A November 29th press release from ICE and DTCC “IntercontinentalExchange Group and DTCC announce plans for Interest Rate Futures listed on NYSE DTCC” grabbed our attention. Is this just about consolidation and cost savings?
From the press release, ICE and DTCC plan
“…to transition the clearing of interest rate futures listed on NYSE Liffe U.S. from New York Portfolio Clearing (NYPC) to ICE Clear Europe centralizing the trading and clearing of ICE’s global interest rate product portfolio. NYPC’s operations will be wound down and open interest transferred by the third quarter of 2014, subject to regulatory approval…”
So this is the end to NYPC, the 50/50 venture between the NYSE (now owned by ICE) and DTCC. It makes sense given that ICE already has a robust clearing business and consolidation is the name of the game in clearing. More products in a clearing bucket allows for more efficient netting.
Cross netting pools, if taken too far, can create an ungodly mess. Unraveling who gets what margin in a default is no easy task. Bankruptcy laws can differ vastly by jurisdiction, making the holy grail of cross-border interoperability much more difficult. Even getting netting across DCOs but within a jurisdiction has been tough. But this is what NYPC was doing by netting NYSE LIFFE’s interest rate & repo futures and DTCC’s fixed-income and repo. Now it will shift over to ICE Clear Europe. Given NYSE’s change of ownership, it should not come as too big of a surprise.
But missing from the press release was any mention of ICE’s clearing competitor, LCH. Back in March, 2012 NYPC announced that they had signed a Memorandum of Understanding with LCH.Clearnet which outlined adding swaps cleared by LCH’s Swapsclear to the NYPC mix. The effort was aptly dubbed “Project Trinity”. From the March 14, 2012 press release entitled “LCH.Clearnet, NYPC, DTCC and NYSE Euronext collaborate to provide unprecedented clearing and margining efficiencies for market participants”
“…The parties’ goal, defined in a Memorandum of Understanding (MOU), is to deliver greater capital efficiency to market participants by combining NYSE Liffe U.S.-traded interest rate futures contracts already cleared by NYPC, fixed income cash and repo trades cleared by the DTCC’s Fixed Income Clearing Corporation (FICC) and interest rate swaps cleared by LCH.Clearnet’s SwapClear service into a single portfolio for purposes of margin netting and offsetting. Netting and recognizing offsetting risk within a multi-product single asset class portfolio would be designed to optimize margin requirements on the combined portfolio…”
We wrote about Project Trinity in our April 23, 2012 post “Does the recent NYPC/LCH.Clearnet deal inch towards a global CCP?” It is worth taking another look at that post.
The race to consolidate clearing is three way: ICE, LCH, and the CME. ICE, taking advantage of their purchase of NYSE Euronext and the half-ownership of NYPC that came along with it, appears to be positioning themselves to take on the other two larger players. But if the move of NYPC into ICE Clear Europe means that interest rate swaps – the biggest of the derivatives markets by notional – won’t be included, it will be tough. We have not heard much from NYPC about how Project Trinity was going. Some have said it was proving to be more difficult than anticipated. Whether LCH’s interest rate swaps are excluded from a netting pool due to technical / legal difficulties or because of competitive issues (LCH is, after all, now owned by competitor LSE), it would be a real shame since cross netting is so important to optimizing collateral.