MarketSpace: a tough challenge for CLS

Details are sparse for now, but if the initiative achieves its stated aim of establishing a centrally cleared exchange where banks and buy-side participate, other institutions should be worried. CLS is the most obvious candidate to suffer if MarketSpace thrives. One of the key selling points of the new venture was that it will be able to deliver clearing centrally, and allowing netting, thereby cutting settlement costs substantially.

As spreads have dropped, these costs have become more and more of a drag on profits. CLS has realised this, and it has been working hard to cut ticket prices. In May it announced that trades would be cut to as low as 25p per ticket for low-value, high-frequency trades. This is to be welcomed, as algorithmic trading is becoming an increasingly important part of the market.

However, on the whole, costs have remained stubbornly high. They are a significant drag on banks that are fighting to squeeze margin out of trades that offer next to no spread. For now, CME is denying that it will establish its own settlement system if CLS fails to play ball and enable netting. However, as one of the world's most robust institutions, it does have the ability to do so. An anonymous trading platform that settles trades and eliminates Hersatt risk would certainly be a USP in a market-place that seems to get more crowded by the week.

However, CLS as it currently operates has a lot going for it. The fact that it is a utility owned by the biggest banks may make it cumbersome and slow-moving, but it ensures that it does operate in the best interests of the market as a whole.

CME or any other single entity that wanted to set up a rival settlement system would have a tough job convincing the regulators that it was promoting the greater good of lowering risk rather than its own interests.