The arrival of a new clearing house in Spain challenges
the balance of power in Europe. Can it succeed against competitors
such as LCH.Clearnet that are pushing for a horizontal solution?
JUST WEEKS AFTER the London Clearing House and Clearnet announced
their merger and celebrated their contribution towards a pan-European
securities infrastructure, Spanish securities trading group
Meff revealed details of a plan to set up a rival European clearing
network.
It is rejecting the trend towards horizontal ownership in
securities trading and processing and, in the words of one banker,
"doing a Germany" by setting up a vertical structure.
Critics say this is yet another example of Spanish protectionism.
Supporters say it will enhance Spanish debt's liquidity. Either
way, it could provide interesting competition.
It was known for months that such an announcement was on its
way. The establishment of a new clearing entity in Spain required
a change in the country's law, which was passed in November
2002. And the Meff Group was authorized to provide this new
service in June 2003.
Long on ambition
But what the announcement lacked in surprise, the details
make up for in ambition. Meffclear started on September 18 by
clearing the repo traded on the Senaf electronic platform for
Spanish government debt. It has plans to move into a large range
of products and territories, and is prepared to compete directly
with LCH.Clearnet.
Spanish repo may not sound like a particularly vibrant product,
but it produces e25 billion in daily trading volumes. And it
is a natural place for Meffclear to start, because there is
no other clearing service for Spanish debt. Once repo clearing
for Senaf trades has become more established, Meffclear will
start clearing Spanish repo from any channel - whether it comes
from other platforms or from bilateral phone deals.
From there, it will move into Spanish government cash bonds.
And then, who knows? José Massa, Meff's CEO, told journalists
at a briefing early last month that he would tackle money markets,
credit derivatives, currency options, or indeed any products
that his members, which include BNP Paribas and Citigroup as
well as all the key Spanish banks, called for. "It is better
to try to go into areas that are not yet cleared," he says.
For the Meff Group, which runs Meffclear, Senaf and government
bond platform Aiaf, the move makes business sense. "The traditional
bread and butter for the Meff exchange prior to the launch of
the euro has gone away, so they are finding other things," says
Richard Berliand, global head of futures and options at JPMorgan
in London. Ibex has become pan-European, Mibor has been swallowed
into Euribor and so on.
Repo and cash bond clearing should be good revenue generators
if the success of LCH and Eurex Clearing in those products is
anything to go by. That will be increasingly important as the
Meff Group and its holding company head towards an initial public
offering - a further development that Massa envisages in the
"not too distant future".
Meffclear will become more interesting when it starts stepping
directly into products that LCH and Clearnet already cover.
"We are strong believers in competition," Massa says. "There
has been lots of talk about a single CCP [central counterparty]
for the whole of Europe. You could extend that argument to having
a single CCP for the whole world. We strongly believe that is
not a good development for the banks. You have never seen a
benevolent monopoly - they offer a lower quality service at
a higher price."
Pieza clave en la estructura de los mercados
Este proyecto, inscrito en el Grupo BOLSAS Y MERCADOS ESPAÑOLES,
ha sido desarrollado durante el último año por
Grupo mF, y puede considerarse la pieza que completa la industria
de valores española.
Se trata de una iniciativa de gran trascendencia para los miembros
y para la propia estructura de los mercados de Deuda Pública
en la medida que aporta seguridad respecto del buen fin a la
negociación de repos y contado.
Como consecuencia de ello, los participantes en MEFFCLEAR logran
importantes ventajas como la eliminación de las líneas
de crédito bilaterales entre las contrapartidas de las
operaciones registradas y el ahorro de recursos propios a efectos
de coeficientes de solvencia.
La aplicación de las normas de Basilea II hará
más acusada la exigencia de una mayor calidad de la gestión
del riesgo y, por lo tanto, evidenciará la oportunidad
de los servicios de MEFFCLEAR, que contempla un uso creciente
de la cámara de contrapartida por parte de las entidades
financieras domésticas e internacionales, participantes
en el mercado de Deuda Pública.
