Hirander Misra, chief executive and co-founder of GMEX Group, expects an increase in volumes when clearing of swaps becomes mandatory in Europe in 2016 as the London-based exchange launched successfully launched last week.
Misra said GMEX deliberately went live in August, when volumes are usually lower, in order to allow clients to get used to the platform and refine their back office processes.
“There were no issues with the system when we launched and there will be a steady build-out as we add more participants next week,” he added.
GMEX’s electronic platform with trade confirmation and clearing through Eurex, the Deutsche Börse subsidiary, went live on 7 August. The German exchange owns a minority stake in GMEX alongside Société Générale Corporate & Investment Banking and the investment vehicle of Forum Trading Solutions Limited.
Brendan Bradley, member of the Eurex executive board, said in a statement: “Now we need to maintain the momentum with GMEX and market participants to build the liquidity that holders of interest rate exposure will need to address the requirements of the new regulatory environment.”
The first trades in GMEX’s euro-denominated interest rate swap constant maturity futures have been executed, cleared and settled. Constant maturity futures contracts do not have quarterly expiry dates and so can provide better hedging than the futures on swaps which have been launched by rival exchanges.
“We are in an interesting position as futures launches are normally driven by the sellside but the buyside has said they need our product to succeed,” added Misra. “The buyside did not used to be charged for all the capital they deployed from banks but those fees are now being passed onto portfolio managers, so they need more margin reduction products.”
GMEX’s margin is based on a two day value-at-risk rather than up to five days in the case of existing standard swaps and swap futures.
Misra said he expects the first buyside activity on GMEX this week. He added that asset managers have been showing increasing interest over the last few months as they knew that clearing of interest rate swaps would become mandatory in Europe at some point next year.
On 6 August the European Commission adopted the regulatory technical standards on the clearing obligation for certain over-the-counter interest rate swaps.
Law firm Simmons & Simmons said it expects the standards to be officially published in September or October so that the rules will be effective from April 2016, in line with the timetable mentioned in recent public statements by Jonathan Hill, EU commissioner for financial stability, financial services and capital markets union.
The introduction of mandatory clearing will be in four phases - beginning with clearing members next April and followed by the second phase in October 2016, when buyside firms will have to comply.
Misra said: “We expect a steady uptick in volume throughout October and November and we will be well set for January. We expect an exponential uptick in April and October next year as clearing becomes mandatory.”
When GMEX launched, trading and clearing members included Bank of America Merrill Lynch, Société Générale and R.J. O’Brien.
Brooks Stevens, managing director, European head of futures and options, OTC clearing and foreign exchange prime brokerage at Bank of America Merrill Lynch, said in a statement: “We are pleased to be extending our range of products to include the IRS CMF from GMEX Exchange. The contract provides additional choice to clients that are looking for alternatives to standardized exchange-traded derivatives and OTC products.”
Misra said that as volumes grow, GMEX will extend the IRS CMF into other currencies such as sterling.
“It is exciting to see the G20 policy recommendations play out in Europe and we expect to see a continuous number of highs as the reforms start to kick in,” Misra added.