Why Did Turquoise Expand ETF Clearing House Options?

July 30, 2014

Equity market platform, Turquoise, announced earlier this month that it would offer investors trading exchange traded funds a choice of clearing house: a boon for them, but a boost for the ETF market as an increasing number of European market players look to get a piece of the ETF pie.

Turquoise is majority owned by the London Stock Exchange and was established to stimulate greater competition in the secondary trading equity market.

Its latest move, to add a range of clearing houses to its ETFs offering, makes it more competitive in the sector and brings it in line with the looming Markets in Financial Instruments Directive (MiFID) II rules (due to come into force on January 3rd 2017) which are anticipated to make post-trading of ETFs more efficient.

The European ETF market has roughly $470 billion invested across 2,059 ETFs/ETPs over 25 exchanges, according to data from ETFGI’s end H1 2014 Global ETF and ETP industry insights report. However, of this, it is thought that only 30- 40 percent of trades are recorded, the rest being undertaken on a bilateral (over-the-counter) trade basis, causing fragmentation across the region.

However, from 21st July this year ETFs and exchange traded commodities on Turquoise will be available to be cleared on LCH Clearnet, Six X-Clear and EuroCCP.  Clearing houses accept collateral from the buyer and seller of securities and is the stage before settlement, when the investor receives stock for cash, or vice versa.

Earlier this month BATS Chi-X, the European exchange, announced that it would offer investors trading ETFs more choice of clearing venues as part of its drive to boost post-trade liquidity and reduce costs.

The additions of central counterparties LCH Clearnet and SIX S-Clear means that more investors will be able to buy and sell stocks across venues, match up the trades and net the costs. For example, an investor could buy shares on the London Stock Exchange and sell the same shares via BATS’ exchange, and settle both transactions in the same clearing house.

In June this year several ETF market participants wrote an open letter calling on the European Securities Market Authority to introduce one consolidated tape across stock exchanges and improve post-trade liquidity and efficiency.

Currently one of the biggest issues the European ETF market has is that ETFs have to clear and settle in the clearing house or central security deposit (CSD) attached to the exchange. This can cause inefficiencies when ETFs are traded across borders and having centralised venues could help improve trading liquidity, ease cross-border ETF processing and significantly lower transaction costs for investors.



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