A new challenger steps forward
The impending launch of Nasdaq OMX NLX, a multilateral
trading facility (MTF) for interest rate derivatives, heralds the arrival of
much-needed competition in a previously untouched market, according to CEO Charlotte
Due to launch in Q1 next year, Nasdaq OMX’s new
platform will take on Europe’s derivatives giants Eurex, owned by Deutsche Börse,
and NYSE Euronext’s London-based Liffe, by offering a single platform for the
trading of European short- and long-term listed interest rate derivatives.
Offering trading in both euro- and sterling-based derivatives products, NLX
aims to introduce competitive execution and clearing fees that should enable
institutional investors to save costs on derivatives transactions.
“This is the first time market participants will be
able to trade both short and long contracts in one place, with a single clearing
system operated by LCH.Clearnet to allow significant cost savings through
cross-margining opportunities,” says Crosswell.
A new design
Based on Nasdaq’s Genium INET low-latency trading
platform, NLX is designed to enable simplified execution of a broad range of
hedge, strategy and contingent trades and will support both central order book
and off-order book trades on the same platform. Settlement prices will be
linked to OTC markets where necessary, to ensure accuracy. The new trading
platform aims to provide users with execution cost savings and will complement
these with fee reductions, according to Crosswell.
“Europe has seen two virtual monopolies dominate
derivatives trading for a long time,” she says. “At the same time, short
contracts have been available on one platform, long contracts on another, while
previous attempts to combine the two have been half-hearted and unsuccessful. For
the first time, we are bringing real, credible derivatives competition to the
If previous experience is anything to go by, breaking into the European listed derivatives market will be challenging. London Stock Exchange-owned multilateral trading facility Turquoise has suffered a slow start since its launch last year, having been hampered by the reluctance of Eurex to cross-licence Euro STOXX indices and the refusal of NYSE Liffe to allow LCH.Clearnet to offset margin in the FTSE 100 derivatives contracts listed on both markets.
NLX will look for efficiencies in other areas. A key plank in the venue's strategy is its partnership with LCH.Clearnet, which promises to generate cross-margining
efficiencies for market participants. LCH will provide clearing and settlement
services, with all instruments to be cleared through Synapse, the firm’s
strategic derivatives clearing platform. Listed products will be cross-margined
within a single clearing risk pool using PAIRS, the clearing house’s
proprietary margining methodology.
NLX will host market makers on its platform, and aims
to attract a broad range of market participants. Buy-side firms will be able to use the
platform to move open interest and to carry out portfolio margining. Already,
clients are connecting to the platform in preparation for its launch, according
While fragmentation in Europe’s equity markets
followed from the introduction of competing platforms after MiFID in 2007,
Crosswell says that much of that competition was based on pricing – a model
that NLX aims to supersede by combining cost savings with new products.
“We knew a copy-cat approach alone would not be enough
to succeed,” she says. “Instead, we have concentrated on engaging with market
participants to work out a viable solution. We are aware that market
participants do not want a myopic race to the bottom on price – instead, they
want product innovation.”
Part of the impetus for the new trading platform is
the commitment by the G-20 nations to introduced standardisation and central
clearing of OTC derivatives by the beginning of next year. With the deadline
looming, many products traded bilaterally will be traded on centralised
platforms – a fact that Nasdaq NLX aims to use to its full advantage.
“Centralised clearing for OTC derivatives as mandated
by the G-20 and by European regulators for the beginning of 2013 should bring
additional derivative instruments and liquidity into the market,” says
Crosswell. “We are committed to a Q1 launch next year as we want to be ready to
serve market participants when the deadline arrives.”
Under the European market infrastructure regulation,
Europe’s buy-and sell-side firms have until January 2013 to prepare themselves
for the central clearing and trading of OTC derivatives. The move aims to
reduce systemic risks in OTC derivatives markets by improving transparency for
regulators and market participants.