In an interview with GC.com, Clearnet managing director Victorien Goldscheider has hit back at claims by London Clearing House (LCH) that the choice of Central Counter Party (CCP) provider to Euro MTS is a “no-brainer” [see News Item below, 18 December]. First, he disputes the London Clearing House (LCH) figures on the size of their respective repo businesses. He says Clearnet has daily netted transaction volumes of Euro 10 billion, ten times the Euro 1 billion put forward by LCH. This is still a tenth of the activity at LCH, and Goldscheider concedes that his London-based rival has built a strong position in Bund repo, but argues that present volumes will shift allegiance as soon as Euro MTS makes its choice. “That being said, volume is not the only feature required for success in the bond business,” he adds. “Liquidity can move easily from one location to another as soon as a major choice such as the one facing MTS is actually made. So existing volumes should not be a concern for us or for our customers. If and when Clearnet is selected as CCP provider to MTS, critical mass will move to Clearnet.”
But Clearnet is not relying on the mobility of transaction volumes alone. Goldscheider adduces several other points in favour of the Paris-based CCP. He cites the experience of the Euronext group in integrating different financial markets and technologies, which he reckons will enable Clearnet to offer Euro MTS users a solution more quickly than LCH. “Clearnet will capitalise on existing synergies between the infrastructure used in both the cash and derivative equity business and the bond and repo business,” says Goldscheider. The idea is to shift all cash, derivatives and financing markets in Europe on to a common clearing platform using the Clearing 21 technology Clearnet has adopted.
Goldscheider also believes that the Euronext clientele are a strong argument for choosing the French alternative. “Our ability to leverage off our existing infrastructure includes a strong overlap with the existing customer base due to the strong correlation between Clearnet’s Euronext members and the MTS group members in France, Belgium, the Netherlands, Portugal and the United Kingdom,” he says Goldscheider. “From a technical point of view our CCP offering to Euro MTS members will rely on infrastructure already in place that requires no enhancements as the participants are already connected to the market, the CSD and other users.” Clearnet does have a geographical coverage that fits the MTS network well, since it is already supplying CCP services in the French, Dutch, Belgian and Portuguese equity markets.
Goldscheider adds that Clearnet has already traversed the regulatory territory in each of these markets, facilitating the creation of a legal framework for cross-border clearing through its system. “The clearing of Euro MTS markets will require an ad hoc legal framework,” he says. “Through our merger process with the Paris, Brussels and Amsterdam exchanges, we have already established a cross-border framework. The relevant agreement has intentionally been left open to accept additional national authorities and cover new markets. On top of that, we have in our favour the regulators’ recommendation that a European CCP be located in the Euro zone, which LCH is not.”
On the tricky question of how the Euro MTS CCP will be owned and governed – an issue complicated by the need to ensure that the Euro MTS CCP is backed by a capital structure which covers risks rather than defuses a political questions – Clearnet is promising flexibility. “We recognise the need to meet the demands of the marketplace on governance,” says Goldscheider. “As such, we favour a flexible approach to the capital structure in order to allow the MTS group, its members and other CCPs to participate in the governance and/or the return on investment.” In other words, those firms which fancy an equity stake in the Euro MTS CCP can have one, while those who do not will not be excluded from a seat on the board. “We have offered both bond and repo players a dedicated structure that can be owned and governed by users,” says Goldscheider. “Moreover, this dedicated structure can be opened to other CCPs in order to offer a consolidated solution, which is what users most want and expect right now.”
On the question of whether that consolidation will take the form of a merger between Clearnet and LCH -especially in the wake of the acquisition of LIFFE by Clearnet parent, Euronext – Goldscheider will not be drawn. But positioning Clearnet as the fastest route to further consolidation of market infrastructure in Europe looks a clever move: it is what the market wants, and Clearnet can rightly claim expertise in the field. As Goldscheider points out, the division of repo and bond market business between BrokerTec (which dominates repo) and Euro MTS (which dominates the cash market) makes little sense. “A split of these two businesses seems to have emerged between the two trading platforms, yet both require a CCP for their users,” he says. “Consolidating risk management and market coverage with a single provider makes sense for both. Bringing the bond and repo markets together would reduce costs for users significantly through the optimisation of collateral and the reduction of settlement instructions through netting.” It remains to be seen if Euro MTS members buy this argument.