Futures exchanges gear up for regulatory reforms
LONDON (Reuters) - Plans by the world's futures exchanges to shake off weak trading activity by tapping reforms to open up a lucrative new market in European swaps clearing tops the agenda as the futures industry meets in London this week.
Exchanges like CME Group (CME.O), Deutsche Boerse (DB1Gn.DE) and Intercontinental Exchange (ICE.N) have been beefing up their European clearing units to compete in the $700 trillion (449.69 trillion pounds) off-exchange derivatives market.
"It is one of the few structural growth areas in financial markets," said Richard Perrott, an analyst at Berenberg Bank.
Clearing houses sit between trading partners, stepping in to reimburse any trading firm left out of pocket by the default of a trading partner.
The world's main exchanges will be discussing the opportunities in over-the-counter (OTC) clearing on Tuesday and Wednesday at the International Derivatives Expo.
LCH.Clearnet, the European clearing house being bought by the London Stock Exchange (LSE.L), is the main clearer of interest-rate swaps, while ICE is the leader in credit.
Clearing is mandatory for firms trading exchange-listed products such as shares and futures, but is optional when trading OTC products such as swaps, instruments that allow traders to hedge their bets.
Politicians and regulators have been keen to overhaul the financial markets to tackle many of the problems exposed by the collapse of Lehman Brothers in 2008.
To this end, policymakers in Europe want to pass, as early as this year, rules to force banks trading in the OTC market to use clearing houses, instead of such instruments being traded privately between parties.
"OTC derivatives impact both financial markets and the real economy, but have not been subject to regulatory requirements," Steve Maijoor, chairman of the European Securities and Markets Authority, the regulator, said in an emailed statement.
"This absence has resulted in negative consequences for financial markets, investors and the real economy."
The regulatory reforms have attracted the attention of the world's top exchanges, who are gearing up their clearing services in hope of winning business when the rules take effect.
The CME is to launch European credit derivatives trading this year, taking it into competition with the ICE.
Deutsche Boerse plans to start clearing interest-rate swaps in the next six months, a move which pitches it into direct competition with LCH.Clearnet.
The exchanges see OTC clearing as an important new market for them at a time when trading activity, their main source of revenue, has been subdued by broader economic concerns since the finance sector hit the skids in 2008.
A report by Morgan Stanley (MS.N) and Oliver Wyman in March said OTC clearing was a $3 billion revenue opportunity and competition among providers would be keen.
Exchanges are also watching developments in the European futures market, which is set to open up for the first time after European regulatory authorities pass laws to allow new entrants to compete with the incumbents on a level playing field.
Nasdaq OMX (NDAQ.O), the transatlantic exchange, plans to launch a European futures exchange early next year in a direct challenge to NYSE Euronext (NYX.N) and Deutsche Boerse.
(Editing by David Holmes)
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