Clearing Houses in Europe: a financial market infrastructure in evolution.

Giusy ChesiniUniversity of Verona, Faculty of EconomicsDepartment of Business Administration, Verona, Italy, E-mail: giusy.chesini@univr.it

XIX International Tor Vergata Conference on Money, Banking and Finance:“New Frontiers of Banking and Finance after the Global Crisis”

December 13-17, 2010University of Rome Tor Vergata, Faculty of Economics

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The research

Main aim of the research: to describe the current, unprecedented pace of change in the European Clearing Houses’ business

Methodology: is inspired by the well known managerial paradigm called environment, strategy and structure (Chandler, 1962)

→ This methodology has never been used for analysing this financial sector.

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Environment / RegulationYear Regulation Effects

April 2004 MiFID, art. 34, 35 and 46 Competition in post-trading infrastructures.

May 2006 European Commission, Draft Working Document on Post Trading

European Commission, Competition in EU securities trading and post-trading,

Issues Paper

Problems identified in trading and post-trading.

November 2006

EACH, ECSDA, FESE, European Code of Conduct for C&S

Answers of the market partici-pants to the identified problems.

June 2010 European Commission, Public consultation on derivatives and market

infrastructures

It provides important guidance to the Commission service to prepare a formal proposal.

September 2010

European Commission, Proposal for a Regulation on OTC derivatives, central

counterparties and trade repositories

It introduces common rules for central counterparties (CCPs) and rules on the establishment of

interoperability between CCPs.

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The Issue of Interoperability

To achieve interoperability three conditions must occur:

Each trading venue should allow non discriminatory access to CCPs that want to offer their services to the customers of the trading venue

The incumbent CCPs should allow competitor CCPs to offer their services for the transactions executed in that trading venue. (interoperability)

The CCP that has new flows of transactions to clear, coming from a new trading platform must establish new connections with different CSDs (connectivity)

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The shift to interoperability

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The shift to interoperability

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9 clearing houses operate in the equity market in Europe

This paper specifically focuses on five major incumbent CCPs and on two new CCPs with a pan-European profile:

- LCH.Clearnet SA - LCH.Clearnet Ltd - Eurex Clearing AG - Cassa di Compensazione e Garanzia (CC&G) - SIX x-Clear - European Multilateral Clearing Facility N.V. (EMCF) - European Central Counterparty Limited (EuroCCP)

* I did not analyze Central Counterpary Austria CCP.A and Oslo Clearing AS.

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CCPs Starting date and recognition

Corporate form Ownership structure

Trading venue served

LCH.Clearnet Ltd.

LCH.Clearnet Group is formed in 2003. It has

two subsidiaries: 1) LCH.Clearnet Ltd. is a

RCH established in 1888;

2) LCH.Clearnet SA (1990) is a ROCH as of 25

May 2010

Commercial entity supervised by the FSA

LCH.Clearnet group:83% users

17% exchanges

London Stock Exchange ..

LCH.Clearnet SA

Bank authorised by the Comité des Etablissements de

Credit et des Enterprises d’Investissement” with its

ongoing supervision

NYSE Euronext ..

SIX-x-clear Since 19 August 2004 it is a ROCH.

Bank licensed under Swiss law; supervised by FINMA and by Swiss National Bank.

It is wholly owned by SWX SWX Group, NYFIX, Euromillenium

Eurex Clearing AG

Founded in 1998.ROCH 16 January 2007

Bank in accordance with the German Banking Law. It

is supervised by the BaFin.

A wholly-owned subsidiary of Eurex Frankfurt AG; Deutsche Boerse AG.

Deutsche BoerseIrish Stock Exchange

CC&G Founded in 1992.ROCH

8 July 2009

Commercial entity. Since 2000 Borsa Italiana has the

majority of shares.

- 86.36% Borsa Italiana SpA- 13.64% Unicredito Italiano

S.p.a.

Borsa Italiana

EMCF In operation since 29 March 2007.

