New initiative from the London Stock Exchange and LCH.Clearnet sees significant market interest
The London Stock Exchange and LCH.Clearnet Ltd (LCH.Clearnet) are seeing significant interest in their new initiative; the world’s first combined cash equity and Contract For Difference (CFD) order book. Over 100 delegates representing potential buy-side users of the service as well as member firms and technology vendors, attended a seminar on the product.
Subject to regulatory approval, the Exchange will initially offer Exchange Traded CFDs (ETcfds) on FTSE100 equity underlyings, trading with and alongside the underlying cash equities, with LCH.Clearnet providing the clearing which underpins the service. Several Prime Financing Partners, all of which are leading financial houses, help ensure that ETcfd and equity trades will be able to match against one another seamlessly, contributing to the liquidity of both products.
The introduction of ETcfds will introduce significant benefits to the current CFD trading model and the wider market, including:
- Standardised and on-Exchange CFD contracts - broadening access to participants that are currently unable or reluctant to trade on an over-the-counter (OTC) basis
- Risk management – the introduction of LCH.Clearnet as central counterparty to CFD trading, giving full anonymity and removing exposure to market counterparties
- Enhanced liquidity – driven by the creation of a single central market place for two products
- Market efficiencies – delivery of multilateral netting, ETcfd v ETcfd trades and counterparty risk mitigation will together result in a more efficient CFD market
- Cost efficiencies - Both the London Stock Exchange and LCH.Clearnet will also combine equity and CFD volumes for tariff calculation purposes
Clara Furse, Chief Executive of London Stock Exchange Group, said:
"Introducing an on-Exchange CFD contract will offer a more transparent and efficient form of CFD trading, opening up stamp-duty free access to UK equities to a wider range of users. We are looking forward to working closely with all our partners, members and with the wider market to maximise the benefits that this new product will bring.”
Roger Liddell, Chief Executive, LCH.Clearnet, said:
"This launch demonstrates how innovative clearing solutions can be the catalyst for evolution in financial markets. This is a real first which has the capacity to shape the future of equity trading.”
Traditionally, CFDs have been traded on an OTC basis. ETcfds will be an exchange-traded contract that will be fungible with equity orders. All ETcfd and equity orders will be treated identically for display and matching purposes, and ETcfd orders will contribute to the price formation in the same way as equity orders. Margin to cover members’ net ETcfd positions will be calculated by LCH.Clearnet and combined with members’ equity position to ensure maximum margin efficiency.
The seamless handling of any mismatches that arise between ETcfd and equity orders will be crucial to the functioning of the combined book. This will be facilitated by Prime Financing Partners that will manage equity shortages or cash funding requirements arising from such trades, borrowing stock where appropriate.
Andrea Schlaepfer/ Rachael Harper, LCH.Clearnet 020 7426 7463/7175
Catherine Mattison, London Stock Exchange Group 020 7797 1222
Notes to editors
About London Stock Exchange Group:
London Stock Exchange Group is Europe's leading diversified exchange business. It operates Europe's largest and most liquid equity market, holds the number one position in trading ETFs and securitised derivatives, and through its interest in MTS, is the leading platform for the trading of fixed income products.
The London Stock Exchange itself is the world's most international exchange with over 700 overseas companies from over 70 countries on its markets. It has consolidated this position in the last two calendar years, having attracted 202 international companies which raised nearly £30 billion between them. These figures include international companies on AIM, the London Stock Exchange's growth market, which has grown to become the world's most successful market for small and medium sized enterprises with close to 1700 companies at the end of 2007.
Following its merger with Borsa Italiana in 2007, London Stock Exchange Group also now offers post-trade services such as netting, clearing and settlement on an efficient and competitive basis, and a comprehensive range of European bond trading services through MTS.
LCH.Clearnet is the leading independent central counterparty group (CCP) in Europe, serving major international exchanges and platforms, as well as a range of OTC markets. It clears a broad range of asset classes including: securities, exchange traded derivatives, energy, freight, interbank interest rate swaps and euro and sterling denominated bonds and repos; and works closely with market participants and exchanges to identify and develop clearing services for new asset classes.
As a CCP, LCH.Clearnet sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade. When the trade is registered with LCH.Clearnet, it becomes the legal counterparty to the trade, ensuring the financial performance; if one of the parties fails, LCH.Clearnet steps in. By assuming the counterparty risk, LCH.Clearnet underpins many important financial markets, facilitating trading and increasing confidence within the market.
Initial and variation margin (or collateral) is collected from LCH.Clearnet members; should they fail, this margin is used to fulfil their obligations. The amount of margin is decided by LCH.Clearnet’s highly experienced risk management teams, who assess a member’s positions and market risk on a daily basis. Both the soundness of the risk management approach and the resilience of its systems have been proven in recent times.
LCH.Clearnet is regulated or overseen by the national securities regulator and/or central bank in each jurisdiction from which it operates.