“I don’t think we’ll ever see interoperability in derivatives clearing,” Liddell told FOi, two days after his resignation was announced. “The risks from contagion are just not worth the benefits.”
His comments are a blow to those who hope that interoperability could one day be introduced, furthering competition between clearing houses and exchanges.
The European Commission’s consultation paper on Derivatives and Market Infrastructures, published in June, seeks market comment on interoperability. It notes that “Europe’s post-trade sector remains fragmented along national lines”, which undermines efficiency and “could make cross-border trades more costly”.
However, the document is notably tentative in this area, compared with, for example, its firm insistence that some derivatives will be subject to mandatory clearing. The EC seems more concerned to explore and evaluate the risks that interoperability could bring than to drive through a right to interoperability.
For clearing houses, interoperability could well be more of a nuisance than a blessing. However, this week the Wholesale Markets Brokers’ Association and the London Energy Brokers’ Association backed the idea in their response to the EC consultation.
The brokers’ bodies said all approved trading venues must have open and fair access to all clearing houses. Alex McDonald, chief executive of the WMBA, said: “The vertically integrated trading and clearing models which are commonplace amongst exchanges can present biased and dangerous incentives and encourage such organisations to restrict access to other tradeiding market infrastructures such as interdealer brokers and MTFs.”
“One long rollercoaster”
Liddell, who is to step down from LCH.Clearnet at the end of his five year contract next July, said he was satisfied with his time at the group. “It’s been one long rollercoaster. If I had to say one thing, it’d be that we’re in a much stronger position than we were four years ago.”
Asked what his plans were beyond next July, Liddell said: “I deliberately haven’t thought about it and I won’t for a few months. I’d imagine [I’ll stay within the industry].”
Asked by FOi whether NYSE Liffe had asked him to run one of its new clearing ventures in London or Paris – which it is setting up so as to cut ties with LCH.Clearnet – Liddell laughed and said NYSE Liffe had not been in touch.
Commenting on the outlook for LCH.Clearnet after the loss of such a significant client – as well as last month’s statement from the London Stock Exchange Group that it was reviewing its relationship with LCH – Liddell was bullish.
“We’re dominant in OTC interest rate swaps, which is where we wanted to be,” he argued. “That will be the focus for the next few years, and I believe we will remain dominant.”
Liddell agreed that the EU’s focus on mandatory swaps clearing should prove a boon to the group, which is Europe’s largest ‘horizontal’ clearer – in other words, one not owned by an exchange.
“Strictly speaking, it will give us more business,” he said. “I think the migration to electronic trading [of swaps] will take a while. [But] both will be good for the business.”
Liddell concluded by saying he was now less worried than he had been by the prospect of a “race to the bottom” among clearing houses – a concern he raised publicly earlier this year. Liddell had been concerned that clearing houses might, under competitive pressure, lower risk management standards or margins to compete for business.
“My concern was not so much about clearers competing on price, but on risk,” he explained. “If margins are reduced, they might not be adequate to survive the stresses and the default of a large clearing member, something which could have horrible consequences.”
“It’s a genuine worry,” he concluded, “but regulators are paying much more attention to it. I’m still concerned, but I’m less pessimistic.”
Tom Osborn +44 207 779 8361 tosborn@fow.com