Post-Trade | Clearing & settlement
he sleepy world of post-trade services is facing a root and branch shake-up. As new regulations, in the US and Europe, work their way onto the statute books, creating some hugely lucrative opportunities for some players and threatening the very survival of many more, competition in the clearing and settlement space has never looked so intense nor the future so unsure. “The complexity of the regulations, and the magnitude of potential change that impacts the entire global landscape generally, mean financial institutions are moving into uncharted water. There are few certainties about who will emerge as market winners,” says Saheed Awan, head of global collateral services, Euroclear. Squeezed in between a regulatory agenda focused on stoking up competition while reducing risk, and a voracious client appetite for products that optimise capital and asset holdings but at no extra cost, the post-trade institutions are having to think fast as the ground shifts beneath their feet. In the clearing market, the decision by
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global regulators to drive OTC derivatives trade onto exchanges presents one of the biggest opportunities and threats to incumbent players. “With a new flow worth over $700 trillion, there’s a huge historic business opportunity here for clearers,” says Javier Tordable, CEO of technology provider Cinnober. “Not every incumbent clearer will be able to adapt their business model to cope with OTC complexities and some will stay focused on core business so I’m sure we’ll see new clearing houses enter the OTC business.” Recent announcements by NYSE Euronext and CME of plans to build new clearing facilities for derivatives in Europe are a sign more newcomers into the clearing space are on the way, says Tordable. However, growing competition in the clearing space is also being powered by another force. As regulations governing capital and liquidity requirements grow more stringent, so the clamour from banks, demanding interoperability between CCPs, gets louder. Interoperability between
Best Execution | Autumn 2012
CCPs, say advocates, cuts inefficiency and risk by allowing market participants to net and consolidate trades into one single obligation using one pot of margin and one set of procedures in a relationship with just one preferred CCP. It also exerts downward pressure on clearing fees by injecting greater competition between CCPs. Earlier this year, interoperability seemed to be an unstoppable market force after several trading venues, led by BATS Chi-X, opened the doors to four-way interoperability. In addition, the decision by EC regulators to block a mega-merger between NYSE Euronext and Deutsche Börse seemed to take the steam out of “vertical exchanges”, which restrict choice by forcing customers to drive trades through the exchange’s own CCP. “I’m not expecting the floodgates to
interoperability to open soon”, says Hugh Brown, director of UK markets at EMCF. “EMIR blesses interoperability but it doesn’t make it mandatory.” According to Tordable at Cinnober though, the pressure from market participants, gunning to consolidate their trade flows into just a handful of large, strong CCPs, will inevitably lead to more competition and consolidation. “We’re already seeing it with deals such as LSE’s recent acquisition of
LCH.Clearnet.”
Rising competition though among CCPs
has fired up safety concerns in some quarters. “What the advent of OTC derivatives into clearing does is to migrate bilateral risk between market participants to the CCP. Is that risk going to be managed appropriately and will CCPs create additional systemic risk which could impact on other on-exchange business categories”, asks Ian
“I’m sure we’ll see new clearing houses enter the OTC business.” Javier Tordable, Cinnober
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