Since 29 January 2009 it is a ROCH (Recognised Overseas Clearing

House)

Commercial entity. It is supervised by “De

Netherlandsche Bank” (DNB) and the “Autoriteit

Financiele Markten” (AFM)

- Fortis Bank Global Clearing N.V. (77%)

- Fortis Bank Nederland N.V. (1%) ***

- OMX AB (22%)

Chi-X Europe, NASDAQ OMX Nordic Exchange, BATS Europe, Burgundy, Quote

MTF, TOM

EuroCCP Since August 2008. It is aRCH.

Non-for-profit entity It is a wholly-owned London-based subsidiary of

DTCC

Turquoise, Smartpool, NYSE Arca Europe, Pipeline

Financial Group, NASDAQ OMX Nordic

Exchange.

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The main strategies I. Since clearing for OTC derivatives is becoming

mandatory, some European clearing houses, anticipating this, are becoming established in the OTC derivatives markets by strengthening their structures to meet the new potential demand.

II. In general, clearing houses are trying, as other operators in the securities markets, to maintain and improve their technology to allow high levels of information processing capacity. This is a strategic factor to efficiently meet the demand for greater volumes. In particular, one of the most important technological initiatives currently underway is the development of software in preparation for a shift towards a fully interoperable market.

III. Whereas the European clearing houses currently face difficulties in expanding or at least maintaining their market shares, some of them may think strategically to implement attempts to aggregate.

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Further analysis

Following the analysis of the competitive characteristics of each CCP, it is possible to further subdivide them into three groups:

- CCPs that belong to stock exchange groups (vertical silos);

- CCPs that still have in their ownership structure the participation of a stock exchange even though they are moving towards an ownership structure composed of users of their services;

- CCPs governed by the users and following a non-for-profit revenue structure.

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The fall of clearing fees

After implementation of the Code and the transposition of MiFID, the only phenomenon that has characterised all European CCPs is the race to reduce clearing fees to their customers.

In this regard the Oxera Consulting firm in July 2009 published a very interesting study on the costs of trading and post-trading, which shows that European clearing costs have fallen between 20 and 80 per cent per transaction, depending on the market, in the period between 2006 and 2008.

Also Celent in 2008 calculated the cost of clearing from 2005 and 2007 and estimated the clearing fees should stop decreasing once they reach what is called the “activation fee” i.e. the level where it is no more advantageous for customers to switch from one clearing house to another.

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An estimation of the decrease in clearing fees

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The main dimensions of the CCPs

CCPsClearing fees

(,000)Annual net profit

(,000)Clearing volume cash

equity markets (million trades)

2008 2009 2008 2009 2008 2009LCH.Clearnet

Ltd198,232 € 132,195€ 171,132 € 270,532 € 188.1 153.4

LCH.Clearnet SA

139,982 € 89,084 € 65,429 € 33,687 € 194.3 172.2

LCH.Clearnet Group

338,214 € 221,279 € 219,800 € (-91,0) € 382.4 325.6

SIX-x-clear 7,146 chf 8,145 chf 7,194 chf 4,769 chf 25.4 33.4

Eurex Clearing 13,110 € 11,552 € 675 € 772 € 129.2 94.2

CC&G (3) 29,617 € 29,943€ € 32,668 € 27,817 € 66 67

EMCF 12,651 € 17,451 € 3,000 € 6,632 € 152 413

EuroCCP n.a. n.a. loss loss n.a. 47.4

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CCP Market shares of European on-exchange equity trades, 2008-2009.

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To summarize

Until recently, clearing houses in Europe were very profitable due to a lack of competition in this sector.

Liberalisation of financial markets due to a rapidly changing regulatory environment, combined with technological progress and customer pressure, have acted as drivers for new competitors to enter the market.

European Commission indicated the measures to make interoperability fully operational in the same document (Proposal, September 2010) that was enacted for OTC derivatives clearing.

Sharp fall in prices for clearing services. The cut in prices is leading to a revision of the business models of

European clearing houses and in general to an overall reconfiguration of this business sector in Europe.