LCH.Clearnet to expand CDS clearing into eurozone

LCH.Clearnet plans to clear credit default swaps (CDS) in the eurozone by the end of the year, having already launched a CDS clearing service in the UK.

The London-based clearing house said its decision has been made "in response to both regulator and market demand". The proposed service will go live in December 2009, subject to regulatory approval, and will be managed by the Paris-based LCH.Clearnet SA, the clearing house's European arm, which is overseen by French, Dutch, Belgian and Portuguese regulators.

On December 22, 2008, in partnership with derivatives exchange Liffe, LCH.Clearnet launched a clearing service for series 8, 9 and 10 of the Markit iTraxx Europe CDS indexes.

When the eurozone clearing service is launched, it will face competition from the Frankfurt-based derivatives exchange Eurex, which plans to roll out a CDS clearing service in March for trades linked to series 7, 8, 9, 10 and 11 of the iTraxx Europe, Hi-Vol and Crossover indexes. The Atlanta-based Intercontinental Exchange (Ice) has also confirmed its intention to establish a European-based clearing house, to satisfy the demands of the European Commission.

LCH.Clearnet's new service will have a front-end matching system whereby CDS contracts are negotiated and agreed in the over-the-counter market before being cleared through LCH.Clearnet, probably via an exchange. A spokesperson for LCH.Clearnet said talks were under way with Liffe over a possible extension of the existing partnership.

The clearing house is also the subject of bid speculation, with a consortium of major US and European financial institutions, including Deutsche Bank, BNP Paribas, Société Générale, UBS, JP Morgan, HSBC and Royal Bank of Scotland, along with interdealer broker Icap, seeking to break up a non-binding merger agreement that the UK clearing house signed on October 22 with the US Depository Trust & Clearing Corporation.

Anthony Belchambers, chief executive of the Futures and Options Association, which opposes the creation of a eurozone CDS clearing service, said: "There is now a political wrapper that sits around the commercial and credit risk management reasons for needing a central counterparty (CCP) that is distorting the concept".

"There are already CCPs in the eurozone and CCPs in the non-eurozone area of Europe which are all able to deliver global solutions. We therefore have to question the need to mandate a European solution," he added.

Belchambers commented: "Ice and LCH have picked up the language and have made provisions to compete for business if Europe is to be cut up along these lines". Both firms have said that their new initiatives were responses to the European Commission's desire for an EU-domiciled clearing service for credit derivatives.

See also: US and European firms in bid for LCH
The fight is on for LCH
Breath of Liffe