The London Clearing House (LCH), the London Stock Exchange and CREST, the London CSD, announced today that they had met their deadline of launching an equity settlement netting facility for the London market by the end of June. Initially, only 60 per cent of SETS market volume will be netted, but this is expected to rise to 95 per cent by the end of the year.
The new facility, the second phase of the Central Counterparty (CCP) service the three organisations are developping, delivers optional settlement netting for trades executed through the London Stock Exchange’s electronic order book (SETS), cleared through the LCH EquityClear service, and settled in CREST. They claim the gross central counter part (CCP) service launched in February 2001 has contributed to a near doubling oftrade volumes through SETS and a narrowing of spreads, by allowing counter-parties to trade anonymously without counterparty risk. Multi-lateral settlement netting can be expected to reinforce these beneficial effects by upping “straight through processing” rates in the London market. SETS traders will now be able to enter an order, and it can pass through execution, clearing, netting and settlement without further human intervention. The three sponsors claim the netting service will also reduce back office costs by eliminating up to 95 per cent of transactions which currently proceed to settlement. Firms will also be able to cut capital spending and reduce capital allocations to operational risk, while simultaneously expanding their trading books.
“We are delighted to have worked closely with our colleagues at the London Stock Exchange and CRESTCo to bring the second and key phase of this world-class Central Counterparty service into use,” says David Hardy, Chief Executive of LCH. “Members of LCH EquityClear will now be able to enjoy the further benefit of reduced operating cost that a CCP is able to deliver. Since the launch of the LCH EquityClear service in February last year, the percentage of London Stock Exchange activity conducted on SETS has risen to over 60 per cent. This improvement to the service will push volumes still higher, and the potential of the service to continue to expand and add further value to the market is significant.”
Clara Furse, Chief Executive of the London Stock Exchange added: “The introduction of settlement netting of trades is a significant step forward for the London market. It underlines our commitment to reducing the unit cost of trading and reinforces London’s pre-eminent position as an international equity market. This makes it very clear that a horizontal market infrastructure works in the best interests of our customers.”
Hugh Simpson, acting Chief Executive of CRESTCo, said: “The introduction of optional settlement netting builds on the successful introduction of the CCP service in February 2001. Through partnership between CRESTCo, LCH and LSE, we have created a world-leading infrastructure for London’s securities markets and our participants.”