NYSE Euronext outlined an aggressive plan to create its own clearing house for futures transactions on Wednesday, a move that leaves its current provider, LCH.Clearnet, without a key customer and ends talk the U.S. exchange may try to acquire it.
The move to launch its own clearing unit next year and start moving business off LCH at that point comes after NYSE's rival, the London Stock Exchange, entered exclusive talks to acquire LCH in September last year.
NYSE Euronext was forced last month to drop a $7.4 billion merger with Deutsche Boerse, a development which had prompted talk it would look afresh at buying LCH.
Clearers are responsible for netting out the positions investors take when they trade on exchanges like the LSE and NYSE. The results are passed on to settlement businesses, which act as custodians of the resulting assets. Given increased regulatory scrutiny since the financial crisis, clearing has become a lucrative business.
NYSE said its British futures business will move to the new clearing facility in the summer of next year while its European futures business will follow in the first quarter of 2014.
"Our clients have long asked for a consolidation of clearing arrangements and the strength of our European derivatives business allows us to deliver meaningful benefits for them in the form of capital efficiencies and savings," said NYSE Euronext Chief Exec Duncan Niederauer.
NYSE Euronext said it would separately renegotiate the terms of its agreement with LCH regarding the provision of clearing to its stock exchanges in Europe, and the new arrangements will take effect from early 2014.
"NYSE has said it's taking derivatives and leaving equities with LCH, which is what we expected. The timing of the move may be later than expected, which is good for LCH, but there's no getting round the fact LCH is losing one of its biggest customers," said Richard Perrott, exchange analyst at Berenberg Bank.
NYSE, with the LSE and the London Metals Exchange, are LCH's largest exchange clients, providing the bank-owned clearing house with valuable sources of revenue.
The NYSE statement draws a line under speculation NYSE Euronext, which has ambitions to boost its clearing business, would bid to buy LCH, despite the Anglo-French clearer having opened exclusive sales talks with the LSE last year. [ID: nL5E8DS71N]
"If NYSE were going to move to buy LCH they would have done so already and the two firms are coming from different places - LCH operates a horizontal clearing model, whereas NYSE is shifting to a vertical structure to protect its lucrative futures business," said Perrott.
The LSE and LCH welcomed the NYSE pledge on Wednesday and said they look forward to working with their rival following the completion of their merger, expected later this year.
NYSE wants to start clearing trades executed on its many exchanges to open up a lucrative revenue stream at a time that regulators are looking to force more types of tradeable assets to use clearing.
Politicians in the United States and Europe want the vast over-the-counter markets, including some of the world's most toxic asset types, to start clearing to address some of the problems exposed by the financial crisis in 2008.
The LSE purchase of LCH is seen by analysts as a move to preempt this regulation by taking control of LCH's OTC clearing service Swapclear, the market leader in interest rate swaps.
The NYSE pledge to launch its own clearing house comes just two months after European competition regulators blocked its merger with Deutsche Boerse, which owns its clearing house, Eurex Clearing.
Exchanges, like the LSE, NYSE and Deutsche Boerse, use clearing houses, like LCH and Eurex, to mitigate risks by refunding exchange members in the event that a trading firm fails, like Lehman Brothers in 2008.
NYSE said on Wednesday it will invest around $85 million in its new clearing house and expects annual cost-savings of around $30 million.
"New revenue streams will accrue from 2014 from NYSE Euronext continental derivatives clearing and from other new post-trade business opportunities including OTC clearing," the exchange said.