Nasdaq Plans to Compete With the NSCC

Nasdaq OMX Group hopes to bring competition to the post-trade clearing world in mid-2009 when it launches a central counterparty that will compete directly with the National Securities Clearing Corp.

“We’re going to act as a central counterparty and provide continuous net settlement in direct competition with the NSCC,” said Brian Hyndman, senior vice president in transaction services at Nasdaq OMX. He added that Nasdaq has focused on reducing trading costs for customers through its market model and transaction pricing, and is now turning to post-trade costs for clearing firms. He spoke today at the annual Security Traders Association conference in Boca Raton, Fla.

The NSCC is the clearing facility used to clear equities trades in the U.S. It’s a subsidiary of the Depository Trust & Clearing Corp.

Nasdaq submitted its rule proposal to launch its central counterparty facility to the Securities and Exchange Commission last week. The exchange expects the facility to be up and running in mid-to-late 2009, pending regulatory approval. Nasdaq said it would rebrand the Boston Stock Exchange Clearing Corp., which it acquired in August with its purchase of the Boston Stock Exchange, as the Nasdaq Clearing Corp. (NCC). Nasdaq also owns the Philadelphia Stock Exchange, which has a clearing license.

Stuart Goldstein, head of corporate communications at the DTCC, said Nasdaq’s move could potentially introduce systemic risk into the market. He added that the NSCC’s mission is to provide a risk management function in the industry and to mitigate risk for member firms.

“At a time when the industry is facing the worst financial crisis in history, the one bright spot of certainty and stability has been the seamlessness in DTCC’s post-trade clearing and settlement process, and the management of market volatility,” Goldstein said. “Bifurcating clearing and settlement in the U.S. would introduce a new element of systemic risk, and we’ll have to see if financial firms and regulators think that is a good idea.”

Nasdaq is targeting a range of customers interested in shrinking their clearing expenses. “We’re looking to get bulge-bracket firms, regional firms and hyperactive electronic firms that are self-clearing to use our facility,” Hyndman said. “Firms that are focused on scale and that want to reduce these variable expenses are in our sweet spot.”

The NCC’s calling card will be cheaper pricing. “Our fees will be 40 to 50 percent cheaper than the NSCC fees,” Hyndman said. “We’ll deliver value for our customers and ultimately our shareholders.”

The NSCC’s clearing cost is sixty-six thousandths of 1 cent per 100 shares, according to Goldstein. He said he would be interested in Nasdaq committing publicly to offer firms half that price. The NSCC’s risk management infrastructure and technology costs are “baked into” that price, Goldstein said.

Nasdaq expects to launch the NCC with “at least 10 percent of the [market] volume on day one,” Hyndman said. “We think that’s doable.” He added that a cross guarantee agreement between the NSCC and NCC would exist by the time NCC launched. That’s necessary to facilitate continuous net settlement across the clearing agencies.

The exchange operator does not yet have commitments from firms to shift their clearing to the NCC, but interest is developing. “We’re eager to work with Nasdaq,” said Steve Swanson, global co-head of electronic trading products and services at Citi. “We’d love to see competition in that marketplace.”

Robert Colby, deputy director of the SEC’s Division of Trading and Markets, told reporters at the STA conference that the national clearing system in the U.S. allows competition. He also pointed out that the U.S. trading industry is better off than its European counterpart “because of how our clearing and settlement works.” In Europe, post-trade services are fragmented, with trading markets often operating their own clearing facilities. In the U.S., in contrast, clearing and settlement has been consolidated across markets since the 1990s.

Colby added that any new central counterparty must clear several hurdles before it can launch. It must be operationally efficient, he said, it must meet strong business continuity planning requirements, it must have robust risk management and margining requirements, and it must be interconnected with the NSCC.