Matching the lowest prices
Massa compares the securities infrastructure industry to the
mobile phone industry. European mobile phone users want network
providers to be international, so that they can use their phones
in different countries, and they want good service. But they
do not want just one pan-European network, because that removes
choice and flexibility on prices. "It is not bad for customers
to have two or three companies investing in the same thing,"
he says.
Massa declines to use the word "cheap", but he is
keen to stress that Meffclear will always match or better the
lowest prices for its services in Europe, with no membership
fee, no minimum monthly fee and no minimum trade fee. It charges
a fee that is relative to the size of the deal. Unlike LCH and
Eurex Clearing, Meffclear also does not run a default fund,
which means that its members do not have to put cash aside to
protect themselves against the bankruptcy of another member.
While LCH nets risk at a member level, Meffclear manages it
at an account level. If an institution wants to join LCH, it
has no choice but to pay into the default fund.
LCH's members recently voted to increase their contributions,
so they don't appear too worried about the default fund. Nonetheless,
Meffclear is pushing the message that it is cheap. It will need
to work hard to convince some international banks. "I like
competition but we want consolidation," says Berliand at
JPMorgan. "We want enough competition to keep everyone
true and honest but not to put costs up. Meff has never done
things cheaply in Spain. To clear in Meff you have to have a
local presence. This is changing, but years after the ISD [International
Securities Directive]."
Aside from price, if Meffclear's members urge it to move into
products already cleared by LCH and Clearnet it will have a
tough job attracting new members. "Do I think they are
a credible player?" asks one banker. "No. I don't
think they have a cat in hell's chance."
Existing members are more positive. "It is difficult to
assess this project because it depends on its acceptance by
clients," says Soledad le Cube, the head of sales and relationship
management for BNP Paribas Securities Services in Spain. BNP
Paribas offers its own clients remote clearing services through
Meffclear. "It is true that initially remote account holders
have not enthusiastically accepted it." Nonetheless, le
Cube says that as volumes rise, new members will be attracted.
"We absolutely welcome this development," she says.
"We have favoured it from the beginning. We have to be
there, we have to be present. Whether clients will join or not
is the key."
Meffclear is confident of success. Massa says that for one
thing, while LCH and Clearnet are focusing on integration issues,
they will be less focused on client demands. In other words,
he is hoping they will take their eye off the ball for long
enough for Meffclear to make progress. "I stress that I
am not dismissive of LCH but they will have to do corporate
things [during the integration]. When they are doing that, they
will not be able to do things for their members."
LCH did not return calls seeking a response to this statement.
"I am not afraid of competing," says Massa. "I
don't exclude the possibility. If I have to compete head-on
with LCH, I will do it." But he is keen to stress that
he will move first into products that are not already cleared.
"We are not going to compete in the exact same instruments,
but there is going to be competition. Will we compete head-on
to steal present business? No, that would not be wise."
When LCH and Clearnet revealed their merger plans in late June,
they stressed that they were keen to seek reciprocal clearing
agreements with other smaller European clearing houses. Meffclear
does not offer reciprocal membership at the moment, and Massa
is reluctant to explore the possibility of doing so in future.
Speaking before Meffclear's operational launch, Massa said:
"We are going to start next Thursday, and you are already
asking me about divorce plans. I am not paying attention to
that now. I am focusing on the wedding, not on divorcing. I
am not saying no or yes."
Even if Meffclear does succeed in quickly building the volumes
it handles, it will need to work hard to attract new members.
"I would not trust Meff because it is too dominated by
the Spanish banks," says a banker from a firm that is not
a member of the group. But Massa remains unfazed. He is not
afraid of vertical integration from exchange through to clearing
and settlement, even though that is frequently criticized as
an ownership model. "It could be a disadvantage,"
he admits. "But it could also be an advantage. I have to
live with it. People stating opinions [about horizontal ownership
structures] are not being neutral. Euronext is not horizontal."
He has a valid point. European securities are riddled with
vested interests, confusing ownership structures and national
pride. In the end, if market makers decide Meffclear offers
a good service, it stands as good a chance as any provider of
succeeding.
