Streetwise Professor

April 5, 2008

You Read It Here First

Filed under: Commodities,Derivatives,Economics,Exchanges — The Professor @ 8:44 am

According to Bloomberg’s Matt Leising (story not yet online), the CME’s would be competitor ELX is in discussions with The Clearing Corporation (the clearinghouse formerly known as BOTCC) to obtain clearing services. Immediately following the announcement of the formation of the new exchange in December, I surmised that the then-unnamed CME competitor would clear through the Clearing Corp due to the fact that several of the nascent exchange’s founders had just bought stakes in the once and former BOTCC. Although the Options Clearing Corp and ICE Clear have submitted proposals to ELX, I predict that at the end of the day Clearing Corp will prevail.

Although this will not be formally a vertical relationship, as ELX and CC are formally separate organizations, given the overlaps in ownership it will functionally integrate execution and clearing. Indeed, that is almost certainly one of the virtues of the arrangement to ELX, although I imagine they will not be too vocal about this as that would contradict their criticism of CME’s ownership of its clearinghouse.

This would also represent another move in the direction of more integration in clearing. The trend is clear (no pun intended): SWX, ICE, and LIFFE have already moved decisively in this direction, and LSE has also mooted the possibility. Regulators on both sides of the Atlantic view this with alarm, due to their fixations on the purportedly anti-competitive effects of integration (a fixation derived from bad economics), and their steadfast refusal even to contemplate the potential efficiency benefits of integration. You’d think that such a trend would spark at least a little doubt and reflection among European regulators and USDOJ, but you’d be wrong.

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