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February 10, 2012 8:02 pm

Quick View: A NYSE-LCH alliance?

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The latest puzzler will set minds buzzing

Duncan Niederauer says he did have a Plan B all along.

The chief executive of NYSE Euronext revealed on Friday that a team led by Larry Leibowitz, chief operating officer, had been working on a range of initiatives that could be sprung into life if the Deutsche Börse deal failed.

That wasn’t the impression many in the industry had. Whatever the truth, we now know one thing for sure: work is resuming quickly on building a full-service clearing house in London.

That makes sense. NYSE Euronext needs a clearing strategy at a time when its peers – CME Group, Deutsche Börse’s Eurex, etc – are all jostling to take advantage of G20 reforms that will require more clearing of over-the-counter (OTC) derivatives.

The plan is to finish work that had started pre-Deutsche Börse on building up NYSE Liffe Clear in London to “become a full service CCP [central counterparty] to clear all of Liffe’s products and deliver many of the operational and capital efficiencies that we envisaged in the merger”, Mr Niederauer told analysts.

He pointed out that with “legislation beginning to crystallise” on the G20 commitments, the time was right. Indeed, Europe this week finalised the European Market Infrastructure Regulation (Emir), which mandates greater clearing of OTC derivatives.

With Liffe’s current contract with LCH.Clearnet on listed derivatives expiring in mid-2013, NYSE could by then be doing all the clearing for its Liffe products in London.

The arrangements with LCH.Clearnet for European cash equities are to be put under an “accelerated review”. That contract – involving the use of Clearnet in Paris for the Euronext markets – expires at the end of next year.

But what did Mr Niederauer mean by delivering all the operational and capital efficiencies envisaged with the Börse deal?

One clue came in the answer to a question about how LCH.Clearnet might fit into NYSE’s clearing strategy. LCH.Clearnet, coincidentally, released full-year earnings on Friday. Ian Axe, its chief executive, hinted that its exclusive talks with the London Stock Exchange might soon result in something.

Mr Niederauer’s comment on LCH.Clearnet was: “We think that the company has a great deal of potential under Ian Axe, but whether it’s LCH or other alliances given the shifting landscape and the clients’ need for capital efficiencies, I think it would be foolish for us not to continue to consider various alliances between exchanges and clearing houses.“

Mr Niederauer went on to dangle the alliance that NYSE already has with The Depository Trust & Clearing Corp – they jointly run New York Portfolio Clearing, a CCP for futures in the US – as “a great example of that; it’s unprecedented”.

One rumour doing the rounds is that Liffe might yet move clearing of euribor to Eurex Clearing. That would fit with Mr Niederauer’s comment about “delivering all the operational and capital efficiencies envisaged” with the Börse deal.

But what about some sort of arrangement with LCH.Clearnet? Mr Axe suggested last summer the two parties could have a longer-term agreement on cash equities when they extended the clearing notice period. But what about a deal over OTC clearing?

That’s the latest puzzler that will set minds buzzing next week.

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