Is that Open OTC, Closed CCP or Neither?


A consortium deal for LCH.Clearnet threatens the DTCC takeover. Moreover, the purchasers have a fascinating ability to reshape current market infrastructure…and it may not be in the way that government/regulators are hoping to see it reshaped!


The history of the credit crunch may well be seen as the ultimate turning point for Central Counterparty Clearing (CCP) of markets. However, that inflexion point may not be as clear as various members of the political/regulatory complex may hope.

In the USA, the Clearing Corp has been bought by a consortium of users and the attempts to create “open” CDS clearing instead seem to be creating another closed members club for OTC players under a slightly different rule book. The attempts by the “open” exchange platforms to create a democratic marketplace with CCP for CDS is currently being shunned by the major CDS players.

However, CDS is not the entire marketplace nor is the LCH.CLearnet the entire clearing environment. However, a takeover bid by a consortium of users (banks plus ICAP it seems) could provide a huge turning point in the marketplace.

Fears of a DTCC monopoly have riled users across the Atlantic. The world’s 500lb gorilla ICAP finds itself in an intriguing dance where it would like to have more influence on CCP (it already has a minority stake in CCorp) for many reasons but also itself fears being seen as a monopolist if it buys a clearing house outright.

As “the reign of terror” phase of the “Capital Market Revolution!” gains hold, every single aspect of markets are being fought over. Therefore, the energy combine ICE is now creeping (with one might add its own integrated CCP) closer to business lines that the likes of ICAP cherish. At the same time, the banks may yet see a takeover of LCH.Clearnet as a way to provide the greater security of CCP to many interbank transactions without neccessarily having to go the whole way and provide open accountible transparent dealing with all counterparties as is the norm on the futures and options exchanges.

ICAP and the banks want to control their cash cow products for as long as possible before they (almost inevitably) become commoditised and emerge on conventional (open) exchanges. Likewise, ICAP has its own ambiditons in the exchange world and a hefty stake in LCH.Clearnet could be a great way to ensure its product developments gain priority.

Ultimately, will the existing exchange shareholders of LCH.Clearnet go with the existing DTCC deal, or is there even a possible third way transaction? Doubtless the EU will be keen to ensure a transparent clearing practice and avoid creating another silo…

There are so many ramifications to this potential move that it is hard to even start summarising them within a single article!


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