KAS Bank has expressed surprise that NYSE Euronext is to launch two new clearing houses in London and Paris by late 2012, severing its existing clearing arrangement with LCH.Clearnet.
In an open letter, the Dutch bank explained: “The Euronext announcement constitutes an expansion in the number of CCPs, surprising many market participants, who had been anticipating an opposite trend towards consolidation. The latter outcome is widely viewed as the most effective way to reduce the prevailing complexity and inefficiency in the post-trade environment.”
An increase in the number of CCPs may put a strain on interoperability between central counterparties. At present, UK, Dutch and Swiss regulators put a stop to interoperability in late 2009 in order to review the linkage agreements.
Regulators have been eager to point out interoperability between CCPs would increase counterparty risk, and that this increase could be covered by the posting of additional collateral by CCP members.
However the regulators have stopped short on how much collateral would be needed, and how this collateral would be managed. CCPs have since been busy discussing various models before regulators meet again, and adding more CCPs to the melting pot may prolong agreement. LCH.Clearnet, the European Multilateral Clearing Facility (EMCF), EuroCCP and SIX x-clear are the major participants in the discussions, with a growing number of smaller CCPs scattered around Europe.
KAS Bank also expressed doubt that the vertical silo business model proposed by NYSE Euronext (where trading and clearing would be controlled by one party) would be efficient for the market. Cross-subsidies and anti-competitive behaviour “will inevitably result.”
KAS Bank acts as a general clearing member for traders active on all major exchanges.
Related News: NYSE/LCH.Clearnet Split