Turquoise Derivatives, the pan-European derivatives market launched by the London Stock Exchange Group (LSEG) in June, may thrive on the new level playing field being created by the European Commission’s final draft of its Markets in Financial Instruments Regulation (MiFIR).
Launched in June 2011, Turquoise Derivatives has faced an uphill struggle in its battle against the dominant Eurex and Liffe platforms, owned by Deutsche Börse and NYSE Euronext respectively, due to a combination of ‘roadblocks’ that have placed significant constraints on ability to attract market participants. The first of these was the refusal by Liffe, to allow clearer LCH. Clearnet to offset the margin for Turquoise FTSE 100 index futures.
“The fact that the Turquoise future is not fungible with the Liffe future potentially would cause customers to pay a higher margin to trade,” Adrian Farnham, CEO, Turquoise Derivatives told theTRADEnews.com in September.
Now however, Article 28 of MiFIR allows for fungibility to be introduced into listed derivatives clearing – meaning that contracts traded on one exchange can be opened at one clearing house and closed on another. The regulation will require central counterparties (CCPs), such as NYSE Euronext’s Liffe Clearing, to accept clearing of instruments on a non-discriminatory and transparent basis, regardless of the trading venue on which a transaction is executed.
“Non-discriminatory access to a CCP should mean that a trading venue has the right to non-discriminatory treatment in terms of how contracts traded on its platform are treated in terms of collateral requirements and netting of economically equivalent contracts and cross-margining with correlated contracts cleared by the same CCP, and non-discriminatory clearing fees,” said the document.
Essentially, this would allow clearing houses to treat both NYSE Liffe and Turquoise Derivatives futures contracts as equivalent in terms of risk, thus allowing margining using a single combined collateral pool. Under such a regime, Liffe Clearing would have to clear competitors’ contracts – such as Turquoise’s FTSE 100 index options – unless it could prove such access would threaten “the smooth or orderly functioning of markets”.
Turquoise Derivatives broadened out from futures and began trading FTSE index options in September 2011. The company claims its transaction fees are around 50% lower than competitors, with clearing a third lower. Yet it still has a long way to go before it can catch up with its main rival in its futures business. NYSE Liffe traded 5,062,092 FTSE 100 index future contracts in September 2011. By comparison, Turquoise Derivatives traded 848 contracts in September, bringing the platform’s total number of contracts traded since launch to 3,012 contracts. Turquoise also offers a range of Nordic and Russian derivatives contracts.
Another obstacle to the market’s growth was the rejection earlier this year of its application to extend its range by offering products based on the European benchmark EURO STOXX 50 index. EURO STOXX is part-owned by Deutsche Börse. Turquoise Derivatives submitted an official complaint following the decision, which currently remains unresolved.
Revisions to MiFID presented by the European Commission last week offer hope as they will introduce new index licence requirements which assert that trading venues “should not be able to claim exclusive rights in relation to any derivatives subject to this obligation preventing other trading venues from offering trading in these [index and benchmark] instruments”.
“I would expect this to provide a big boost to Turquoise Derivatives once it comes into force,” said Simmy Grewal, European analyst at financial research firm Aite. “What’s really striking is that Article 30 says non-discriminatory access should be granted to licenced benchmarks following a request by a CCP or trading venue. So there is no reason why Turquoise Derivatives should not be able to get licencing for products based on EUROSTOXX.”
MiFID II is effectively two pieces of legislation: a directive that allows interpretation by local regulators; and a regulation (MiFIR) that will be imposed directly. Both are expected to come into force in 2014, following endorsement by the European Council of Ministers and European Parliament.