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

change.

href="http://www.batstrading.co.uk/" target="_blank">BATS

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,

and is why

target="_blank">LCH Clearnet is reportedly mulling

over a number of offers from exchanges and others keen to further

their ambitions in this direction.

So,

suddenly the world of clearing looks more exciting as the promise

(threat) of real competition looks like becoming a reality. The

target="_blank">European Association of CCP Clearing

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

solitary

target="_blank">DTCC that performs the same function

(at least for equities) in the USA.

Do we

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.