Is it time for smart clearing?
First Published Friday, 3rd June 2011 02:04 pm from Fidessa : Steve Grob
The opinions expressed by this blogger and those providing comments are theirs alone, this does not reflect the opinion of Automated Trader or any employee thereof. Automated Trader is not responsible for the accuracy of any of the information supplied by this article.
When MiFID first emerged into the mainstream, many of us
focussed on developing smart routing systems that could navigate
the new fragmented liquidity landscape. Over time, these smart
routers have become increasingly sophisticated and now take into
account both lit and dark venues and assess them against a
dazzling array of metrics. Left behind in the gold rush was the
seemingly dull world of clearing, where the contribution by
Europe's clearing houses was pretty much limited to waving an
"interoperability at some point in the future" banner.
Well this looks like it may well be set to
Europe has recently announced that it will allow its
market participants to choose which clearer they use (which shows
that interoperability has now become a reality). By offering
choice, BATS is disrupting the vertical silo model whereby
exchanges own (and extract fees from) every step in the trading
process. It will also allow participants to take advantage of
different clearing deals they can negotiate by tagging particular
orders to go down one clearing route or another. On top of this,
the regulatory pressure to see more products (such as OTC
derivatives) cleared centrally has ignited interest in the space,
target="_blank">LCH Clearnet is reportedly mulling
over a number of offers from exchanges and others keen to further
their ambitions in this direction.
suddenly the world of clearing looks more exciting as the promise
(threat) of real competition looks like becoming a reality. The
Houses lists 24 members on its website and, as
interoperability bites, all these firms could be providing the
same generic service (namely venue and asset class agnostic
clearing). So it looks like we might be heading towards a
situation of over supply, especially when compared with the
target="_blank">DTCC that performs the same function
(at least for equities) in the USA.
really want to see the same levels of cut throat competition
between clearing houses that we have witnessed amongst trading
venues? Will European clearing houses entice firms to clear
through them by offering lower and lower fees or ever more
speculative offsets?. And, more importantly, is this what we
really want given that the primary role of a clearing house is to
act as the last bastion of sanity when markets start to melt
down? Sure, we could all use better margin offsets and more
efficient use of our precious capital, but maybe it's even more
important that a clearing house never fails in its role as buyer
to every seller and vice versa.