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January 13, 2009

Europe Awaits Competition

Will culture and regulation stop the American invasion?

By Gregory Bresiger

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U.S.-based companies are readying a full-frontal assault on the European clearing business. They believe that Europe is not only ripe for competition, but that overseas providers are inefficient and too expensive. American executives say they can dramatically reduce clearing costs, as they contend that Europe should welcome new players to enter their turf

and make trading less expensive. That's the argument that Nasdaq and the Depository Trust & Clearing Corp. (DTCC) are separately making.

"Nasdaq is really trying to muscle into the clearing business," points out Phillip Silitschanu, a senor analyst with the Aite Group.

Both Nasdaq and DTCC-unfriendly rivals looking at a relatively new market and offering different models-emphasize that European clearing is out of step with their more effective clearing methods.


DTCC says European clearers now charge too much through their various central counterparty clearinghouses, or CCPs, and central security depositories (CSDs). DTCC is in the process of trying to persuade European exchanges that they should farm out clearing to its EuroCCP subsidiary.

A DTCC study supports the conclusion that its subsidiary's prices are cheaper. Its cost per side to clear a trade is about one-tenth of what European clearers are charging.

Many European exchanges, as now constituted, can't effectively compete, DTCC argues. The study says that the only way a European CCP could now achieve its subsidiary's price (0.003) would require huge investments, which "would negate the anticipated fall in prices."

How would Americans deliver these cost savings for European markets? Firstly, big savings could come simply from unifying the dozens of marketplaces.

Nasdaq OMX and DTCC officials point to 27 European Union nations. Each has myriad different clearing laws and customs. That means the continent is a very expensive place to clear and process trades. Unlike the United States, there is no single central CCP.

This is the primary reason why clearing and settlement services are so expensive: There is a patchwork of disparate clearing and settlement practices across Europe. Almost any financial institution-from an exchange to a CSD, or even a bank, sometimes-can perform clearing when it internalizes a transaction.

Different Practices

Some markets function without a CCP. In Spain, for example, it is a CSD doing the clearing. And in some markets, such as Germany, France and Italy, extra precautions are taken. Transactions are run through a CCP prior to sending the transaction to a CSD. All these practices add to the clearing bill, observers say.

"In the case of some cross-border trades, it can be 20 times more expensive, compared with DTCC," Aite's Silitschanu says. Indeed, DTCC officials, in the study, claimed that Europeans buying equities overpaid by 350 million euros annually or about 60 to 70 percent more than what their subsidiary, EuroCCP would take for equivalent services.

Observers say Nasdaq OMX is already making inroads in Europe. It is a big player in the Northern European countries, including the Baltic states and Scandinavia. It is also looking to clearing both here and Europe as a profitable new line.