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.

 

The aim of simplifying the issuance structure and post-trade environment in the European ETF market is to make it easier for liquidity providers to service clients and ultimately lower the cost of owning ETFs through reduced transaction costs.

 

ETF.com’s European editor, Rebecca Hampson, talks to Turquoise’s CEO, Robert Barnes, about why they have added this ETF function and what it means for them and the ETF market.

ETF.com: Why have you expanded your business to accommodate ETFs?

Robert Barnes: “Interoperable [bringing venues together] clearing is a catalyst for ETF growth in Europe.

Equity trading and clearing in the same place is a good thing because it is expensive to do this if fragmented cross-border. Turquoise has now added ETFs to trading of shares from 18 European countries with a CCP (central counterparty clearing house) choice that can consolidate clearing to net trades for single settlement into the respective domestic depository.

ETF.com: Why have you only done this now?

RB: July 21st was the first time that non-objection for clearing was granted.

On the back of this we enlarged our stock universe to more than 900 ETFs which are eligible for fully interoperable clearing.  This means that if you’re trading an ETF on Turquoise it can now be aggregated for post-trade economies of scale.

ETF.com: How is this going to help the ETF market?

RB: We are evolving the framework for efficient trading clearing and settlement. There is potential for a number of ETFs to grow on order book liquidity.

Our move into the ETF space facilitates MiFID II compliance by end of 2016 when ETFs become MiFID securities with Europe-wide transparency requirements.

ETF.com: Has it been easy to add this ETF function to your platform?

RB: It has been easy to add ETFs for trading because MiFID allows admission of an instrument with a working post-trade model, which Turquoise now can offer enhanced with clearing interoperability. 21st July was the first day we were able to do this following this non-objection for interoperable clearing of ETFs.

ETF.com: What sort of uptake have you seen in the nine days since launch?

RB: From day one of Turquoise offering ETFs to trade with interoperable clearing, members already exercised choice to clear ETFs in a CCP other than the incumbent CCP available pre-announcement of interoperability. Our expectation is that on order book liquidity may be low at the start, but likely will grow.”

 

 

 

 

 

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