The battle for dominance in Europe’s over-the-counter clearing market is hotting up as its major players jockey for position ahead of upcoming regulations that will force the majority of OTC derivatives trades through clearing houses.
Interest rate swaps, which is the largest of the three main OTC markets in Europe, is the early battleground as the region’s clearers look for a slice of the action.
Anglo-French clearer LCH.Clearnet is the world’s biggest clearer of interest rate swaps, through SwapClear, and has a dominant position in the European market. But the G20 mandate to push the $700 trillion global OTC derivatives market through clearing houses by the start of 2013, to safeguard the financial system against large defaults, has created new interest in the post-trade space.
U.S. stock exchange operator CME Group, which launched CME Clearing Europe from London last year, is planning to expand from commodities to interest rate swaps next year. While fellow stock exchange operator NYSE Euronext is developing its own clearing business, NYSE Liffe Clearing, with a scheduled summer 2013 start date.
Deutsche Börse’s clearing house, Eurex Clearing, meanwhile, is also looking to take on LCH.Clearnet over interest rate swaps with the launch of its new product, EurexOTC Clear, which is set to come on stream in July.
With many buy-side firms only now beginning to choose their clearer for the very first time, to comply with the new European Market Infrastructure Regulation rules governing OTC derivatives in Europe, there appears to be plenty of new business to be won for European-based clearers.
Eurex, whose core markets are equities and interest rates, has teamed up with seven major dealers—Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, JP Morgan and Morgan Stanley—to support the launch of its new clearing service, in a bid to offer the dealers incentives to use EurexOTC Clear to make the operation a success. The German clearer set in motion a credit default swap clearing service in 2009 but was forced to close it last year due to limited take-up.
“We are excited to work closely with the leading OTC derivative dealers in rolling out our new service,” said Andreas Preuss, chief executive of Eurex. “Our objective is to deliver the market-leading solution for OTC client clearing in Europe. Our customers will benefit from a broad product coverage across asset classes, full portfolio based risk management across listed and OTC products, strong asset protection and a broad collateral universe.”
The launch by Eurex, ahead of regulations that have not yet been fully formulated, could be seen as a ploy to gain early-mover advantage. In the credit default swaps arena, another of the three main OTC classes along with foreign exchange derivatives, U.S. exchange group IntercontinentalExchange set up Ice Clear Europe in London in 2009 to target the European market and gained significant market share after it struck a deal with major dealers to offer a share of the spoils if they used the clearer.
“Our industry is facing far-reaching structural changes to meet the clearing mandates for OTC derivatives,” said Christian Mundigo, global head of rates trading and co-head of FI Americas at French bank BNP Paribas. “We need partners to meet these challenges. Eurex Clearing is a strong player in derivatives markets.”
Meanwhile, British bank Barclays announced that it had cleared more than $1 trillion worth of interest rate, credit and foreign exchange OTC derivatives globally, as it says it has seen a big increase in clients voluntarily clearing, as buy-side firms move towards a central clearing model ahead of the G20 mandate.
“While this volume of clearing is significant, we believe it is only a very small portion of what will be cleared as regulatory deadlines approach and more clients move to a centrally-cleared model,” said Ray Kahn, head of OTC derivatives clearing at Barclays. The transactions were cleared at LCH.Clearnet, CME Group or IntercontinentalExchange.
