LCH.Clearnet and CME: back in battle

The race to launch a central counterparty clearing (CCP) facility for over-the-counter products gathered pace last week, with news that at least one initiative for spot foreign exchange is due for launch this quarter.

It's no surprise that first off the mark is the Chicago Mercantile Exchange (CME). With its previous experience launching joint-venture platform with Thomson Reuters, FXMarketSpace (FXMS) and FXSettle, it is able to kick-start the process to alleviate concerns around credit and settlement risks inherent in FX in this environment.

The venture does not necessarily involve former partner electronic broker Thomson Reuters in any grave or exclusive way, despite comments at the time of closing FXMS (FX Week, October 13, 2008).

Unsurprisingly, CME would face its biggest threat from Icap, which is part of a consortium of banks looking to acquire LCH.Clearnet. While the emphasis on the bid is to take advantage of the clearing house's plans to launch a credit default swaps clearing business by year-end, it is understood that Icap has also been scoping out the potential for running a central counterparty for spot FX on LCH.Clearnet.

The initiative would resurrect an old rivalry between LCH.Clearnet and CME which dates back to July 2004, when the two potential providers moved plans forward to launch their respective systems (FX Week, July 5, 2004).

At the time, LCH.Clearnet said it had discussed its proposals for a CCP model for foreign exchange spot, forwards and options with central bank sources. Meanwhile, the CME said it planned to link up five clearers to its recently launched CME FX on Reuters service by the fourth quarter that year.

For LCH.Clearnet to team up with Icap would prove a powerful mix, particularly given the additional support through equity stakes by major dealers involved in the consortium. There are also rumours CLS Bank may be part of the final group of bidders, although this is not substantiated. Other brokers also reported to be looking to join the consortium are Tullett Prebon, GFI and Tradition.

Comments? Email saima.farooqi@incisivemedia.com