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TABB Group Says Europe’s Equity Markets Need Competition In The Clearing Space But Only Consolidation Will Make This An Effective Reality - MTFs, Brokers And The Marketplace Need Low-Cost Pan-European Central Counterparty Clearing But Unfettered Competiti

Date 21/01/2009

Low-cost, pan-European central counterparty clearing (CCP) is a prerequisite for multilateral trading facilities (MTFs) to expand their business models and brokers to reduce their risks and costs, as the marketplace worries about the post-trade process. But according to TABB Group in a new European-focused research report published today, “Clearing in European Equities: Competition and Consolidation,” competition in the clearing space across Europe must be accompanied by consolidation to provide a sufficiently robust and commercially viable environment.

Behind the fanfare surrounding interoperability, says Miranda Mizen, senior consultant at TABB and author of the report, is the reality that unfettered competition will add risk and cost to the clearing environment through over-engineering.

Some progress has been made, claims Mizen. SIX x-clear now offers services in competition with LCH.Clearnet in the UK, and consolidation has started with the proposed merger between LCH.Clearnet and DTCC. New cost models, partnerships and business models are appearing as the momentum behind further change builds, and CCP clearing is fast moving from a position of cost to a differentiator that will create opportunities and a competitive edge.

But it has taken two years since the Code of Conduct was signed before there was competition, explains Mizen. “There are more than 80 requests for access and interoperability outstanding, languishing in lawyers’ offices and in CCP inboxes, stuck behind differences in national laws, market practices and facing foot-dragging resistance to competition. Most of the 80 will never see light of day.”

As competition increases, Mizen says that there will soon be too many CCPs competing for approximately six million trades per day. Without economies of scale, the limits of the market and pressure on cost make competition unprofitable, which is why CCPs need to consolidate into no more than three clearing houses that can offer sufficient breadth and depth of services and economies to a wide range of members.

At the same time, brokers are reviewing their core competencies and clearing relationships and want just enough competition to promote value for money, allowing them to choose how they balance risk, cost and service. MTFs need new clearing relationships to expand their business models and product offerings. And CCPs need new sources of revenue as costs come under pressure and competing CCPs bang on the door to their market.

However, Mizen warns, large-scale interoperability in Europe is not the answer to providing robust and efficient CCP services to support the pan-European trading environment. Two new pan-European CCPs were created to support the new MTFs, but without consolidation amongst CCPs, they add to the complexity and brokers’ margin fragmentation.

While clearing costs have been reduced under pressure to ward off competition, they belie easy comparison, lacking standards or any form of common unbundling. The benefits of cost reduction, she explains, have been negated by rising trade volumes and operational costs. “Clearing is a volume game and CCPs need to create economies of scale and diversification across markets and industries to leverage common platforms and create multiple revenue streams. This is only possible through consolidation of CCP services into larger, more diverse companies that reach across borders.”

Accordingly, the lack of competition, high costs and inability to operate at a pan-European level will continue to limit growth. And yet, concludes Mizen, “the unfettered competition will result in unacceptable complexity and risk and cost to brokers, causing changes in clearing arrangements or execution methods in an effort to reduce the burden.”

The 26-page report can be accessed by TABB Group Research Alliance clients and all pre-qualified media at https://www.tabbgroup.com/Login.aspx. To request an executive summary or to purchase the report, please visit http://www.tabbgroup.com or write to info@tabbgroup.com.