NYX Nyse Euronext

NYSE Euronext (NYX) on Thursday called a push to limit banks' stakes in derivatives clearinghouses anticompetitive, arguing that dealers have expertise and capital needed to help lower risk in over-the-counter derivatives markets.

The trans-Atlantic exchange operator, along with industry groups, in a letter urged members of the U.S. House Financial Services Committee to do away with proposed restrictions inserted by Rep. Stephen Lynch (D., Mass.) into legislation designed to reform swaps markets.

The provisions would prohibit dealer banks and major swap market participants from owning more than a 20% voting stake in swaps clearinghouses, and are backed by NYSE Euronext rival Nasdaq OMX Group Inc. (NDAQ).

"This special interest amendment is anti-competitive because it would exclude dealers and major swap participants from the market for clearing and execution services," said the letter, a copy of which was seen by Dow Jones Newswires.

"These entities have the business, legal, and operational expertise needed to establish and operate a clearinghouse, and they are the most likely source of investment capital for such an enterprise," it said.

Alongside NYSE Euronext, the letter was signed by representatives of the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the ABA Securities Association.

The Lynch amendment addresses perceived conflicts of interest in allowing dealer banks to control clearinghouses and swap-trading platforms, developed to mitigate risks that contributed to the financial crisis.

Clearing, the process in which a central counterparty stands as the buyer to every seller and the seller to every buyer, is being pushed by the Obama administration as one way to reduce systemic risk in over-the-counter derivatives markets, under scrutiny for their role in the financial crisis.

Nasdaq OMX could gain a competitive advantage if the Lynch amendment becomes part of the law; the exchange operator's International Derivatives Clearing Group unit is targeting the $420 trillion interest-rate swaps market.

NYSE Euronext, though a partnership with the Depository Trust and Clearing Corp., is considering the same opportunity. London-based LCH.Clearnet currently dominates inter-dealer interest-rate swap clearing.

The Lynch amendment could affect both ventures, as both LCH.Clearnet and the DTCC count dealer banks among their ownership.

The letter, addressed to House Financial Services Committee Chairman Barney Frank (D., Mass.) and other congressmen, argues that restricting banks' participation in clearinghouses isn't necessary.

The authors noted that the House Agriculture Committee's version of the derivatives bill gives the Securities and Exchange Commission and the Commodity Futures Trading Commission the authority to decide which swaps are cleared, eliminating any concern that banks could opt not to clear some products.

And if one derivatives clearinghouse won't clear a certain swap, another facility would likely offer to handle it, according to the letter.

"[I]f dealers invest in a clearing agency their incentive will be to clear transactions, not turn them away," the authors wrote, suggesting that OTC clearinghouses be required to maintain independent boards of directors.

The status of the Lynch amendment is uncertain. It was removed due to procedural issues, but Lynch had planned to try to get it restored before a derivatives bill hits the U.S. House floor.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

(Sarah N. Lynch contributed to this article.)

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