Chi-X Europe Limited, the largest multilateral trading facility (MTF) in the European equity markets, is to offer its users a choice of clearing house. The MTF, which has hitherto obliged users to clear through the Fortis-owned European Multilateral Clearing Facility N.V. (EMCF).
Following the signature of a Memorandum of Understanding (MOU) between EMCF and Swiss-owned SIX x-clear Ltd. to interoperate, Chi-X users will now have a choice of clearing house.
Despite evidence of multiple applications to inter-operate following the introduction by the European Commission of the European Code of Conduct on Clearing and Settlement in November 2006, Chi-X Europe has become the first MTF to offer its participants the ability to clear though multiple central counterparty (CCP) firms.
Efforts by SIS x-clear to inter-operate with LCH.Clearnet to offer users of the London Stock Exchange a choice of clearer stalled. In this case, the decision was almost certainly made easier by the fact that EMCF became State-owned when the Dutch government rescued its parent last year. Nasdaq OMX has since taken a 22% equity stake in EMCF.
Chi-X Europe says it has been in discussions with other CCPs to “identify ways to help participants further reduce overall clearing costs through an interoperable business model.” The MTF adds that its users will be free to choose a single CCP for all its trading across multiple platforms, eradicating the need to fund cross margin arrangements across different CCPs. This should lower costs while reducing risk.
“We believe that the choice and competition offered through this horizontally integrated CCP model will result in lower prices, better service and further innovation,” says Hirander Misra, COO of Chi-X Europe. “We applaud the efforts of both CCPs in cooperating for the benefit of the industry.”
Marco Strimer, CEO of SIX x-clearAG, who led the earlier negotiations with the London Stock Exchange and LCH.Clearnet, says the MoU and Chi-X deal is an important step towards customer choice in clearing arrangements. “As a fierce proponent of interoperability and the benefits it brings to the industry and clients alike, the prospect of working with Chi-X Europe to bring about significant change is particularly exciting,” he says. “We welcome its foresight in pursuing competitive clearing and see this as evidence of wider industry support for full pan-European interoperability.”
Jan Bart de Boer, Chairman of the Supervisory Board of EMCF, added that EMCF has “proven that in post-trading, competition, not consolidation, delivers better and cheaper services for market participants. Interoperability is crucial for fair competition.”
Robert Barnes, Managing Director, Equities at UBS Investment Bank, was supportive. “Chi-X Europe’s introduction of ‘user choice’ is a smart pan-European response to requests for a mechanism to help reduce frictional front-to-back costs,” he says. “The beauty of this model is that benefits are available to those who feel it is in their interests to switch CCPs without forcing costs on those that wish to stay. This will encourage providers to remain nimble on fees and functionality.”
Subject to the terms of EMCF and SIX x-clear’s Memorandum of Understanding, Chi-X Europe anticipates that clients should be able to clear with SIX x-clear during the summer of 2009 subject to regulatory approval.
SIS x-clear said in a statement that interoperability with EMCF offers benefits beyond Ch-X. It says the MoU “will provide a competitive clearing environment for the equity trade flows in those exchanges or platforms that wish to adopt the dual CCP model, allowing customers around Europe to select the CCP of their choice. Both CCPs will provide customers with benefits in netting, collateral management, margining and settlement in all stock that are actively traded.”
“This is a major breakthrough and we look forward to taking our proposition to exchanges and platforms across Europe,” said Strimer. “We welcome the foresight in pursuing competitive clearing and see this as evidence of wider industry support for full pan-European interoperability.”
Jan Booij, CEO of EMCF, describes the MoU as “a tangible commitment to the future of interoperability in Europe and we look forward to continuing to drive innovation in the market. Competitive clearing has long been a goal for EMCF, its participants and the platforms, Chi-X, BATS and Nasdaq OMX Europe. Interoperability with SIX x-clear will constitute a vital step in achieving this goal.”