Pros and cons
The megamerger offers, in theory, a slew of benefits for market participants — the most obvious being that traders will have all the major European interest-rate futures on one platform using a single clearinghouse. That means easier cross-margining, and ultimately makes trading cheaper.
Then there’s the savings on operating costs. The two exchanges estimate savings will top a staggering €300 million per year after three years. Roughly a quarter of that is projected to come from reduced IT costs alone. This savings probably will not be passed on to the market at large, but instead divided among shareholders.
"That’s something you can bet on," says Christian Baum, who began his career structuring, trading and selling derivatives in the over-the-counter (OTC) sphere before joining the CME’s European sales team and then developing new products for Eurex. Now he’s an independent consultant based in London. "If this new entity has the monopoly on the market, do you think it’s going to get cheaper for the users?" he asks. "If so, it will be the first time in history that’s ever happened."
Regulators go a step further: Not only do they expect the new entity to not pass savings on to users, but they are worried that such a monopolistic behemoth will use its position to ratchet up prices unreasonably over time — at least in Europe.
"The regulatory response could be quite complex and nuanced," says Anthony Belchambers, CEO of the Futures and Options Association (FOA). "You have to remember that most euro-denominated business is traded in London, but the European Central Bank (ECB) and the Banque de France have made it very clear that they would like to see Euro-clearing in the Eurozone"
What’s more, NYSE.Liffe’s clearinghouse, LiffeClear, is run jointly with LCH.Clearnet. That means both regulators and the new entity have incentive to shift business to Eurex Clearing.
"This means you could end up with potentially a very large clearing silo in Frankfurt," Belchambers says. "That’s going to raise eyebrows against the background of what’s going on with the EMIR (European Market Infrastructure Regulation), where the opening of silos is on the agenda."
He believes that the emergence of such a massive clearinghouse could be the straw that convinces regulators to finally mandate the two pillars of clearing reform: Namely, that clearinghouses open their platforms to all comers, and that OTC derivatives go onto clearinghouses.
"The key issue is not about whether a clearing operation is or is not part of an exchange, which can deliver real cost savings and enhanced market efficiencies," says Belchambers. "The real issue is access."
On the monopoly front, several banks have floated the idea of an "economic regulator" — an entity that treats exchanges as utilities and regulates their prices.
Belchambers says that’s not so far-fetched. "We’re getting this drift already," he says. "Regulators are beginning to ask about pricing of products, and even bankers, who normally call for free markets, are saying that, if you have a large, near-monopoly provider, you’ll need a price regulator."
