NYSE to Inaugurate Liffe Clearing - Analyst Blog
30 Marzo 2012 - 1:45PM
Zacks
On Wednesday, NYSE Euronext Inc. (NYX)
announced its intention of building clearinghouse – NYSE Liffe
Clearing – in London that should be operational between the second
and third quarters of 2013. This is a significant attempt to erect
an exchange entity on a vertical clearing model.
Initially, NYSE projects to commence the clearing of derivative
contracts, while the equity trades will still be cleared by
LCH.Clearnet, which cleared all of the company’s trades until now,
for the time being. Besides, management also aims to transfer all
the derivative trades from Amsterdam, Brussels, Lisbon and Paris to
London by the first quarter of 2014.
Necessity to Invest in Clearinghouse
Clearinghouses operate as central counterparties or middlemen
and guarantee every buy and sell order executed by the trading
parties, thereby reducing the risk if a trader defaults. This
clearing business is becoming more lucrative and significant given
the stringent derivatives trading regulations in both the US and
Europe.
The financial regulations and legislations now warrant that the
derivative products like interest rate, credit default and other
swaps should be processed through the clearers to maintain
transparency and stabilize the financial system. Therefore, either
exchange operators such as CME Group Inc. (CME)
and IntercontinentalExchange Inc. (ICE) have their
own clearinghouses or some like London Stock Exchange (LSE) seek
the services of third party experts like LCH.Clearnet, to get their
clearing strategies reassessed. LCH.Clearnet’s primary business
comes from NYSE, LSE and London Metals Exchange (LME).
Moreover, while NYSE had been planning about building two
clearinghouses since 2008 – in Paris and London, the immediate
urgency on initiating a clearinghouse in London was sensed now as
arch-rival LSE is into high-level negotiations to acquire a
majority stake in LCH.Clearnet, since September last year. NYSE
holds only 9% stake in LCH.Clearnet and had been eyeing it for most
of last year. The company also plans to renegotiate new terms with
LCH.Clearnet.
Meanwhile, NYSE’s clearinghouse plans had also got shelved last
year as it was involved in the merger with Deutsche Boerse, which
had its own clearinghouse – Eurex Clearing. However, the merger got
terminated due to regulatory snags in February this year.
Nevertheless, seeking its own clearinghouse has become a
priority for NYSE as other business propositions have subsided and
competition has risen intensely. Hence, the company projects to
incur about $85 million in building its new clearinghouse that is
anticipated to generate cost synergies of about $30 million
annually.
Although expenses related to building the new clearing facility
will likely weigh on the financials for some time, we believe that
the new clearinghouse should help NYSE by enhancing its capital and
cost efficiencies, while also rendering it a competitive advantage
in the peer group, besides helping it adhere to the regulatory
provisions. Overall, these efforts will not only help NYSE
strengthen its fundamentals but will also aid in benefiting from a
satisfactory clientele, thereby boosting the long-term operating
growth potential of the company.
Currently, NYSE carries a Zacks Rank #3, implying a short-term
Hold rating and a long-term Neutral stance.
CME GROUP INC (CME): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
NYSE EURONEXT (NYX): Free Stock Analysis Report
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