LONDON - The head of the London Stock Exchange on Wednesday called for a harmonized, pan-European regulatory framework for central clearing houses to help bring down costs and increase trading volumes in the region.
Such a framework would govern risk models and provide for governments as lenders of last resort, LSE Chief Executive Xavier Rotel said.
Then interoperability comes into effect and competition starts, he added.
Several years ago, the European Commission negotiated a voluntary code of conduct with the financial industry to boost competition in clearing, but it has failed to make much headway in increasing user choice, also known an interoperability.
If they don't agree to interoperability, then they will be negating 10 years of hard work to establish a more competitive playing field in Europe, Rolet said.
The LSE cited statistics to show that European equity markets have scope to grow. Trading in the Americas, measured by value, was far more than double the value in Europe in 2008 and 2009, even though Europe has a larger population and bigger gross domestic product.
The regulators have recently called a halt to interoperability and asked for three months to analyse the issue, Rolet said.
Meanwhile, the LSE is working with Euroclear and LCH.Clearnet to seek a reduction in clearing and netting costs by asking them to move from billing on a gross basis to a net basis, Rolet told journalists after the company reported a drop in first-half pretax profit.
Post-trade costs now amount to about two-thirds of the marginal cost of trading, he said. Improvements in post-trade costs are the next area where we can substantially improve our competitiveness.
The LSE has also bought a clearing operation of its own as part of its acquisition of Borsa Italiana. That business recently secured a clearing licence in the UK, Rolet said.
There are various things we can do, various options to provide alternative ways of bringing down costs, he said.
But the success of the exchange's efforts to cut post-trade costs depends largely on whether it can obtain leverage through the regulatory framework.
It depends on the future shape of clearing, Rolet said. He cited three potential regulatory outcomes:
* A return to a system of national clearers, or back to the stone age.
* The adoption of a single pan-European system for clearing and settlement like the Depository Trust & Clearing Corp in the United States, which Rolet said was not likely. The DTCC took 17 years and an act of Congress.
The DTCC model also has potential drawbacks in that it acts like a utility to the detriment of innovation and cost-cutting, he said.
* A harmonised framework for multiple clearers acting across national borders in Europe. Such a framework would allow for connections between clearers so that one could have a call on collateral held by another, Rolet said.
A major draft law on market infrastructure will be presented next July that would extend the EU's reach into clearing and settlement for shares and derivatives, industry sources have said.
(With reporting by Huw Jones; Editing by David Cowell)