Clearing competition lures buy-side to derivatives – The TRADE Poll

Buy-side firms are finding new clearing arrangements to be the biggest draw to Europe’s derivatives markets as a result of increased exchange competition, according to’s July poll.

Buy-side firms are finding new clearing arrangements to be the biggest draw to Europe’s derivatives markets as a result of increased exchange competition, according to’s July poll.

New entrants are challenging incumbent exchanges across the continent thanks to regulatory requirements, providing investors with new products and platforms to trade derivatives on.

The injection of competition is subsequently driving innovation, while existing European venues are scrambling to appeal to buy-side firms through a range of initiatives.

As a consequence the landscape has shifted, benefitting the buy-side, which can capitalise on the array of changes. 

According to the poll results, 46% of buy-side firms feel clearing arrangements to be the most attractive feature of new competition in Europe.

The wave of competition and new regulations mean investors will benefit from open access to clearing houses across Europe, along with margin and collateral efficiencies

“Clearing arrangements are fostering increased exchange competition in Europe. This is driving innovation which is to the benefit of all market participants,” said Simon Weetman, head of derivative clearing sales, EMEA, Nomura.

“The key battlegrounds are cross-margining with OTC derivatives and new products such as swaps futures and client asset protection.”

New exchanges such as Nasdaq OMX NLX, CME Europe and swap futures platform GMEX in London have challenged the status quo, widening the choice of venues for market participants.

NLX’s entrance gave an unexpected twist to an already competitive interest rate derivatives market, previously dominated by European giants NYSE Liffe and Eurex.

The exchange clears through LCH.Clearnet, giving participants the ability to portfolio margin short-term and long-term interest rate contracts in a single clearing house.

The likes of CME and Eurex are also looking to build out their OTC businesses alongside their exchange-traded operations and offer cross-margining efficiencies, in response to the regulatory changes.

The vertical silos could also begin charging a single execution and clearing combined fee, which could discourage participants to clear elsewhere.

Whatever form the end rules take, CCPs and exchanges will be scrambling to offer lower costs to secure market share in the new landscape. 

Regulators are aiming to open up Europe’s derivatives markets as part of their far-reaching reforms to increase competition, transparency and enforce mandatory central clearing of OTC derivatives.

As a result trades will be conducted not only on exchanges, but on multilateral trading facilities (MTFs) and organised trading facilities (OTFs) in years to come.

“More trades will be conducted on electronic platforms - exchanges, MTFs or OTFs - leading to better price disclosure by more participants, leading to tighter spreads in more standardised products,” said Geert Vanderbeke, executive director of ABN AMRO Clearing.

“Contrary to the existing OTC set up, where investors always had to turn to the original counterpart to close a position, they will now have the opportunity to look for the best price in the market to close a centrally cleared trade.”

The range of product offerings across Europe has also widened with new and innovative contracts alongside look-a-likes.

CME Europe brought the first FX futures to the region earlier this year, while swap futures are set to take off on Eurex and GMEX later this year.

The London Stock Exchange could throw itself into the interest rate mix soon, following NLX’s challenge to Europe’s big guns.

While The Order Machine (TOM) in the Netherlands has shown how a start-up MTF can successfully challenge an incumbent exchange, showing success within two years of its launch.

“Forthcoming regulatory change in Europe is encouraging the creation of new electronic trading venues across a broad range of asset classes much like it did in equities‎,” said Hirander Misra, CEO of GMEX.

“This is further supported by balance sheets being constrained across the industry with the buy-side being no exception.

“This is driving the need for more cost-effective exchange-traded alternative products to those which are OTC traded be it in the interest rate swap futures space or others areas such as credit default swaps.”

In poll, 35% of respondents found the increasing product range to be most attractive from the rise in competition, while just over 17% believed support from marker makers was a key factor affecting their trading decisions.