U.K. to fight monopolistic derivatives exchanges in EU talks

November 6, 2013 04:14 PM
Competition vs. fragmentation

Britain will fight “monopolistic” exchanges in the European Union in a bid to boost competition in the market for clearing derivatives trades, according to U.K. Financial Secretary to the Treasury Sajid Javid.

“This is absolutely key to us,” Javid said in an interview with Bloomberg News on Nov. 5. The U.K. is pushing for “more competition and greater transparency on exchanges. A key part of that is not tolerating monopolistic practices by certain exchanges or clearinghouses.”

European Union nations have repeatedly clashed over how far the EU should go in forcing exchanges such as Germany’s Deutsche Boerse AG to open up their derivatives-clearing services to competition as part of an overhaul of the bloc’s financial market rules.

While governments including the U.K., the Netherlands and Finland have argued that greater competition will reduce costs for investors, others including Germany and Spain have said that the plans would fragment markets and harm financial stability.

Clearinghouses such as LCH.Clearnet Group Ltd., majority- owned by London Stock Exchange Group Plc, and Deutsche Boerse’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default. Eurex is Deutsche Boerse’s derivatives exchange.

Trading Venues

Many trading venues, including two in Britain, and one elsewhere in Europe “are tied to certain clearing venues,” Javid, who used to work for Deutsche Bank AG before entering Parliament three years ago, said. “We want to see more competition and greater ease of access, in a non-discriminatory way, for all market participants.”

The Group of 20 nations is pushing for central clearing of derivatives as part of its response to the financial crisis unleashed by the 2008 collapse of Lehman Brothers Holdings Inc.

Michel Barnier, the EU’s financial services chief, proposed the competition boosting measures in 2011 as part of a broader overhaul of EU market legislation known as Mifid. Under Barnier’s plans, exchanges would face obligations to share trade feed data with rival clearinghouses, so enabling them to offer competing services.

Clearing is the second stage of completing a trade on the financial markets, coming in between the initial agreement to a transaction, and final settlement.

In-House Clearing

Barnier’s plan seeks to challenge the model used by some exchanges where trades, once agreed, are automatically channeled through an exchange’s in-house clearing service.

Talks on the draft law by national officials earlier this year brokered a compromise, which scaled back some of Barnier’s open-access provisions.

The final version of the law must still be negotiated with the European Parliament, which has argued for an even more restrictive approach toward access to trade-feed data. Javid has said he hopes this can be done by year-end.

“It’s still possible to reach a successful conclusion on this,” Javid said.

EU antitrust officials vetoed merger plans by Deutsche Boerse and NYSE Euronext last year after concluding that the combination could threaten competition for trading in some derivatives. Barnier urged Joaquin Almunia, the EU’s antitrust chief, to take the competition-boosting effect of the draft law into account when deciding whether the merger should be permitted.


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