1. Clearing Houses in Europe: a financial market infrastructure in evolution. Giusy Chesini University of Verona, Faculty of Economics Department of Business Administration, Verona, Italy, E-mail: giusy.chesini@univr.it XIX International Tor Vergata Conference on Money, Banking and Finance: “New Frontiers of Banking and Finance after the Global Crisis” December 13-17, 2010 University of Rome Tor Vergata, Faculty of Economics

2. 2 The research Main aim of the research: to describe the current, unprecedented pace of change in the European Clearing Houses’ business Methodology: is inspired by the well known managerial paradigm called environment, strategy and structure (Chandler, 1962) → This methodology has never been used for analysing this financial sector.

3. 3 Environment / Regulation YearRegulationEffects April 2004MiFID, art. 34, 35 and 46Competition in post-trading infrastructures. May 2006European Commission, Draft Working Document on Post Trading European Commission, Competition in EU securities trading and post-trading, Issues Paper Problems identified in trading and post-trading. November 2006 EACH, ECSDA, FESE, European Code of Conduct for C&S Answers of the market partici- pants to the identified problems. June 2010European Commission, Public consultation on derivatives and market infrastructures It provides important guidance to the Commission service to prepare a formal proposal. September 2010 European Commission, Proposal for a Regulation on OTC derivatives, central counterparties and trade repositories It introduces common rules for central counterparties (CCPs) and rules on the establishment of interoperability between CCPs.

4. 4 The Issue of Interoperability To achieve interoperability three conditions must occur: Each trading venue should allow non discriminatory access to CCPs that want to offer their services to the customers of the trading venue The incumbent CCPs should allow competitor CCPs to offer their services for the transactions executed in that trading venue. (interoperability) The CCP that has new flows of transactions to clear, coming from a new trading platform must establish new connections with different CSDs (connectivity)

5. 5 The shift to interoperability

6. 6

7. 7 9 clearing houses operate in the equity market in Europe This paper specifically focuses on five major incumbent CCPs and on two new CCPs with a pan-European profile: - LCH.Clearnet SA - LCH.Clearnet Ltd - Eurex Clearing AG - Cassa di Compensazione e Garanzia (CC&G) - SIX x-Clear - European Multilateral Clearing Facility N.V. (EMCF) - European Central Counterparty Limited (EuroCCP) * I did not analyze Central Counterpary Austria CCP.A and Oslo Clearing AS.

8. 8 CCPs Starting date and recognition Corporate formOwnership structure Trading venue served LCH.Clearnet Ltd. LCH.Clearnet Group is formed in 2003. It has two subsidiaries: 1) LCH.Clearnet Ltd. is a RCH established in 1888; 2) LCH.Clearnet SA (1990) is a ROCH as of 25 May 2010 Commercial entity supervised by the FSA LCH.Clearnet group: 83% users 17% exchanges London Stock Exchange.. LCH.Clearnet SA Bank authorised by the Comité des Etablissements de Credit et des Enterprises d’Investissement” with its ongoing supervision NYSE Euronext.. SIX-x-clear Since 19 August 2004 it is a ROCH. Bank licensed under Swiss law; supervised by FINMA and by Swiss National Bank. It is wholly owned by SWXSWX Group, NYFIX, Euromillenium Eurex Clearing AG Founded in 1998. ROCH 16 January 2007 Bank in accordance with the German Banking Law. It is supervised by the BaFin. A wholly-owned subsidiary of Eurex Frankfurt AG; Deutsche Boerse AG. Deutsche Boerse Irish Stock Exchange CC&G Founded in 1992. ROCH 8 July 2009 Commercial entity. Since 2000 Borsa Italiana has the majority of shares. - 86.36% Borsa Italiana SpA - 13.64% Unicredito Italiano S.p.a. Borsa Italiana EMCF In operation since 29 March 2007. Since 29 January 2009 it is a ROCH (Recognised Overseas Clearing House) Commercial entity. It is supervised by “De Netherlandsche Bank” (DNB) and the “Autoriteit Financiele Markten” (AFM) - Fortis Bank Global Clearing N.V. (77%) - Fortis Bank Nederland N.V. (1%) *** - OMX AB (22%) Chi-X Europe, NASDAQ OMX Nordic Exchange, BATS Europe, Burgundy, Quote MTF, TOM EuroCCP Since August 2008. It is a RCH. Non-for-profit entityIt is a wholly-owned London- based subsidiary of DTCC Turquoise, Smartpool, NYSE Arca Europe, Pipeline Financial Group, NASDAQ OMX Nordic Exchange.

9. 9 The main strategies I. Since clearing for OTC derivatives is becoming mandatory, some European clearing houses, anticipating this, are becoming established in the OTC derivatives markets by strengthening their structures to meet the new potential demand. II. In general, clearing houses are trying, as other operators in the securities markets, to maintain and improve their technology to allow high levels of information processing capacity. This is a strategic factor to efficiently meet the demand for greater volumes. In particular, one of the most important technological initiatives currently underway is the development of software in preparation for a shift towards a fully interoperable market. III. Whereas the European clearing houses currently face difficulties in expanding or at least maintaining their market shares, some of them may think strategically to implement attempts to aggregate.

10. 10 Further analysis Following the analysis of the competitive characteristics of each CCP, it is possible to further subdivide them into three groups: - CCPs that belong to stock exchange groups (vertical silos); - CCPs that still have in their ownership structure the participation of a stock exchange even though they are moving towards an ownership structure composed of users of their services; - CCPs governed by the users and following a non-for-profit revenue structure.

11. 11 The fall of clearing fees After implementation of the Code and the transposition of MiFID, the only phenomenon that has characterised all European CCPs is the race to reduce clearing fees to their customers. In this regard the Oxera Consulting firm in July 2009 published a very interesting study on the costs of trading and post-trading, which shows that European clearing costs have fallen between 20 and 80 per cent per transaction, depending on the market, in the period between 2006 and 2008. Also Celent in 2008 calculated the cost of clearing from 2005 and 2007 and estimated the clearing fees should stop decreasing once they reach what is called the “activation fee” i.e. the level where it is no more advantageous for customers to switch from one clearing house to another.

12. 12 An estimation of the decrease in clearing fees

13. 13 The main dimensions of the CCPs CCPs Clearing fees (,000) Annual net profit (,000) Clearing volume cash equity markets (million trades) 200820092008200920082009 LCH.Clearnet Ltd 198,232 €132,195€171,132 €270,532 €188.1153.4 LCH.Clearnet SA 139,982 €89,084 €65,429 €33,687 €194.3172.2 LCH.Clearnet Group 338,214 €221,279 €219,800 €(-91,0) €382.4325.6 SIX-x-clear 7,146 chf8,145 chf7,194 chf4,769 chf25.433.4 Eurex Clearing 13,110 €11,552 €675 €772 €129.294.2 CC&G (3) 29,617 €29,943€ €32,668 €27,817 €6667 EMCF 12,651 €17,451 €3,000 €6,632 €152413 EuroCCP n.a. loss n.a.47.4

14. 14 CCP Market shares of European on- exchange equity trades, 2008-2009.

15. 15 To summarize Until recently, clearing houses in Europe were very profitable due to a lack of competition in this sector. Liberalisation of financial markets due to a rapidly changing regulatory environment, combined with technological progress and customer pressure, have acted as drivers for new competitors to enter the market. European Commission indicated the measures to make interoperability fully operational in the same document (Proposal, September 2010) that was enacted for OTC derivatives clearing. Sharp fall in prices for clearing services. The cut in prices is leading to a revision of the business models of European clearing houses and in general to an overall reconfiguration of this business sector in Europe.