The collapse of U.S. futures brokerage MF Global has brought to light inconsistencies in the way clearing houses operate, prompting questions over regulatory plans to use more of these platforms to make markets safer.
The confusion stems from the fact the largest European futures markets -- Deutsche Boerse's Eurex and NYSE Euronext's Liffe -- use different arrangements when a market party defaults.
Six weeks after the U.S. firm's demise, some clients are still angry about the different approaches to the MF Global unwind the clearers took, leaving them in the dark for weeks as to what had happened to their money.
There was confusion around the clearing houses, as some transferred positions and others closed them out, said one senior futures trader at a large investment bank.
In the immediate aftermath of the default we simply didn't know our exposure, this person said.
Clearing houses like LCH.Clearnet, which clears Liffe, and Eurex Clearing sit between trading partners and hold money to reimburse any firm left out of pocket if a counterparty defaults, making the markets less risky.
Regulators in the United States and Europe are keen to increase the use of clearing houses after the collapse of Lehman Brothers in 2008, which they say has the additional benefit of making the market more transparent.
At the moment, mainly exchange-traded assets such as equities, futures and options, use clearing. But regulators are keen to expand the use of clearing into OTC products such as swaps, bonds and foreign exchange.
But the confusion after the demise of MF Global has triggered demands that top clearing firms adopt a more unified approach before they adopt these greater tasks.
There is no standardization across the different clearing houses in Europe and no standardization between Europe and the U.S., which is confusing for clients, particularly when dealing with a global player like MF Global, said Grewal.
Eurex Clearing began liquidating, or selling off, positions after MF Global defaulted, a process it had completed by the following day, November 2.
By contrast LCH.Clearnet, gave members the option of keeping their positions open. It then switched those positions to other brokers, a more laborious process that took until the end of November to complete.
Eurex likes the liquidation approach, because clients quickly have certainty.
LCH argues that transfers are preferable because clients need these positions to hedge others, and liquidating the trades
increases client risk exposure.
You'd think the clearing houses would have had a conversation about this but from what we are seeing now it looks like there was no coordination, said Simmy Grewal, analyst at research and consulting firm Aite Group.
MF Global was trading vanilla listed futures and options, and it exposed serious flaws in the clearing model. How will the clearing houses perform if a large OTC broker goes under? she said.
The criticism comes with Deutsche Boerse and NYSE Euronext set to merge, pending European support for the $9 billion (5 billion pounds) merger.
The combination would likely lead to greater consistency in how Eurex and Liffe are cleared but it might also expedite the growth of rival platforms that could use different clearing practices.
(Editing by Douwe Miedema and Jon Loades-Carter)