25 April 2011

FN: LSE derivatives launch fuels debate over clearing competition

This month the LSE confirmed it would begin offering trading in FTSE 100 index futures during the first week of June, bringing it into direct competition with NYSE Euronext’s London-based derivatives market, Liffe, which also trades futures contracts on the FTSE index.

The launch of Turquoise Derivatives represents the first credible attempt by any exchange to break into the European derivatives duopoly dominated by NYSE Euronext Liffe and Deutsche Börse’s Eurex, which trade around 95% of all Europe’s listed futures and options. It is a move welcomed by many market-watchers and traders who fear the European derivatives market is at risk of becoming a mammoth monopoly should the merger between NYSE Euronext and Deutsche Börse, announced in February, go through.

The LSE is using independent clearing house LCH.Clearnet to clear its new derivatives platform. Natan Tiefenbrun, commercial director at Turquoise, conceded that because the LSE does not own a derivatives clearing house it is at a competitive disadvantage in its attempt to shift trading volumes from the “duopoly or monopoly” of Deutsche Börse and NYSE Euronext. He said: “There is no doubt that the incumbents can use their ownership of clearing to their advantage. There is no doubt that they can use that in an anti-competitive fashion to exclude new entrants and competitors".

At present, there is no regulation compelling exchanges to open up to, or interact with, other exchange platforms or clearing houses. Exchanges with successful derivatives business have no commercial incentive to open up. This may change. In Europe, the European Market Infrastructure Regulation, which is establishing rules for the clearing of derivatives, promises to subject clearing houses to greater competition by forcing them and exchange platforms to provide access to third parties, although this will take some time to come into effect.

Tiefenbrun said: “I am confident that there is going to be change. But it is hard to say what the regulators will do. They may do it by interoperability, or by unbundling trading and clearing, which would stop exchanges from using trading and clearing in combination to behave in an anti-competitive fashion".

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