost for the LME and puts
it on a par with some of its larger rivals such as the
IntercontinentalExchange, CME Group and Eurex, all of which own
the clearing houses that clear trades executed on their
Owning your own clearing house is sensible from a product
development point of view.
LCH.Clearnet has multiple clients, including the London
Stock Exchange, Euronext and Nasdaq OMX NLX to name but a few,
which means clients are constantly vying to have their product
innovation accommodated by LCH.
By contrast LME Clear will have (at least at the outset) one
exchange client, the LME itself, so that business knows its
requirements should be properly looked after.
An inhouse clearing function is also commercially
Clearing is the new black in derivatives after regulators
pledged in 2009 to force standardised swaps to use clearing
houses and, more recently, tightened up and made more expensive
the processes around uncleared swaps, thereby making their
cleared cousins more attractive.
European authorities have set 2016 as the deadline for the
introduction of mandatory clearing, which seems like a long way
away but many firms are still smarting from the tough February
deadline for trade reporting which left many unprepared.
Clearing is also a much bigger undertaking and requires the
buy-side to take for the first time full responsibility for
their cleating operations, something that today they
effectively outsource to banks or brokers.
LME Clear is one of many eyeing 2016 however.
Already some 11 firms have been approved to clear swaps
under the so-called European Markets Infrastructure Regulation
and these include LCH.Clearnet, Eurex Clearing and CME Clearing
ICE Clear Europe was, at the time of writing, the only
heavyweight European clearing house that had not won its
approval but it is hard to believe this rubber-stamp will not
be forthcoming in the near future.
Market participants may have been able to sustain various
accounts with multiple clearing houses for the purposes of
clearing listed futures but the valuations and margin
treatments on swaps are very different.
Given the sums involved, most firms will only be able to
afford to maintain accounts at a handful of clearing providers
but these enterprises, naturally, need to be sustainable in
their own right.
The challenge for banks, asset managers and other traders at
this stage is which clearing houses will be viable over the
medium term and which will struggle to reach critical mass and
fall by the wayside.
The Holy Grail for clients and providers alike is the fabled
cross-margining, where firms pay margin based on their net
rather than gross exposure across a portfolio of similar
products, a trick that can dramatically reduce their margin
Citigroup, Commerzbank and Morgan Stanley were among the
banks lining up to back Eurex when it launched in June
Europe’s first cross-margin service, between
interest rate futures and swaps
LCH.Clearnet has the most to gain by opening up
cross-margining because it has a massive swaps book against
which clients could offset their futures but it has been more
circumspect about its cross-margining plan.
LCH did however make a couple of breakthroughs this week by
upgrading its collateral system and rolling out a new swap
Swap compression is not as transformative as cross-margining
but it’s a nice distraction in the meantime, as
suggested by the support for the new LCH offering of Deutsche
Bank and Credit Suisse.
LME Clear makes sense for the LME and its current clients
but it is impossible to know at this early stage who will be
the winners and losers under the new Emir clearing regime.