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February 22, 2010

Nasdaq's Much Debated Clearing Venture Is Dead

By Editorial Staff

The Depository Trust & Clearing Corp. (DTCC) now offers better prices than a year ago, so competition is not needed, say Nasdaq OMX officials.

At presstime the officials announced they were ditching a clearing plan to compete with the DTCC.

Last year, they said they would go head to head in 2009 with the DTCC and its affiliates, offering the same services at much lower prices. But as CQ&D was going to press, Nasdaq OMX officials reversed themselves.

"DTCC has made a number of changes to its National Securities Clearing Corp. price models and schedules," Nasdaq wrote in a Trader Alert, "and promised significant improvements in record and guarantee processing, since Nasdaq OMX first indicated its intention to enter the clearing space."

Nasdaq's rationale last year was that firms were paying too much to the utility. Earlier this year, Nasdaq officials were telling would be customers that it would offer the same services as the DTCC at fees that were "50 percent less" (CQ&D, Spring 2009). Those numbers were vigorously disputed by the DTCC.

"That was just not an accurate statement," DTCC spokesman Stuart Goldstein told CQ&D. Goldstein noted that the DTCC was cutting fees some $100 million a year several years before the Nasdaq clearing proposal was unveiled.

"There was never any evidence that their competition changed what we were doing, which was cutting fees as volume was going up," Goldstein said.

Nasdaq OMX had been slated to begin operations this year. But for several months it had become apparent that it would be impossible to meet that deadline-because Nasdaq had never submitted its public plan to the Securities and Exchange Commission.

Any plan would have required extensive regulatory reviews and possibly some congressional hearings. That process could have taken months, or maybe years. So it recently became apparent that the plan was dead this year (see Briefs, CQ&D, Fall 2009).

Nasdaq also would have likely faced many questions about how its new clearing venture would affect counterparty risk. Still, Nasdaq, in its Trader Alert, said it had forced NSCC to provide more "value and efficiencies" to the marketplace.

But Goldstein said Nasdaq "never substantiated" any of these claims. He also argued that Nasdaq's plan was not feasible. It would have "bifurcated" the clearing business, with some firms trying to take the best of both Nasdaq and DTCC.

That wouldn't have worked, Goldstein contends. Nevertheless, he added, now the DTCC wants to work with Nasdaq in "bringing innovation to the marketplace."


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