Clearing Systems in Asia: Catching up to Trading
Wayne Eagle, Head of Equities, LCH.Clearnet, digs into clearing costs in Asia and unearths the reasons for current clearing structures
Clearing is very much a volume business. The infrastructure for a quality clearing operation is expensive to build and maintain, and it is consequently a business in which economies of scale can make a huge difference to pricing. The more the infrastructure can be leveraged, the lower the cost per trade. Conversely, across a region, the more fragmented the infrastructure, the more costly clearing is likely to be.
It is also worth considering the evolution of clearing. In many markets the clearing house is owned by an incumbent exchange, which enjoys a monopoly position. If this entity is a profit maximising institution, it will naturally seek to maximize its returns from clearing and the absence of any competition will mean it has no incentive to lower fees.
Differences between Asia and Europe
The most significant difference between Asia and the Europe is the existence of the European Commission – that is, a body which can legislate across all member countries. It was only the introduction of MIFiD in 2007 that cemented competition in the European markets. The impact of this has been to reduce both the cost of trading and of clearing in many markets and erode the margins of the established players. However, it has also resulted in a more fragmented landscape, and we anticipate that the next evolutionary step will be consolidation.
The situation in Asia is similar in some respects, but different in others. In some markets the established infrastructures still enjoy a privileged position, however, in others, competition is being introduced in the form of alternative trading venues , even without specific legislation, and this is likely to impact costs in the medium term.
Clearing in Asia
There are two reasons why Asia is so important to LCH.Clearnet. On the one hand, Asia is an important part of the global economy and its rate of growth far outstrips the rest of the world. On the other, markets are becoming ever more global in nature and as our clients, many of which are large international banks, grow their presence in Asia they are looking to us to support some of their key trading activities.
Asia has some highly developed and sophisticated markets, however, we believe LCH.Clearnet has unique expertise, particularly in risk management,as was highlighted during the Lehman default.