2nd UPDATE: LME Considers Building Its Own Clearing House
03 Maggio 2011 - 6:24PM
Dow Jones News
The London Metal Exchange is giving serious consideration to the
possibility of building its own clearinghouse, its chief executive
said Tuesday, a move that would make it the latest market operator
to bring the function in-house.
LME taking control of its own clearing functions would
contribute additional fees to the exchange and also mark another
loss for London-based LCH.Clearnet, the trade-clearing company that
last year saw NYSE Euronext (NYX) announce plans to build its own
clearinghouse units.
The LME's decision to examine self-clearing is part of a
strategic move "in a world where the horizontal clearing model is
being steadily eroded," LME CEO Martin Abbott told traders in a
notice.
"In addition it should be noted that we believe self-clearing
would also be accretive to earnings at the LME," Abbott said. The
exchange plans to consult with shareholders, members and other
stakeholders on the matter, although no deadline has been set for a
final decision.
LCH.Clearnet, which is currently contracted to clear trades for
the exchange, said it hasn't received notice from the LME or any
indication regarding the likely timeframe required for a decision
to be made.
"We value our relationship with the LME and shall continue to
provide the LME and its members with an excellent service and the
benefit of our unique experience in clearing for this complex
market -- we are a leader in commodities clearing globally," said
LCH.Clearnet CEO Ian Axe in a statement responding to the LME
notice.
LME's main business lies in trading futures and options
contracts on metals such as copper, aluminum and zinc. The
134-year-old market last year ranked as the 19th-largest
derivatives exchange worldwide with more than 120 million contracts
traded, according to figures compiled by the Futures Industry
Association.
Clearing trades involves a central counterparty acting as the
buyer to every seller and the seller to every buyer, ensuring a
robust middleman that can absorb the impact of a major market
participant's default. The function has been embraced by regulators
around the world as an antidote to the systemic risk represented by
some off-exchange derivatives markets, underscored by the 2008
financial crisis.
Developing its own clearing unit would see the LME take a page
from much-larger rivals such as Deutsche Boerse's (DB1.XE) Eurex
exchange and CME Group Inc. (CME), which run their own
clearinghouses and have used the capability to develop new services
for over-the-counter derivatives markets.
Taking control of trade-clearing is also seen granting a
competitive edge. NYSE Euronext officials said last year that
running its own clearinghouse would enable it to develop new
products and services more quickly than it could under its existing
relationship with LCH.Clearnet.
-By Rhiannon Hoyle, Dow Jones Newswires; +44 (0)20 7842 9405;
rhiannon.hoyle@dowjones.com
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