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Last golden goose may fly the ASX coop

THE ASX and its boss, Elmer Funke Kupper, are expected to receive a big blow in a couple of months when the Council of Financial Regulators - the umbrella body for Australia's main financial regulatory agencies - releases a report on clearing and settlement. It is tipped to call for an end to the ASX's clearing monopoly.

It follows the loss of the ASX's other golden goose: its share trading monopoly after Treasurer Wayne Swan granted Chi-X a licence for an alternative exchange. Since Chi-X opened a year ago, it has snared 7.5 per cent of market share.

In June last year, one of the world's biggest clearing houses, LCH.Clearnet, set the cat among the pigeons when it applied to the Australian Securities and Investments Commission for an alternative clearing-system licence. ASIC and the Reserve Bank are finalising recommendations on whether it should be opened up to global competitors. But final approval rests with Swan.

The boss of LCH.Clearnet is believed to be coming to Australia in December and will be hoping for positive signals on when it might be granted a clearing licence. It is believed there would need to be agreement on certain conditions, including conducting all clearing in Australia, not overseas.

It fits with the government's policy to create greater competition in financial markets, as well as fulfil its promise to overhaul clearing regulations after it rejected an $8.4 billion takeover bid by Singapore Exchange largely because of the ASX's clearing and settlement monopoly.

The Treasurer rejected that takeover proposal on the basis that clearing and settlement were the backbone of the financial system and it couldn't afford the risk of its transfer offshore.


From the government's perspective - and that of market operators - changing the structure for clearing fits into its strategy to promote a greater focus on Asia and provide opportunities to integrate. The Asian Century white paper is part of that long-term ambition.

For instance, Chi-X argues that the Oxera report prepared for a directorate of the European Commission found that increased competition and market integration in Europe had a profound impact on price and service. It concluded that ''on average across the financial centres, the CCP clearing cost for equities has declined from €0.37 a transaction to €0.10, a reduction of 73 per cent between 2006 and 2009''.

In a submission to the Council of Financial Regulators, Chi-X argued that concentration risk posed by a monopoly clearing and settlement provider was significant and was best tackled through competition. ''Many jurisdictions have learnt the lesson of 'too big to fail' in a brutal and unforgiving way.

''Australia is fortunate to be able to mitigate concentration risk in clearing by introducing competition in this area as a compliment to competition in trading,'' it said.

The arrival of Chi-X has resulted in a reduction in fees and arguably better service from the ASX. This was no better illustrated than a note released to clients on September 13 giving a progress report on its cash market settlement services. ''The current service and fee structure has been in place since 2006. It reflects a 'one-size-fits-all' offering that no longer aligns with customer needs in Australia's more complex and diversified market … ASX is introducing a more transparent fee structure to align charges with services provided and to ensure that customers are better informed about the services for which they are paying.''

But not everyone sees it that way. The ASX has argued vigorously against a second clearing system on the basis that the rest of the world is moving to consolidate its clearing houses. In a paper to ASIC, it said: ''Any change to the structure of clearing and settlement will increase operational risk.''

It estimates that additional costs to the market of a dual clearing-house structure could be up to $30 million a year, with potential fee savings of only $15 million to $20 million a year, excluding any additional credit-risk costs.

Interestingly, an analyst report released by UBS on October 9 said: ''In our view, recent consultation by the Council of Financial Regulators appears driven by a predetermined policy position favouring clearing competition. This ignores the negative sum outcome from market competition and the complete absence of proper cost/benefit analysis. It is clear that (1) agency costs overwhelm any fee reduction potential (no such thing as 'zero cost' implementation) (2) claimed benefits are largely an illusion (European experience), and (3) unintended consequences are inevitable.''

The stakes are high and the next stage is for the Treasurer to make a decision, which some believe could happen soon after the release of the financial regulators' report. Interestingly, ASIC recently issued a consultation paper outlining a list of rigorous proposals to give it more power in the event of ''cross-border'' clearing and settlement operators in Australia.

If Swan gives the green light to LCH, and the feeling is that he will, it will no doubt prompt investment bankers to freshen up their files on potential mergers for the ASX. Singapore missed out due to the monopoly on clearing and settlement. If this is restructured in a way that satisfies the government, it could open up a whole host of possibilities of alliances.