NYSE to Move Derivatives Clearing, Keep LCH for Equities

NYSE Euronext plans to spend $85 million moving clearing for London derivatives trades to its own clearinghouse, while retaining the services of LCH.Clearnet Group Ltd. for cash equities transactions.

NYSE Liffe Clearing, a central counterparty to all trades on the London-based Liffe futures market, will be operational by the summer of 2013, the exchange said in a statement today. it will shift clearing for derivatives traded in Amsterdam, Brussels, Lisbon and Paris to the U.K. capital in the first quarter of 2014. The company previously said it would build two clearinghouses: one in London and one in Paris.

NYSE is implementing a standalone strategy after its merger with Deutsche Boerse AG was blocked by European regulators in February. NYSE delayed its clearing plans as Deutsche Boerse owns its own clearinghouse and routes all trades through its own services in a so-called vertical silo.

“All derivatives clearing will be done in London, which could raise the eyebrows of French regulators,” Richard Perrott, exchange analyst at Berenberg Bank said today. “NYSE’s ambitions to clear over-the-counter derivatives might suffer due to its late entry. Also, in its pursuit of a vertical structure, it could struggle to garner the vital broker support.”

Derivatives Competition

NYSE operates the New York Stock Exchange, bourses in Paris, Lisbon, Brussels and Amsterdam and Liffe, Europe’s second-largest derivatives market. Exchanges are jostling to offer post-trade services as regulators in Europe and the U.S. push brokers to process OTC derivatives through a clearinghouse.

The exchange has been looking at clearing its own derivatives since 2008 when Liffe renegotiated its post-trade contract with LCH.Clearnet, Europe’s largest clearinghouse, incurring a $335 million charge. NYSE began the process to protect its European derivatives business after brokers including UBS AG and Goldman Sachs Group Inc. held talks on starting a rival derivatives exchange to Liffe, dubbed Project Rainbow, and approached LCH.Clearnet to act as clearinghouse.

CME Group Inc., Deutsche Boerse’s Eurex and IntercontinentalExchange Inc., rival derivatives exchanges, all have vertical clearing models. Chicago-based CME and Atlanta-based ICE also have clearinghouses in Europe while London Stock Exchange Group Plc has agreed to buy a majority stake in LCH.Clearnet.

“NYSE’s priority is to protect its European derivatives franchise via a vertical silo,” Berenberg’s Perrott said today.

Cost Savings

The exchange said it will spend about $85 million over the next two years and expects annual net cost savings of about $30 million.

LCH.Clearnet has agreed to sell a majority stake to LSE, which wants to compete with NYSE in derivatives trading. Ian Axe, LCH.Clearnet’s chief executive officer, said this month that he wants NYSE Euronext to remain an owner and client.

“LCH.Clearnet will work collaboratively with NYSE Euronext, clients, market participants and regulators to ensure a smooth transition and continuation of clearing services,” Axe said in a separate statement today. “We wish NYSE Euronext every success in its clearing strategy and look forward to continuing to serve NYSE Euronext as a key long-term client and clearing member in cash equities.”

Merger Blocked

Deutsche Boerse agreed to acquire its New York-based rival in a deal valued at $9.5 billion in February 2011. The European Commission said the merger would have led to a “near monopoly” in European exchange-traded derivatives and any savings would “not be substantial enough to outweigh the harm to customers caused by the merger.”

Rejection by European regulators means NYSE needs new ways to cut costs and expand. NYSE is resuming a buyback, focusing on its clearing strategy for Europe and looking for other merger opportunities, Chief Executive Officer Duncan Niederauer said last month.

Clearinghouses act as central counterparties for every buy and sell order executed by their members, protecting them if other traders default.

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