Market regulators seek to end clearing competition logjam in Europe

February 12, 2010

By Huw Jones and Jane Baird

LONDON, Feb 12 (Reuters) – British, Dutch and Swiss market watchdogs have agreed conditions to end a ban on clearing linkages, which could spur competition and cut fees in Europe’s stock market, industry officials said on Friday.

Share trading platforms like Chi-X and BATS want clearing houses to share markets, so that these venues can offer multiple clearers and strengthen their ability to compete with exchanges such as Deutsche Boerse and NYSE Euronext by bringing down transaction fees.

The worst financial crisis since the 1930s prompted regulators to slam the brakes on a string of applications from clearers to hook up with one another.

Now clearers will have to take another look at their requests for market-sharing, known as interoperability, to meet the conditions agreed on Friday by the regulators, which will delay the introduction of linkages in the market.

Regulators wanted to be sure they had a full picture of risks posed by linkages to the broader financial system. They feared links would see a bust clearing house spread contagion throughout the broader financial system.

“On balance it looks positive because the regulators jointly are saying interoperability can go ahead but we want to see the management of risk/collateral between the central counterparties correctly modelled and implemented,” Mark Hemsley, chief executive of BATS Europe said.

“The central counterparties are reviewing the statement and meeting with us next week,” Hemsley added.



Regulators from the British, Swiss and Dutch securities authorities agreed on several key conditions for allowing interoperability:

— the additional counterparty risk of hooking up to another clearer has to be quantified and backed by additional collateral;

— there are several ways of increasing collateral and the regulators are not giving preference to one model;

— clearers will also have to show how interoperability arrangements deal with other types of risks such as legal and technical.

“EMCF (European Multilateral Clearing Facility) is happy that there is now clarity about the direction regulators are going with regard to interoperability,” said the Dutch clearing house, which clears trades for Chi-X, BATS and other markets.

EMCF, Europe’s biggest equity clearer by number of transactions, said it was studying the document and would have a fuller statement next week.

The three-way regulatory framework has been thrashed out in close contact with the European Union’s executive European Commission, which is due to put forward a draft law on clearing securities by mid-year.

Some market players said the wording of the statement, which has not yet been released publicly, is vague and open to multiple interpretations.

A set of EU rules known as markets in financial instruments directive (MiFID) has succeeded in sparking competition among share trading platforms but Europe’s clearing systems, which square trades ahead of settlement, has remained fragmented to keep cross-border transactions costly. (Editing by David Cowell and Sharon Lindores)

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