Editorial: Where does the London Stock Exchange stand on vertical silos?
One the face of it, LSEs bid, news of which was broken last night by the Financial Times, makes sound commercial sense. It will allow the exchange to lock in the revenues from the international clearing house at a time when its interest rate swap clearing business looks set to grow significantly.
At the same time it will enable the groups to launch new products without the time delay that comes with awaiting approval from the clearing house.
The bid was not a bolt from the blue, however, it marks a significant about turn in the LSEs public statements over the vertical silo, exchange owned clearing model.
This is Kevin Milne, director of Post Trade at the LSE, speaking to Global Custodian magazine: We need to give people and markets choice. We cannot operate vertical silos, in which a trade idea goes in at the top, and a completed trade comes out the bottom, and users cannot get out of the silo once they are in it or into the silo unless they joined it at the top...We do not want to build a vertical silo.
And Adrian Farnham, chief executive of Turquoise Derivatives in an interview with FOW in June: We think that is a much better model for customers compared to the narrow, walled-in vertical silo model that exists today.
The LSE has a defence (and an ambiguous track record), however. Back in 2010, Xavier Rolet declared the days of the horizontal clearing model numbered adding that post trade services represented the biggest challenge and opportunity for the exchange.
It will be important to ensure that a vertical model is not hermetically sealed and that users can enter or leave the process at a time of their choosing, he said.
So it seems that LSE has a vision of an exchange-owned, open clearing house. An interesting model and one that will attract significance if Bats launches derivatives in Europe as is expected once and if it completes its merger with Chi-X Europe, which is under review by the UK competition commission.
The timing of the bid is awkward for the LSE though coming as it lobbies the EU to mandate strong conditions for a NYSE Euronext and Deutsche Börse bid to go ahead and you cant help but feel its hand was forced by the rival bid by Markit.
Should the LSE succeed in its bid (and it warned this morning it was a long way from the finishing post), it will have the chance to put its money where its mouth is and expound its vision of competitive clearing in Europe. If it fails in its bid or fails to follow its ideologies with action, the exchange will be exposed to charges of hypocrisy from its European rivals.
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