LCH.Clearnet Group has very much been in the news lately by way of its tie-up with the London Stock Exchange. To get an inside view from the top, SmartBrief caught up with LCH.Clearnet CEO Ian Axe on the sidelines of the 37th International Futures Industry Conference in Boca Raton, Fla.
How is the tie-up with the LSE going to help LCH.Clearnet navigate the evolving landscape of over-the-counter and exchange-traded derivatives?
We’re a multi-asset-class clearer. So we are already in these OTC spaces with SwapClear and credit default swaps, but we also have a large European and emerging-market listed derivative, commodity and cash-equity service. The debate here was about risk management on the OTC side. But the efficiency debate around listed derivatives and cash equities is still very real. And having a partner that allows us to, firstly, gain some scale straight off the bat and realize some of those efficiencies is really important. Secondly, what the LSE has done is create this horizontal model in which I can still have all of those multiple banks and broker-dealers in place as a relationship as well as actually multiple venues and trading venues. So it’s those two things that are going to support us going forward. But one must sort of differentiate the heavy risk debate on OTC, which we’re already established in, versus the exchange side, where LCH.Clearnet is again a big player in collateral, but we’re not a big exchange by any means.
During the panel discussion, you mentioned how you differ from investment banks in that you manage risk in preparation for default. What kind of lessons did you learn from MF Global Holdings or Lehman Brothers Holdings?
The question was: Could you exempt margin; initial margin or variation margin? The truth is when we look at some of these defaults, our ability to real-time mark to market the market itself and have that risk capability to understand what’s going on meant that we were able to call additional margin. So when we got into the Black Swan event — the default — in both of those situations, we were able then to auction off at a distress price, as you can imagine. Default by nature means these are bad markets. And you look at MF Global; that’s a sovereign-risk issue. And euro sovereign risk of which we are, I believe, more than 70% of the market in clearing in Europe, rather like Depository Trust & Clearing is here with the U.S. Treasury. Our ability to work with members and actually auction off is one facet. Having the right margin to bridge the gap of what’s happening in those pricing markets is imperative. And that is the reason people are saying, “Look, we’re a risk manager. We need to manage that. Because if I don’t get that right, I’m going into the default fund. And if I get that wrong, then, clearly, I’m damaging my members.” And that’s what we protect against.
You were in talks with the LSE for quite a while. What sealed the deal?
Three things really come to mind when I look at strategically the reason things broke. First of all, the benefits of scale: be it geographic expansion into emerging markets, be it efficiencies or be it product expansion in services such as listed derivatives and so forth. So I think that’s fantastic. The second thing that sealed the deal was that horizontal model. It gives us the ability to still have the banks, broker-dealers to bring in other trading venues and give them product governance. Now, that’s a different way. It’s not vertical; it’s horizontal. And, of course, I have fiduciary responsibilities as the group chief exec. I think that that was a fair value price, and I think it will be attractive to a number of shareholders.