Rainbow weighs up options

29 Feb 2008 email

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by Paul Francis-Grey

While Project Rainbow’s preferred clearer remains LCH Clearnet, despite its hesitancy in committing itself to the start-up exchange, it has started to consider its options which could include building its own, independent clearinghouse.

The exchange, which is still in its embryonic stages, had asked LCH Clearnet to provide a clearing service as it planned to launch a spate of contracts which would rival a series of Liffe’s products. LCH Clearnet has to date failed to give Rainbow a definitive response to whether it will clear for it as it has had to weigh up the pros and cons of sacrificing a much needed new client for that of keeping its largest shareholder – Liffe - happy.

The clearinghouse has already held a day long board meeting and remains undecided on its course of action.
As a result, an increasingly frustrated Rainbow has started weighing up the possibility of turning towards an alternative clearing venue, or creating its own.

Given the backing that Rainbow has – a number of large institutional investment banks and FCMs – it has the financial clout to back such a proposal.

“There are others waiting to join Rainbow and so there is no shortage of potential backing. We are full of options although LCH remains our preferred choice,” said a source close to the exchange. “If LCH continues to take its time or decides it will not make itself available then we will have to assess alternatives.”

The list could contain the likes of Eurex, Clearing Corp (C-Corp) and OMX.

“Eurex has been a name thrown about, but I don’t see that as a true runner. OMX would be on the list, but not at the top. And C-Corp would also have to be considered,” the source said.

It was previously suspected that the forces behind Rainbow had contacted OMX to provide front-end technology. A second source said that getting the company to act as front and back supplier would ultimately kill two birds with one stone.

OMX provides clearing for London’s EDX, Sydney Futures Exchange and NordPool.
OMX declined to comment over suggestions it has been approached to supply either front-end technology or a clearing service.

Eurex has continually refused to comment on the matter.

Liffe and LCH Clearnet meanwhile have both refused to comment on the latest in the long line of reports speculating that Liffe could look to clear its own trading. It has long been suggested that Liffe could look to scale back its business with LCH Clearnet. This was strengthened after it sold back the majority of its stake in the clearinghouse.

By the end of 2008, Liffe will hold a 5% stake in LCH Clearnet, following a repurchase agreement whereby LCH Clearnet agreed to repurchase over 26m ordinary shares held by Euronext Liffe at €10 each.

The reduction of the exchange’s shareholding in LCH Clearnet has only added to the speculation that it could look to build its own clearinghouse.

This would also follow in the footsteps of Eurex and more recently ICE Futures. Eurex has for a long time cleared its own trades while ICE Futures announced that it was terminating its contract with LCH Clearnet in 12 months last July to start clearing for itself after purchasing New York Board of Trade and its internal clearing service some six months earlier.

The Rainbow source said that it would be less likely that Liffe tries to build its own clearinghouse especially in light of member discontent seen at ICE’s efforts.
“I think by doing that it would be doing as Liffe is, which has not gone down too well in some quarters. I think Liffe is more likely to strike a deal which would exclude others beiung cleared, such as Rainbow. If that becomes the case it would certainly be deemed as anti-competitive and we would need to down another route – Office of Fair Trading. Or even Brussels,” he said.

A second market participant said that the exchange should focus on closer matters at hand.

"In my opinion, Liffe should not so much concentrate on replacing a clearing system which works perfectly adequately but look to improve and expand its product offering."

"While we support its overall direction, a number of the requirements in the review are needlessly oppressive, particularly the proposed limits on execution-only business and bilateral execution. Additionally, the swathe of costly disclosure obligations is more likely to confuse than inform customers.”

The FOA's Anthony Belchambers responds to the EC's Mifid review.

Rainbow weighs up options

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