LCH.Clearnet has been reported to have joined forces with Chi-X Europe, Europe’s second-largest equities market stock trading hub, to launch the world’s first contract-for-difference (CFD) clearing service) for institutional investors.
About two years ago the London Stock Exchange abandoned its plans to launch centrally-cleared contracts for difference due to difficult market conditions and a hesitation of investment brokers to invest in the venture.
The inclusion of Chi-X is an important development as it makes up the second largest trading platform in Europe by volume, just after Euronext, and is already providing pan-European stock trading. Chi-X also has an side-venture to allow traders and investors using IG (one of the biggest CFD provider worldwide), to access its trading hub. IG Markets has a similar arrangement with BATS Europe, a Chi-X Europe competitor.
The news comes as Chi-X Europe is also in merger discussions with BATS Global Markets, operator of BATS Europe. Alasdair Haynes, Chi-X Europe’s CEO stated that Chi-X felt the need to continue expanding its product range beyond securities trading and is targeting to penetrate the equity derivatives market.
The Chi-X and LCH.Clearnet venture plans to allow major institutional investors to trade and settle LCH.Clearnet-defined standardised CFD contracts through Chi-X Europe – starting with FTSE 100 stocks but with plans to expand into further UK and continental European equities at a later date. Institutional investors will be able to source best execution from the broker of their choice and transform this into an on exchange centrally cleared CFD.
The venue is designed to satisfy tougher new regulations from global regulators. The USA and European Union have both voiced interest to divert standardised the over-the-counter (OTC) derivatives onto recognised exchanges and other types of trading platform. The would also like more business to be cleared via a central counterparty (CCP) to reduce risk to the financial system and make the over-the-counter derivatives market more transparent.
The move is aimed to standardize the market for CFDs, which in most cases are traded privately between brokers, making transactions invisible to the wider market. A central counterparty acts as a guarantor between every buyer and seller which eliminates the risk of one party defaulting and not being able to honour contracts. An LCH.Clearnet spokesman said: ‘Institutional investors will be able to source best execution from the broker of their choice and transform this into an on-exchange, centrally-cleared CFD.’ Mr Haynes stated: ‘In the same way as Chi-X Europe launched its cash equities market ahead of Mifid’s transformation of the trading landscape, we hope centrally cleared CFDs will help address the European Commission’s aim of bringing more OTC trades on-exchange ahead of any regulatory imperative.’
Wayne Eagle, director of EquityClear at LCH.Clearnet, said: ‘This unique offering provides real choice to participants and addresses buy-side concerns around OTC counterparty risk.’ Chi-X post trade services manager Nathan Renyard said: ‘With any new market that we launch it’s always a soft launch and you have to bring in clients slowly. This is a world first, so there’s some sense of educating people and bringing clients on board’. ‘CFDs are an important market and we’re providing a service which we know the market needs.’ According to latest research by US research Tabb Group the CFDs market was thought to be worth around £1 trillion last year in the UK.