In market infrastructure the dreams are getting ever larger. The European Central Bank’s (ECB) decision to explore the concept of a single European clearing house has met with a mixed response. Few feel ready to justify the current situation in which exchanges are often tied to a single clearer.
Some favour the American model in which a utility run by the users is formed for clearing and settlement. Others see competition as the driving force for cost-cutting. The ECB has said it would run the system with those national central banks (NCBs) that together form the Eurosystem and would look at linking it to Target2 payment system.
A good idea? Sure – if one ignores the constant problem facing large-scale IT projects. They regularly run into difficulty, increasing costs and kicking any theoretical savings out of sight. A recent unfortunate case-in-point demonstrates the risks involved.
On June 6, David Hardy, then chief executive of LCH.Clearnet, wrote an article entitled “The case for a single European clearing house” in the Financial Times. On July 7, he resigned from his position, three years after the merger that formed LCH.Clearnet, which had been slated to save customers money by reducing IT costs. It had failed to do so.
Cold feet
The Generic Clearing System (GCS) project, in which a new system was to replace the pre-merger systems, was already in trouble last year, having missed internal deadlines and a public go-live date and has now been dropped. These issues were compounded for Mr Hardy by concerns over the structure of the clearing house.
What is the positive case for a single clearing house? Making the (usually) fixed costs lower by running greater volumes via a single house seems reasonable. Of course opponents of the plan such as Craig Donohue, CEO of the Chicago Mercantile Exchange (CME), will argue that competition is the best way to lower prices. Both are valid in theory. Either way they are just theories.
What Mr Hardy’s case demonstrates is that for all the planning in the world, if a central counterparty service is formed, whether via merger or construction, the reality of delivering savings may depend on the ability to deliver the technology behind it, regardless of the model. To those who wish to follow in his footsteps – such as replacement, former Goldman Sachs managing director Roger Liddell – good luck.
