EU clearing houses results reflect tough environment

 

The financial results for two of Europe’s largest equities clearing houses have highlighted the difficulties faced by the operators, amid a slump in trading volumes and an increasingly competitive post-trade environment.

 

 

EU clearing houses results reflect tough environment

 

EuroCCP, owned by US post-trade giant The Depository Trust & Clearing Corporation, reported its fifth successive year of pre-tax losses, of €15.8m, for the year ended 31 December 2011, according to accounts filed with Companies House last month. The losses were €1.6m less than those incurred in 2010.

The London-based operator reported a 27% revenue rise to €14.7m for the year, while its costs increased 5% to €30.6m. Its highest-paid director, who was not named, received €795,000 in remuneration over the year, down from €857,000 in 2010. DTCC made an €11.9m capital contribution in February of this year, the accounts said, to ensure EuroCCP's continued compliance with UK regulatory capital requirements.

 

Meanwhile, its Dutch rival EMCF, majority-owned by ABN Amro with Nasdaq OMX holding a 22% stake, reported a near-halving of its pre-tax profits to €7.2m over 2011, according to the annual report posted on its website. Its total income fell by 28% to €19.8m. In a statement accompanying the accounts, Jan Booij, EMCF's chief executive, said that the firm's "aggressive pricing strategy did have an effect on [the firm's] profitability."

 

The firms are part of a new generation of European clearers set up over the last five years to support alternative trading platforms, such as Chi-X Europe, Bats Europe and Turquoise. The operators stand in the middle of a trade to guarantee against either party defaulting; a process called novation.

The operators have competed fiercely for clients, a process which has been intensified by the depressed level of trading volumes since the 2008 financial crisis. EuroCCP's first key client was Turquoise, now owned by the London Stock Exchange, and during 2011 it cleared around 7% of European equities trades, according to statistics from the Federation of European Securities Exchanges.

 

EMCF won the original mandate to clear for Chi-X Europe and Bats Europe, which merged last December to form Bats Chi-X Europe. In 2011, EMCF had a 39% market share, its account said.

However, those shares have altered significantly following the introduction of widespread interoperability at the start of this year. Interoperability is a model whereby several clearing houses can clear for a given trading platform, allowing users a choice over their clearing provider. It allows trading firms to consolidate their clearing flows in a smaller number of clearing houses, and has brought the operators into direct competition with one another.

 

EuroCCP and EMCF were two of four clearers to launch full four-way interoperable services with Bats Chi-X Europe on January 6 this year. Other platforms to have also committed to interoperability include Turquoise, the Nordic-based Burgundy MTF and UBS MTF.

 

The model has benefited EuroCCP, wtih its market share increasing to 25% of European equities volumes, according to FESE statistics. In contrast, EMCF's market share has suffered, according to market sources and confirmed by Boiij. He told Financial News: "As expected, our market share was hit when Bats Chi-X went interoperable. However, it is now growing again and we are already the second largest clearer on Turquoise, with further platforms and developments in the pipeline.”

Reflecting this fall, Nasdaq OMX said in April that it had booked a $12m impairment charge on its EMCF investment, which it bought in 2009 and valued at $27m at the end of 2011.

Diana Chan, chief executive of EuroCCP, said: "The financial benefits of a threefold increase in volumes passing through EuroCCP since the launch of full four-way interoperability are not reflected in EuroCCP’s 2011 financial results."