LCH.Clearnet has announced they are negotiating to buy the International Derivatives Clearing Group (IDCG) from Nasdaq OMX in an all stock deal. The clearinghouses have signed a non-binding agreement, but we’d be surprised if the deal didn’t go through. IDCG has the advantage of holding a license as a U.S. domiciled clearinghouse vs. LCH’s status as a U.S.-licensed overseas-domiciled clearinghouse. For some buy-side swaps players, the difference is very important. They feel more comfortable transacting under U.S vs. U.K. law.
This purchase is another step in LCH.Clearnet’s march toward cross-product clearing in the U.S. LCH.Clearnet’s already has a Memorandum of Understanding with New York Portfolio Clearing, the DTCC/NYSE Euronext joint venture. The objective is to combine NYSE Liffe U.S traded interest rate futures, fixed income cash and repo trades in DTCC’s FICC (all cleared by NYPC), and swaps from LCH.Clearnet’s Swapsclear. The U.S. license that comes with IDCG is a missing piece of the puzzle.
The advantage of including futures, cash trading, repo, and swaps in one margining pool is huge. It is much more efficient from a margin and collateral management point of view. While we are a ways away from cross-border inter-operability, the next best thing is to focus on including multiple products within one jurisdiction. Risks can offset, minimizing exposure. The market is evolving in a positive way.
Its not clear how much value there is outside of IDCG’s license. IDCG has technology in place, but so does LCH. Despite their ownership by NASDAQ OMX, IDCG never really got to critical mass.
The primary competition is the CME. While the CME has the advantage in the market share for futures trading and numerous links to other exchanges (as well as an existing swaps clearing business), they don’t have the repo piece. The market may not want a dozen different CCPs running around, but they don’t want just one either. Two big players (plus maybe a couple niche guys) might be about right.
We wrote about the evolution of clearinghouses recently in our posts “Does the recent NYPC/LCH.Clearnet deal inch toward a global CCP”, April 23, 2012 (a link is here) and “The battle of the clearinghouses is on: LCH.Clearnet versus the CME”, March 19, 2012 (a link is here).