A new business, dubbed Rainbow, designed to rival Liffe is considering clearing its business through Eurex after Liffe prevented LCH Clearnet from entering into discussions concerning the project.

The move has also prompted speculation that Liffe might decide to buy back LCH Clearnet in full.

Project Rainbow has been in development since mid 2007 and comprises a group of large derivatives trading houses. While still in its embryonic stages, Project Rainbow has already encountered difficulties. FO Week has learnt that the London-based clearinghouse was contacted by the hopeful bank consortium, to discuss providing clearing for the new set-up.

Given LCH Clearnet’s potential loss of yet more business in the wake of ICE Futures’ decision to set up its own clearinghouse, it agreed to talk. However, when Liffe caught wind of the plans it pressured LCH Clearnet into abandoning talks. It has long been rumoured that Liffe has considered setting up its own clearinghouse away from LCH Clearnet.

Liffe’s intervention has left Project Rainbow considering its alternatives, which include clearing through Liffe’s arch rival Eurex. The Clearing Corporation has also been rumoured as a potential partner.

LCH Clearnet’s precarious position has meant it has been weighing up its own options, a source said.

The source explained that, alongside the probable loss of ICE Futures passing through the clearinghouse and any threat that may have been made by Liffe, LCH may be considering being cannibalised by the exchange.

By the end of 2008, Liffe will hold a 5% stake in LCH Clearnet, following a repurchase agreement whereby LCH Clearnet agreed to repurchase over 26m ordinary shares held by Euronext Liffe at €10 each.

The clearinghouse said at the time of agreeing the buyback that it believed a number of potential developments in the exchange and clearing markets could pose significant threats to its clearing volumes and revenue streams. These included clearing-driven mergers between exchanges, new or potential new entrants in its market-space and the development of alternative trading platforms, which may attract liquidity from its customers.

That it is possibly considering being swallowed whole again by Liffe could indicate how much it fears for its survival independently, a source said.

The emergence of Project Rainbow has become crucial to the future of LCH Clearnet which also clears London Metal Exchange, part of London Stock Exchange and EDX, all of which could be affected if it were to fall under Liffe’s ownership.

If Project Rainbow did see its planned contracts cleared through Eurex it would come as a kick in the teeth to Liffe.
“That would be even more galling than having a rival contract cleared through LCH. Having a rival contract cleared through a rival exchange, that will hurt,” said one source.

A second member of the Rainbow project highlighted that Liffe’s behaviour towards LCH Clearnet was questionable.
“The issue of building barriers so high so as to protect a franchise and prevent competition is something that should be looked at closely,” he said suggesting that the UK’s office of fair Trading and or the European Union could become involved if it was believed that Liffe was preventing competition.

LCH Clearnet’s’s decision to turn its back on the project because of Liffe’s pressure resulted in a final warning shot towards the clearinghouse by one of the sources close to Rainbow. “Liffe applying pressure is one thing. Those of us involved in this project are also LCH shareholders and own a lot of open interest. We could similarly apply some sort of pressure,” he said.

Both Liffe and LCH Cleanet refused to comment.