LCH is set to offer refunds to smaller compression providers if they tear up 1 million trades in a given year, amid accusations from members that its current fee structure cossets TriOptima, the reigning provider.
Under the central counterparty’s previous fee regime, firms could become top-tier platinum providers – which could schedule unlimited runs, for free – if they generated £5 million ($6.3 million) a year in fee revenue for LCH. Now, firms will simply have to tear up 1 million trades in a year. Silver- and gold-tier firms will be refunded their vendor fee for the previous year if they hit this threshold. Otherwise, the current annual fees are £200,000 a year for silver and £480,000 for gold.
LCH’s two other approved compression service providers (ACSPs) – Quantile and Capitalab – do not hold platinum status.
The proposals – effective from January 1, 2019, and filed with the US Commodity Futures Trading Commission on December 11, 2018 – follow criticisms from the CCP’s members, reported by Risk.net, that LCH’s fee structure for compression providers is overly complex, and does little to encourage competition among providers. In particular, several market participants complained the current setup encouraged TriOptima to schedule an excessive number of runs on favourable days, shutting out rivals and loading more work onto banks’ back offices.
Besides the rebates, LCH is also proposing that platinum-tier vendors – TriOptima is currently the only one – pay a top-up fee if a compression run does not meet a minimum efficiency standard: 15,000 tear-ups in one cycle. Not everyone is convinced the January 1 changes will remedy the situation, however.
“It’s good to see the rebate – that should help the smaller players,” says an XVA trader at one large bank. “But the bigger problem is there’s no disincentive for the bigger player to pile in and do more runs. They could have simply charged all providers equally, or just capped the overall number of runs. That would maximise the benefits of each.
“I would like to see them scrap all of these thresholds, and just have a target number of trades. It’s too complicated.”
LCH, TriOptima and Capitalab declined to comment. Quantile was not available for comment.
Under the new regime, gold- and silver-tier ACSPs will no longer have to pay a fee for performing additional runs outside their yearly allocations, provided those exceed a certain level. Euro and dollar cycles will be free of charge if the provider is able to compress 15,000 trades; runs in sterling must reach 8,000 to qualify.
Should additional runs fall short of those targets, the fees would remain at £22,500 a cycle for the silver tier and £18,000 for gold.
Conversely, platinum vendors will be charged an £18,000 penalty if one of their compression runs slips below 15,000 trades crushed in euro and dollar runs, or 8,000 in sterling.
This measure could mitigate complaints on the efficiency of compression cycles – the theory is if ACSPs risk a penalty for sparsely populated runs, they may elect to compress less frequently to ensure higher levels of participation.
Asked whether the moves are enough to encourage greater competition, the XVA trader says it is a start.
“I do find it slightly strange,” he says of the pricing structure. “It would have been nice if they’d gone a bit further, but it’s a step in the right direction.
“The platinum providers should be charged if they want to run as frequently as they do. At the moment, they don’t have to pay LCH for additional runs. That makes the number of cycles too many, and too frequent, which has led to a reduction in the effectiveness of compression, as dealers have to choose how many we can participate in. We have to limit the number of runs we do at the moment. We think there are too many. It would be better if everybody was in for big ones.”
Editing by Joan O’Neill