Derivatives exchanges develop their own products, so is there really scope for competition in this area?
While derivatives exchanges have tended to focus on their own sets of products they do still tend to offer contracts outside of their core that are available on other exchanges. For example, in Europe, the two well establish derivatives exchanges of Liffe and Eurex have tended not to directly compete on products. In the interest rate derivatives space, Liffe has mainly focused on UK Gilt products while Eurex has focused on German Bunds. However, Liffe has recently relaunched Bunds and both exchanges offer trading in products linked to short-term Euribor interest rates.
As new entrants have come to market, some have sought to offer existing contracts in the hopes of attracting market participants to trade contracts they are already familiar with, while offering new incentives. For example, Nasdaq OMX NLX, which launched in May last year, offers trading in some of the same short-term interest rate products seen on Eurex and Liffe, and also offers some Bund and Gilt contracts. It is hoping that the combination of these familiar products and its clearing proposition, in which it uses LCH.Clearnet to enable market participants to net their positions cleared with LCH.Clearnet elsewhere, will help it attract flow away from the incumbent players.
What sort of product innovation is there among derivatives exchanges?
The aforementioned new entrants to the market means that both incumbent and new exchanges are coming up with unique product propositions in order to attract flow. Just today, Eurex launched a range of FX futures and options products, putting it in direct competition with newly-launched CME Europe, which has a similar range of currency pairs alongside several energy contracts. The two suites represent Europe’s first ever exchange-traded FX contracts.
Eurex and others also have their eye on swap futures. The products, which aim to provide a listed alternative to OTC swaps, have already become popular in the US after the introduction of mandatory central clearing for OTC derivatives. The cost of clearing and margins for OTC products means that swaps are now much more expensive to trade than in the past, particularly compared to futures, meaning market participants with relatively straightforward needs are now looking to swap futures as a viable alternative. As well as Eurex’s swap futures, due to launch in September, new entrant Global Markets Exchange is also planning to offer a type of swap future as its launch product following regulatory approval. NLX is also hoping to launch a swap future, though has not yet provided any detail.
Can we expect any further competition on products in the near future?Aside from many exchanges looking to launch a swap future, there could also be renewed competition in equity index derivatives. At the end of June, London Stock Exchange Group (LSEG) agreed to acquire indexing specialist Russell Investments. The deal gives LSEG intellectual property rights over a broad range of indices which it could then base derivatives contracts on, to be traded on its derivatives market (formerly part of Turquoise). As the developer of these products, it would become the natural place to trade them, potentially breathing new life into the derivatives venue that had previously struggled against Europe’s dominant players.