Transcript European Cash Equities Programme Operating Model Design

Clearing: The Strategic View
Dennis Dutterer, The Clearing Corporation
Phupinder Gill, Chicago Mercantile Exchange
Daniel Gisler, EUREX
David Hardy, London Clearing House
George Hender, The Options Clearing Corporation
Neal Wolkoff, New York Mercantile Exchange
Moderator: John P. Davidson, Morgan Stanley
Futures & Options Expo
November 6, 2003
Clearing Strategies: A Brief Overview
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Dutterer: Please explain the Clearing Corporation’s strategy with
respect to both EUREX and the other markets for which it provides
clearing services. Is EUREX in effect subsidizing these other markets?
How does the EUREX clearing link differ from the CME-SIMEX Mutual
Offset System?
Gill: What is the strategic plan for the Common Clearing Link postimplementation? What prevents the CBOT from taking their clearing
business elsewhere, now that they have DCO status? Does CME plan
to offer clearing services to other markets?
Gisler: What has been the impact of the introduction of EUREX
Clearing AG as the central counterparty in the German equity market?
Why is EUREX spending resources on the highly competitive markets in
America when virtually undeveloped Eastern Europe lies at your
doorstep?
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Clearing Strategies: A Brief Overview 2
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Hardy: Will the LCH-Clearnet merger change the focus on expanding
SWAPSCLEAR? Is there any hope for an expansion to Credit Default
Swaps when there are so many integration issues on your plate? Why
should the LSE continue to utilize LCH as its CCP when a competitor
has a significant ownership interest in LCH?
Hender: Has the fungibility of single stock options at The OCC been
detrimental to the interests of the US options exchanges? Does OCC
have a proactive role in innovation in the US equities markets, or is it
simply reactive to the needs of its owner exchanges?
Wolkoff: How is NYMEX expanding its clearing franchise beyond pittraded conventional futures contracts? Your strategy of converting OTC
energy contracts into futures contracts is very distinct from the LCH’s
strategy with SWAPCLEAR. Was necessity (e.g. systems limitations)
the mother of that invention, or is there an important legal or economic
imperative? Will this approach change once the OnExchange software
is implemented?
All: To what extent did clearing members play any role in the
development of the above strategies?
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Clearing Strategies: Horizontal vs. Vertical Integration
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Hardy and Hender: At least historically, your clearing organizations
have been models of the “horizontal” view of clearing as a “utility” that
provides key services to a number of markets. Are there systemic risk
advantages to this view of clearing? If there are no competitors in a
horizontally organized clearing universe, what keeps costs low?
Hardy: How has your view on this debate changed since the Clearnet
transaction? Is it possible for Euronext to maximize shareholder value
without a vertically integrated central counterparty and central securities
depository?
Dutterer: The Clearing Corporation provides clearing services to
multiple markets; has your new largest shareholder placed restrictions
on your ability to do this in the future?
Gill, Gisler & Wolkoff: Is the vertical integration of exchange, central
counterparty and central securities depository (where relevant) a
fundamental component of your strategy, or the result of historical
“accident?” To what extent does this integration limit your ability to offer
clearing services for products that do not trade at organized exchanges?
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Clearing Strategies: Distribution of “Profit”
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Gill and Gisler: Why should your shareholders participate in the
distribution of profit from the provision of clearing services when they do
not participate in the mutualization of risk? What is the explicit and
unique return on a clearing participant’s deposit into your clearing fund?
Why do providers of debt and equity capital receive an explicit return but
providers of this form of capital do not?
Dutterer and Hender: How is a “clearing fee rebate” different from a
“dividend?” Would not the public interest be better served by
permanently lower fees?
Hardy and Wolkoff: To what extent do “per contract” transaction fees
bear any relationship to the cost of providing clearing services? How
are you compensated for the variable duration that a contract is held
“open?” Why do you assume that clearing has the same value to each
clearing member and thus charge them an identical price?
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Clearing Strategies: OTC Products
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Hardy and Wolkoff: What is the “end game” for clearing OTC
derivatives? If we assume the major categories of OTC product are
interest rate, credit, equity and energy, is there room for more than one
provider of clearing services to each segment? To what extent is there a
need for linkages among the service providers in each segment?
Hender, Gisler and Gill: Each of your organizations has a successful
franchise for clearing exchange-traded equity related derivatives. Yet
none of you provide clearing services for either equity swaps or OTC
equity options. Are there characteristics of these products that make
them more difficult to clear, or characteristics of the marketplace that
make clearing less attractive?
Dutterer: Single-name and basket credit default swaps are notoriously
difficult to document, confirm and model. The DTCC has just kicked off
a confirmation matching service for this market, but as yet no one
provides clearing. Do you see the DTCC’s clearing subsidiaries as likely
providers of clearing for this market, or is a listed derivatives clearing
organization a better choice?
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Clearing Strategies: Regulatory Oversight
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Gisler: Who is the appropriate regulator of a market or a clearing
organization that has a large number of cross-border participants?
Hardy: Upon completion of the Euronext transaction the primary
regulator of LCH will become the French banking regulator. Do you see
any essential differences in the approach of a banking regulator vs. a
securities regulator in the oversight of clearing services?
Wolkoff: How involved is FERC in the clearing dimension of your
markets? Do they understand clearing and settlement issues? Is there
good cooperation with CFTC?
Hender: How would you compare SEC and CFTC oversight of
clearing?
Dutterer and Gill: Clearing organizations have enormous pools of
Treasury Securities and other “window eligible” collateral. Should
clearing organizations be able to borrow from the Fed at the “Discount
Window” in the event of a clearing member default? What about in the
event of the insolvency of a settlement bank?
All: Should clearing organizations have a majority of public directors on
their Boards?
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Clearing: The Strategic View
Please remember there are additional Clearing sessions at
10:45 a.m., 1:00, 2:15 and 4:00 p.m. today.
Futures & Options Expo
November 6, 2003