The Risk Controllers: Central Counterparty Clearing in Globalised Financial Markets

20

Exchanging Places

20.1 COMPETITION, PROLIFERATION AND EXPANSION

The drive to clear OTC derivatives trades told only half the story of clearing in the years after the Lehman bankruptcy. Clearing also became a vital part of the strategies of exchanges to strengthen their businesses in much tougher competitive conditions.

The years of deregulation that preceded the crisis culminated in measures to boost competition at the trading level which undermined the traditional structures of many exchanges on both sides of the Atlantic.

Stock and derivatives exchanges were affected differently, however. Also, as far as stock markets were concerned, regulatory changes that were similar in scope on both sides of the Atlantic had very different consequences for clearing because of the different ways exchanges and their clearing services were structured and regulated.

In the US, the biggest change to stock market regulation in 30 years took effect in March 2007. The Regulation National Market System, known as Reg NMS, aimed at stimulating competition in US equity markets. One of its most potent provisions required all brokers to ensure that investors got the best price, no matter where it was published, when they bought or sold stock.

Its effect on the long-established stock exchanges of America was dramatic. Market share, fees and profits tumbled. Incumbents invested massively in electronic trading technology to speed trades and attract the increasingly important algorithmic traders. Their ...