CurveGlobal Expands Portfolio Margining With LCH
Andy Ross, chief executive of CurveGlobal, said the London Stock Exchange Group’s new interest rate derivatives venture had a phenomenally good start yesterday as trading began within seconds of opening.
CurveGlobal, which launched yesterday, will initially offer trading on the London Stock Exchange Derivatives Markets in short-term interest rate futures – EuriborTM and Short Sterling – and long-term interest rate futures in Bund, Bobl, Schatz and Gilts, which can all be cleared at LCH, the exchange’s clearing arm.
Ross told Markets Media: “LCH SwapClear holds a vast amount of over-the-counter risk so this is not just a new vertical futures silo. CurveGlobal clients will have access to more than $100bn of open risk in LCH.”
Therefore CurveGlobal clients can achieve capital savings through LCH Spider, a portfolio margining tool for interest rate derivatives, which launched in May. Eligible members and clients using LCH’s SwapClear and Listed Rates services can offset margin between over-the-counter and listed interest rate derivatives in order to decrease the combined initial margin they have to pay.
“We will begin with portfolio margining at short end of curve and add longer term futures in a few weeks,” added Ross.
LCH Spider already provides portfolio margining for sterling and euro-denominated short-term interest rate futures traded on rival venue, Nasdaq NLX, but which are cleared by LCH.
“Return on capital is driving the behaviour of market participants and the benefit of portfolio margining depends on the underlying portfolio,” Ross added. “Each bank is different but some savings are very meaningful.”
Consultancy Opimas warned in a report in May that new entrants in the exchange market have struggled to wrest business from established incumbents.
“They must make quantum leaps in economics or operating models to be effective,” added Opimas. “Many new exchanges struggling to capture market share have languished – for example, CME Europe and Nasdaq NLX have had difficulty attracting volume away from Eurex.”
The capital savings from portfolio margining increase for clients as more contracts are added to the service.
Ross said: “We believe in open access, which is also what our clients want and MiFID II is a wind to our sails.”
MiFID II, the new regulations covering financial markets in the European Union from 2018, encourage open access or allowing members to choose where to clear their trades regardless of where they are traded.
Gaspard Bonin, deputy global head of derivatives execution and clearing at BNP Paribas, said in a statement: “CurveGlobal will strengthen competition across derivatives market places, and foster innovation across the industry. We believe this is instrumental to supporting our clients in the evolving regulatory environment and consequently renewed market dynamics.”
For example, trades executed on Deutsche Börse currently have to be cleared by the German exchange, which has announced an acquisition of the London Stock Exchange. CurveGlobal is co-owned by the LSE with a group of banks – Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Goldman Sachs, J.P. Morgan and Societe Generale – and the Chicago Board Options Exchange.
Ross predicted that open interest will have increased at CurveGlobal in a year. He added: “We will have launched additional futures and will be relevant and real in market.”
More on exchanges:
- LCH Launches Portfolio Margining
- Capital Markets Bright Spot: Exchanges
- Eurex Adds TriReduce Compression
But will settlement be a headache?
Many contracts mature after the second quarter of 2019, when the UK is scheduled to leave the EU.
Efficiencies from clearing are being extended to non-cleared derivatives.
New contracts await CFTC review.
Pricing methodology will diverge from Cboe and CME.