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A Risky Exchange 

February 25, 2016

Lionel Laurent, Bloomberg Gadfly

Back-office plumbing will take a front seat in LSE-Deutsche Boerse's potential tie-up.

The business of clearing and settling trades has always looked dull compared with the racier business of buying and selling. But it's likely to be at the heart of whether regulators approve a tie-up between Deutsche Boerse and London Stock Exchange -- and whether the financial system will be riskier or safer as a result.

Since the 2008 financial crisis, regulators have been agonizing over how to better protect markets from the risk that a major investment bank or broker like Lehman Brothers goes bust -- "counterparty risk" in jargon.

Improving capital levels and financial strength at the banks or counter-parties themselves was one half of the story; driving more trades through central clearing (a neutral middle-man who takes on the risk of a trade failing) was the other.

The growth in central clearing has been dramatic. In 2014, more than half of the notional amount outstanding of derivatives transactions was centrally cleared, almost twice 2009 levels, according to a paper by the Bank for International Settlements.

LSE and Deutsche Boerse are behemoths in this world: LSE owns LCH.Clearnet, which is dominant in interest rate swaps, while Deutsche Boerse's derivatives platform Eurex controls more than half the market in the trading and clearing of listed European derivatives. Both are expected to benefit further from an increased push in Europe for more central clearing in coming years. Read more


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