Futures exchanges are building out their execution and clearing capabilities to accommodate over-the-counter derivatives as global regulators seek to move derivatives into a centrally cleared environment.
CME Group has launched CME Direct, a system providing side-by-side trading of exchange-listed and OTC markets. CME Direct will initially support trading of CME Group’s benchmark energy futures markets alongside OTC energy swaps through leading inter-dealer brokers.
“While the final rules are not yet known, it seems certain the Dodd-Frank Act and MiFID II will mandate more electronic trading of OTC markets,” said Chris Grams, associate director of commodity products at CME Group.
CME Direct is integrated with CME Group’s OTC post-trade services via CME ClearPort for straight-through-clearing and CME ConfirmHub for straight-through-processing of trades.
“In working with our OTC brokers and customers to bring CME Direct to market, we’re helping them to address a rapidly changing regulatory environment, which calls for more on-screen trading in OTC markets, data reporting and automated clearing to drive straight-through processing,” said Grams.
Current and anticipated market regulations, including those proposed under the Dodd-Frank Act in the U.S. and MIFID II and Emir in Europe, call for more transparency, automated trading, data reporting and clearing in OTC markets.
The Dodd-Frank clearing mandate will be implemented later on this year. And in Europe, new OTC rules are expected to take effect some time next year.
“Despite the staggered implementation of mandates in different parts of the world, recent Emir agreements and proposals by other countries are showing a general alignment with Dodd-Frank,” Laurent Paulhac, senior managing director of OTC products and services at CME Group, said at the International Swaps and Derivatives Association’s Annual General Meeting on May 2.
CME has “started to see material cleared OTC volume since August of last year”, Paulhac said.
“At CME Group, we’re working with regulators and the industry generally to ensure that the alignment is preserved for the benefits of the global derivatives markets,” added Paulhac.
Firms are looking to complete legal documentation, test operational workflows and technologies well ahead of the clearing mandate to uncover issues and have enough time to address them.
Buy-side firms that have moved early in the process are probably getting better service from clearing member firms than those that will kick off closer to the mandate later on this year, Paulhac said.
Another factor driving volume is the concern around bilateral credit risk. Increasingly, customers are looking at central clearing as a key mechanism to reduce overall bilateral exposures.
“Early adopters of OTC clearing have been able to position themselves as market leaders in their respective segments and benefit from it,” said Paulhac.
The exchange-listed products on CME Globex that may be traded through the CME Direct technology include Nymex WTI crude oil, Nymex Brent, DME Oman crude oil, RBOB Gasoline, New York Heating Oil and the benchmark Henry Hub Natural Gas futures contract.
These products are part of the CME Group energy complex, which has average daily trading volumes of over 1.9 million contracts.
CME Group is licensing the CME Direct technology to leading inter-dealer brokers to offer trading of global OTC oil markets, including Marex Spectron, Tradition and Tullett Prebon.
Traders will be able to execute electronically or in a hybrid, broker-assisted model on CME Direct through the participating brokers, combining the benefits of electronic trading, yet retaining the flexibility of voice brokering.