News that Chi-X Europe and LCH.Clearnet are set to go live with their centrally-cleared service for Contracts-for-Difference (CFDs) on FTSE 100 stocks today is a sign of the times.
As we discussed in our September 2010 report “Centrally-cleared CFDs -- A Buyside Perspctive,” the concept of moving CFDs into a central clearing counterparty (CCP) model isn’t new to the UK. But the fact that such a service is only now coming to light is in part due to a desire from regulators to see market-led solutions to impending derivatives reform.
The EU has proposed mandatory CCP clearing for eligible OTC derivatives. To determine eligibility, regulators have introduced a 'top-down/bottom-up’ approach whereby they will force OTC derivatives into clearing based either on their own findings or on demonstration by a CCP that clearing is possible.
The fact that the UK’s Financial Services Authority (FSA) has given its blessing to the LCH.Clearnet initiative is the first real demonstration that regulators would rather endorse bottom-up approaches instead of imposing top-down mandates.
Admittedly, CFDs weren’t in the crosshairs of the regulators when they drafted the reforms – the equity derivative markets behaved impeccably during the financial crisis and showed no signs of systemic risk. And the fact is that LCH.Clearnet was working on the concept long before the financial crisis even started, which is why they have stolen the march when it comes to seeing which new derivatives will move into a CCP model.