NYSE Euronext is planning to use Deutsche Börse’s Eurex Clearing as its central counterparty (CCP) for European equities and some derivatives regardless of the outcome of the exchanges’ proposed merger, according to sources close to the situation.
Teams from Deutsche Börse and NYSE Euronext have held meetings with brokerage clients to discuss logistics for moving clearing for NYSE Euronext’s European cash equities and non-Liffe derivatives, including its Paris-based Matif futures business, to Eurex Clearing.
The move demonstrates the necessity for NYSE Euronext to overhaul its clearing capabilities to remain competitive should the merger fail, particularly in light of the London Stock Exchange Group’s bid to acquire Anglo-French CCP LCH.Clearnet Group, which currently clears a lot of the bourse’s continental trades.
Currently, equity clearing for NYSE Euronext’s domestic markets in France, Belgium, Netherlands and Portugal is handled by LCH.Clearnet SA, while clearing of continental European derivatives is handled by LCH.Clearnet Ltd. NYSE Liffe, the London based derivatives market NYSE Euronext bought in 2001, offers FTSE-based and Libor products and uses its NYSE Liffe Clearing subsidiary, with LCH.Clearnet providing some outsourced risk management services.
In May 2010, NYSE Euronext announced its intention to end its relationship with LCH.Clearnet by 2012 and use two purpose-built clearing houses in London and Paris. However, the prospective tie-up with Deutsche Börse saw NYSE Euronext extend its contract with the CCP until December 2013 for cash equities and June 2013 for non-Liffe derivatives.
Interoperability pressure
NYSE Euronext did not comment on whether the plan to build its own clearing infrastructure is still in place, but the time it would take to establish new CCPs could see the exchange group fall further behind other trading venues, which have begun to offer more choice to their members.
Members are particularly concerned that a shift by NYSE Euronext to Eurex Clearing for cash equities could be a setback to creating a fully interoperable European cash market.
“If the deal does collapse, it seems likely that NYSE would re-evaluate its clearing operations, and the close ties it now has with Deutsche Börse could be one of the reasons behind the move to Eurex,” said one London-based broker. “But from a member perspective, it isn’t a positive move. Eurex has sat on the sidelines while other CCPs have pursued interoperability, so any increase in its market share is not in the best interests of the wider market.”
In addition to the London Stock Exchange’s LCH.Clearnet takeover approach, exchanges including SIX Swiss Exchange and Nasdaq OMX Nordic, and multilateral trading facilities BATS Chi-X Europe, Burgundy and Turquoise have all pushed ahead with interoperability initiatives.
Pan-European CCPs have continually stated their desire to include the likes of Deutsche Börse in interoperability offerings, but have so far been rebuffed. The German exchange’s refusal to participate in interoperability may be short-lived, as the regulation accompanying MiFID includes a proposal that forces all European exchanges and CCPs to offer fair access to each other.
“We are ready willing and able to clear your markets and increase competitiveness of European markets,” said Hugh Brown, director of UK markets at pan-European CCP EMCF. “As long as market participants continue to pay around €0.05 for clearing blue-chips on NYSE Euronext and €0.03 plus 0.1 basis point to clear German equities on Xetra – compared to an average as low as €0.005 at pan-European CCPs such as ourselves – these exchanges will always be at a competitive disadvantage.”
Last-minute pleas
NYSE Euronext and Deutsche Börse are awaiting formal notification from the European Commission’s competition division on whether their merger can proceed. According to widespread news reports, a draft decision recommending the rejection of the deal is currently circulating Brussels, with the official deadline set for 9 February.
Executives from both exchanges have written a joint letter to European Commission president José Manuel Barroso, stating that prohibiting the deal would “represent a serious missed opportunity at a critical juncture for Europe”. The letter emphasised the global nature of the derivatives market and the potential for US derivatives exchange CME Group to increase its standing in Europe if the merger is rejected.
“[Prohibition of the merger would deny] Europe the unique opportunity to play a leading role in the reform of international financial markets and the provision of systemic stability,” read the letter.