Clearing house LCH.Clearnet and investment bank Cantor Fitzgerald have launched the first centrally cleared OTC contract for difference (CFD) in Europe.
The new offering was developed in response to demand from clients using CFDs, many of which are hedge funds, to reduce risk among CFD providers.
CFDs are derivatives that track differences in price of an underlying asset and have become popular as a way of trading both long and short positions on a leveraged basis. They are similar to total return swaps but are simpler to arrange, according to Cantor Fitzgerald, which has helped their popularity.
The product has been launched in partnership with Commerzbank and ING, which offer synthetic prime brokerage services to Cantor Fitzgerald, and Citi, which provides clearing services for ING.
LCH.Clearnet’s CEO of repo and exchanges, Alberto Pravettoni, said: “We are delighted to be the first CCP to offer central clearing of OTC CFDs and have worked closely with market participants to develop a solution that is tailored to their needs.”
LCH.Clearnet and Cantor Fitzgerald have spent the past 18 months developing the product and said it has been created in line with regulators’ aims to increase the proportion of centrally cleared OTC contracts.
“Client are also very interested in cutting the risk of using CFDs,” said Charles Knott, director of Cantor Fitzgerald Europe. “Past events such as the collapse of Lehman Brothers and MF Global have shown that it is often the client that ends up suffering and being unsure of where their money is and when they will receive it. By centrally clearing they will gain a lot of peace of mind due to the greater degree of protection.”