Were the proposed LCH.Clearnet and LME takeovers inevitable?
15 October 2011
The reform of the financial markets through legislation such as Dodd-Frank Act (DFA) in the US and MiFID II (Markets in Financial Instruments Directive) and EMIR (European Market Infrastructure Regulation) in Europe seems to be creating powerful forces for market infrastructure reorganization. The expected takeovers of LCH.Clearnet and LME are examples of this change. I believe that there is an underlying suspicion that both these organizations would have struggled to compete after the full implementation of the recommendations of DFA and EMIR . The possibility of LCH.Clearnet losing the LSE and NYSE Euronext business due to the creation of in-house CCPs by these exchanges was a cause of genuine concern. Similarly, in the very competitive exchange environment, the tendency for rising consolidation was making the position of LME precarious. From an economic point of view, the rise in consolidation means that a handful of exchange groups have become dominant. These include the Deutsche Boerse/ NYSE Euronext combine, Nasdaq OMX, LSE Group, CME and ICE. How healthy this trend is from a systemic point of view only time will tell, but market regulators must be wondering if all that 'too big too fail' talk was having any effect. If anything, exchanges are becoming bigger than ever before. Now we are going to add a lot of the OTC derivatives clearing business to that. It would be interesting to see what plans the regulators have in place to manage a default by one of these groups. One must not tempt fate, but it certainly would not be wise to be unprepared.