Clearing houses hit back at European plans

A group of six European derivatives exchanges operators have hit back at regulators' plans to give investors greater choice to trading futures and options, arguing law drafts underplay risks to financial stability.

The six warned that advanced European plans to require derivatives clearing houses to link to each other - intended to stimulate competition and lower trading costs - pose a threat to market stability and customer protections, especially in distressed conditions.

The warning was delivered to the European Securities and Markets Authority (Esma) by Deutsche Borse, Intercontinental Exchange (ICE), Euronext, the London Metal Exchange, the Athens Exchange and the ICE-owned Holland Clearing House. They also warned that plans clashed with European rules and global standards.

Clearing houses, which act as counterparties to trades, concentrate markets risk and have moved to the forefront of global policy makers' plans to underpin world markets.

In Europe their elevated role has created tension between two camps as Brussels also looks to finalise markets rules for transparency, competition and investor protections over the summer.

Europe has already mandated that exchanges and clearing houses allow rivals to connect to their venues, but policy makers have included a caveat that allows operators to deny access if integration threatens market stability.

Regulators are still debating the precise conditions that would allow operators to shut out rivals. Critics, led by many in the City of London, have argued stringent conditions would be tantamount to allowing a market monopoly.

The six warned that "that commercial concerns should not cloud the potential risks" created by forcing the interlinking of clearing houses with different risk management models and capital buffers.

Their response was also a riposte to a letter by the London Stock Exchange Group, Nasdaq, interdealer broker ICAP and LSE-controlled LCH.Clearnet, to Esma two weeks ago that called on regulators to open up markets and inject more competition.

The six said European drafts did not yet fully meet the mandate set out by European policy makers to guard against systemic risk. "The ability of . . . [EU regulatory authorities] to deny access is disproportionately and unreasonably limited."

It also countered the charge made by the LSE, ICAP and Nasdaq that the changes would help the European economy.

"A fragmented market is not what the real economy needs. The end users of markets - from pension funds to asset managers, from miners to industrial companies, from farmers to manufacturers - want deep, liquid markets where they can effectively and efficiently manage price risks," the letter said.

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