Press releases 2001

26 February 2001

SUCCESSFUL LAUNCH OF WORLD CLASS CENTRAL COUNTERPARTY

London Clearing House (LCH), the London Stock Exchange and CRESTCo today launched the Central Counterparty (CCP) service for the London Stock Exchange's electronic order book (SETS).

The service offers London securities markets the full advantages of post-trade anonymity, further deepening the liquidity of the London equity markets for the benefit of all investors. Firms trading on SETS will be protected from the default of their market counterparties. The service will also offer firms the ability to net margins across derivatives and cash markets, improving the efficiency of settlement processing.

LCH, the London Stock Exchange and CRESTCo have co-operated closely to provide this service. Its successful introduction demonstrates once again London's ability to work with the financial community and reinforces London's pre-eminent position as an international equity market.

Combining the London Stock Exchange's role as the largest exchange in Europe with LCH's role as central counterparty and CREST's capabilities in high volume real-time processing has produced a world-class service.

In the first phase commencing today, LCH settles each trade with market participants on an 'as dealt' basis. A further phase of the service will see the introduction of optional netting, planned for early 2002. Netting will increase operational efficiencies and cost savings for users.

The CCP service is extremely cost effective; LCH members will be charged only 0.20 for each side of an equity trade submitted to the CCP, irrespective of the value of the transaction.

Clara Furse, Chief Executive of the London Stock Exchange said: "This central counterparty is good news for London and it is good news for our customers. It highlights how London-based organisations can work constructively to meet market needs, and in so doing, deliver world class services. By encouraging greater use of SETS, this service will lead to more effective price formation, to the benefit of the market as a whole."

David Hardy, Chief Executive of LCH, said: "The introduction of CCP for Equities demonstrates LCH's commitment and flexibility in delivering multi-user services which will provide ever greater business efficiencies and cost savings to its members."

Iain Saville, Chief Executive of CRESTCo, said: "We believe that the CCP model and tariff sets the standard in Europe for equity clearing. The infrastructure is flexible enough to take feeds from a variety of trading platforms."

LCH and CRESTCo intend to re-use the infrastructure for the Irish Stock Exchange and virt-x this year.

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Notes to editors:

1. The proposals comply with principles established by the European Securities Forum for recycling existing clearing and settlement infrastructures. LCH and CRESTCo are member-owned organisations and conform to the European Securities Forum principles on central counterparties and settlement respectively.
2. The central counterparty has been designed to satisfy the London Stock Exchange's markets.
3. SETS is a fully automated screen-based market for all the securities in the FTSE 100 index, FTSE 100 reserve stocks, and other stocks that meet the London Stock Exchange's liquidity criteria. There are currently 189 stocks traded on SETS.
4. The value of trades on SETS totals over 2 billion daily.
5. The central counterparty service will also be used for SEAQ Auctions.
6. Following the introduction of this service, CCP is scheduled also to operate for the following:
   • Irish Stock Exchange - for which CREST already provides settlement services;
   • virt-x - the combination of Tradepoint Stock Exchange and SWX Swiss Exchange which will go live in the summer of 2001; and
   • other trading platforms.

LCH

7. LCH acts as central counterparty for trades executed by its members:
   • on the London International Financial Futures and Options Exchange (LIFFE), the London Metal Exchange (LME), the International Petroleum Exchange (IPE) and virt-x; and
   • in certain classes of over-the-counter (OTC) products, specifically interbank interest rate swaps (LCH SwapClear), and repo and cash trades in European government bonds and Pfandbriefe (LCH RepoClear).
8. Once LCH has registered a matched trade it becomes principal to that contract. This is designed to ensure the financial performance of such contracts in accordance with the rules of the London Stock Exchange and LCH's General Regulations, and provides the following key benefits for the markets it currently clears:
   • reduced risk - LCH's role reduces counterparty risk for its members;
   • increased market liquidity - LCH's position as central counterparty generally allows members to net out contracts originally traded with different members;
   • decreased settlement costs and risk - by operating a centralised settlement process, netting payments and receipts across contracts and exchanges reduces settlement costs and systemic risk for members.
9. LCH is 75% owned by its members and 25% by LIFFE, LME and IPE.
10. LCH's primary protection in the event of failure by a member is the initial margin collected from that firm. As protection against the insufficiency of initial margin, members collectively contribute to LCH's Default Fund. This currently stands at 203m, and there is provision to increase its value up to a maximum of 400m. The Default Fund is supplemented by an insurance policy, providing a further 100m of cover.

CRESTCo Ltd

11. CRESTCo provides a wide range of real-time settlement services for UK and international securities and mutual funds (through CREST) and money market instruments (through the Central Money Markets Office). Each day CREST settles around 230,000 transactions with a value of over 200 billion.
12. CREST settled 58.2 million transactions in 2000 with a value of 48.8 trillion, a 32% rise on volumes in 1999.
13. CRESTCo is owned by 97 shareholders, including major international securities firms, stock exchanges, banks, brokers and registrars.
14. CRESTCo has recently issued a consultation document on the introduction of optional netting.

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