CME sees clearing boost from OTC collateral rules

Futures exchanges are hoping stricter collateral rules on OTC derivatives will encourage market participants to migrate to cleared derivatives services.

CME Group has seen a boost in voluntary clearing in swaptions, FX and equity derivatives following the onset of stricter collateral rules.

Speaking on its quarterly earnings call, Sean Tully, CME Group’s global head of financial and OTC products, said he has seen “The biggest impact… are in rates and foreign exchange.”.

Since CME launched its voluntary interest swaptions clearing service earlier this year, Tully notes activity has grown and since the onset of the rules on 1 September it has taken on two new clearing members, and now has a total of seven clearing banks including Credit Suisse, RBS and BNP Paribas.

Tully also noted it is working with market participants to launch an OTC FX options clearing service to capture “rising demand for FX clearing”, and is seeing increased activity in equity options clearing following the launch of its total return S&P 500 options.

“With the no-action relief until October 3rd, we didn’t see any trades in that until the week of October 3rd, but that week immediately, we had several participants trade in that first week, about 3,500 contracts. So you are talking about $3.5 billion approximately. And they traded in blocks of about 500 million each,” he said.

The initial margin rules currently cover the top 20 financial institutions, however this is set to increase to 2,000 firms in the next four years.

“So we do expect … relative to the new products and services that we are offering that there will be a lot of pain out there that we can help relieve with the new cleared products as well as with futures products,” CME Group’s Tully added.

Derivatives exchanges are looking to launch more of these OTC-like products in a bid to encourage traders to move to the listed markets.

Eurex is planning to launch a total return future on the Euro Stoxx 50 index on 3 December, one month ahead of the go-live date for the margin rules in Europe.

“We therefore expect market participants to cut back on their OTC swap positions and instead choose futures to meet their trading and hedging needs in the months to come,” stated Mehtap Dinc, global head of derivatives product development, Eurex.

While the collateral rules for non-cleared derivatives spells opportunity for futures exchanges, it could mean hard times for interdealer brokers that have previously thrived in the uncleared world.

Most recently interdealer broker BGC Partners reported a 8.5% decline in its brokering revenues in the third quarter. It said in a statement that its interdealer voice, hybrid and electronic brokerage revenues were “negatively impacted by a temporary but large decline in market activity during the quarter due to the implementation of new US over-the-counter margin requirements for certain uncleared derivatives”.