LME considers building clearing house

LME considers building clearing house

In a statement put out this afternoon, Martin Abbott, chief executive of the LME, said: “The LME’s decision to examine self-clearing is driven by strategic considerations arising from the ability of an exchange to manage and develop its own clearing services in a world where the horizontal clearing model is being steadily eroded.

“In addition it should be noted that we believe selfclearing would also be accretive to earnings at the LME.”

LCH.Clearnet, of which the LME owns a small shareholding, said that it has not received notice of a timeframe.

Ian Axe, chief executive of LCH.Clearnet said: “We value our relationship with the LME and shall continue to provide the LME and its members with an excellent service and the benefit of our unique experience in clearing for this complex market - we are a leader in commodities clearing globally.

“Market participants tell us they are looking for proven, efficient and consolidated clearing offerings. LCH.Clearnet is best placed to continue to deliver this.”

The news is a further blow to LCH.Clearnet, which lost the contract to clear ICE ECX carbon credits in November 2008. Last year, over 120m contracts were traded on the LME with a notional value of $11.6tr.

LCH.Clearnet is battling against a trend towards exchange-owned clearing models, where the exchange controls its clearing house in a “vertical silo” model. Exchanges favour the model as it increases profits and enables them to harness synergies as well as increasing the speed of new product launches.

Critics claim that the model reduce competition shutting rival exchanges and rival clearing houses out of the market.

Last May, NYSE Liffe announced plans to bolster trades cleared through its Liffe Clear clearing house, moving away from LCH.Clearnet, its longstanding clearing house, adding that it would build a new clearing house in Paris for equities by the end of 2012.

In addition, it was rumoured that the London Stock Exchange was ready to expand into clearing, severing ties with LCH.Clearnet. However, these rumours were quietened when the stock exchange said last month that it would clear its new FTSE 100 future contracts through the clearing house.

However, LCH.Clearnet has won recent success internationally with recent wins in Hong Kong, where it will clear all trades on the Hong Kong Mercantile Exchange’s new electronic platform and in Australia where it announced a deal to clear for the FEX Derivatives Exchange last month.

The exchange may also receive a boost from the regulators. Last month, the EU antitrust commissioner Joaquin Almunia expressed concern over the expansion of the vertical silo model in the event of merger between NYSE Euronext and Deutsche Börse.

For more on the issue of vertical silo clearing, see this month’s FOW, out this week.

Thought Leaders

SmartStream RDU gears up for Mifid II challenge

SmartStream won the FOW Award for best new technology product in both the trade...

Total Return Futures - a real-life example for futurisation

Eurex won the FOW Prop Traders' exchange of the year award

ABN AMRO Clearing is optimistic about the future of proprietary trading

ABN AMRO Clearing won the award for proprietary traders' clearing firm of the...

Wematch: Shining a light on collateral and securities financing

Wematch discusses regulatory tailwinds, building liquidity and supporting banks...