May 9, 2013 2:23 pm

Plan to allow more OTC equity trades go through clearing

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Four of Europe’s largest cash equities clearing houses are aiming to dramatically cut the cost of settlement fees for banks and brokers with a service that allows more off-exchange equity trades to be processed through clearing.

EuroCCP, LCH.Clearnet, the European Multilateral Clearing Facility (EMCF) and SIX Group, the Swiss exchange, have signed up to the plan, which was developed by Traiana, a post-trade group majority-owned by interdealer broker ICAP. The plan, which would involve matching over-the-counter trades in real-time, is currently being tested by a small group of European-based banks.

If taken up by banks, it could deepen the push in Europe to cut costs for post-trade services such as clearing and settlement as fierce competition reshapes the industry. Battles for market share between exchanges, share-trading venues and brokers has eroded profits while the growth of more passive exchange traded funds has also cut the frequency of investors’ share trading. Global reform of derivatives markets is also forcing more OTC trades to be moved on to exchanges.

But at present OTC equity trades, typically equity swaps or contracts-for-difference, are not cleared but settled bilaterally between brokers. That process, sometimes known as the “give up”, requires brokers to put up millions of pounds annually in settlement fees.

Traiana, which acts as messaging hub in other OTC markets, would match a deal, allowing it to be sent to a clearing house. The clearing house could then net customers’ positions, saving on settlement fees. Traiana estimates about 75 per cent of trades could be netted, meaning banks could save up to $3m a year in settlement fees.

The move could force more change on Europe’s post-trade infrastructure. In the five years since the Mifid markets directive mandated competition in equities markets, profits from equities clearing at LCH.Clearnet have fallen 75 per cent.

Many have also agreed to free up access to each other’s clearing houses, a process known as “interoperability”. It allows market participants to net trades between venues, cutting settlement costs.

Roy Saadon, co-founder and head of Europe, Middle East and Africa at Traiana, said his company’s service was “complimentary” to interoperability. “We take the second leg of the trade [the give-up] and are putting it through a clearing house,” he said.

Many are consolidating, with LCH finalising its takeover by the London Stock Exchange last week. In March EuroCCP and EMCF agreed to merge to cut costs, although the deal is subject to regulatory approval. Last December SIX Group bought the clearing operations of its Norwegian counterpart for NKr180m ($32m) to beef up x-clear, its own clearing house.

Traiana’s growing importance as a key market infrastructure provider was underlined in January when seven banks, including Barclays, Citi and JPMorgan, took a 12 per cent stake in a deal that valued Traiana at $300m. The consortium also has an option to buy a further 20 per cent stake from ICAP for up to $82.5m at a later date.

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