CME Clearing Europe: Scale will count, says Betsill

The new head of CME’s European clearing business expects competition to be intense as the region heads towards the start of mandatory clearing, but he believes his firm has a winning hand. By Tom Osborn

Lee Betsill

“It’s a fascinating time to be in the derivatives industry,” says Lee Betsill, chief executive of CME Clearing Europe. “The amount of change the industry is going through is incredible, and it’s great to be a part of it.”

Nine months into the job, the Illinois native is tasked with steering his firm’s fast-growing European business through the biggest shake-up the over-the-counter market has seen. Betsill can draw on CME Group’s experience in the US, where it captured a share of client volumes in a two-way tussle with LCH.Clearnet, but he has a fight on his hands to establish its offering in Europe.

The central counterparty (CCP) opened for business in 2011, offering clearing for OTC energy and metal contracts, but the real prize is the interest rate swap market. CME is one of five European CCPs with an offering, the others being Eurex, KDPW, LCH.Clearnet and Nasdaq OMX. Ice is planning to take a run at the market as well. 

As in the US, Betsill believes CME’s main strengths will be the scale of its global client base and the breadth of its product offerings – two attributes he argues no other clearer can offer in combination. “Competition is a good thing for driving innovation and efficiencies, but I think it will be intense. We can bring the broadest sweep of asset classes to the table, leveraging off the infrastructure and global distribution we have already. The fact we’ve been successful in developing OTC markets in the US means the dealer community already knows how to build to CME systems. We’re trying to make it as easy as possible for the clearing firms to give their clients the choice of clearing with us,” he says.

In common with a lot of CME’s top brass, Betsill started his career on the floor of the Merc, which he remembers with a grin as being “terrific fun as a teenager”, before graduating to clearing and back-office roles. That firm grounding in the mechanics of the market has stood him in good stead when working with the dealer community to build CME’s footprint in OTC clearing. 

We’re trying to make it as easy as possible for member firms to give their clients the choice of clearing with us

Another potential advantage is the firm’s innovative approach to the thorny problem of client asset protection. The clearer has developed what it believes is a unique way of satisfying the regulatory requirement to offer full segregation of client assets. Under CME’s model, the collateral a client lodges against a trade never leaves the central securities depository (CSD) where it is held, with only the legal rights over the asset changing. 

This model has some support from conservative clients, such as pension funds that want full physical segregation of their assets from those of the dealer, as well as capital-conscious banks. Given the assets are bankruptcy-remote from the clearing member and the clearing house, Betsill says banks should be able to apply a 0% risk weighting to their client exposures. “We’re excited about the offering. For certain clients, particularly clients such as pension funds, we think it’s very attractive. We’re working with several CSDs and have agreed the structure with them. We will be the first to offer this model,” he says.

Because of the added legal complexities, Betsill does not expect clients to sign up from day one. The CCP also needs to ensure the model is compatible with local bankruptcy codes in each European country, meaning it will only become available in each jurisdiction as and when it is approved by local regulators.

 The focus on pension funds makes some strategic sense. If a CCP can attract these firms, which often have big directional swap portfolios, the dealers will see a funding advantage when moving their own, offsetting trades into the same clearing house. 

“Finding niches to attract will help us build a broader volume base,” Betsill concedes, but he says the aim is to build a service that works for a diverse user-base.