UPDATE: CME, Newedge Battle For OTC Clearing Business

Competition intensified on Tuesday for potentially lucrative clearing of over-the-counter interest-rate derivatives as CME Group Inc. (CME) announced plans to cut clients' costs on trades they perform away from exchanges, while Newedge Group became the first major brokerage to enter the fray.

Exchanges and brokerage firms hope to capitalize on new regulations on both sides of the Atlantic that are pushing traders to clear more business previously done on a bilateral basis.

Newedge said it will become the first independent futures commission merchant to guarantee interest-rate swaps, in a joint venture with shareholders Societe Generale SA (GLE.FR) and Credit Agricole SA (ACA.FR) that is expected to start in the second quarter.

Beginning May 7, CME will offer to its member firms portfolio-margining of over-the-counter interest-rate swaps, Treasury, and Eurodollar futures. Margins or collateral required to guarantee trades will be charged based on a market participant's entire portfolio, rather than for an individual product. CME estimated that certain portfolios will produce savings of up to 85%.

"The exact amount of dollar relief depends on how your portfolio is constructed," Laurent Paulhac, head of OTC products and services at CME, said in an interview Tuesday.

Paulhac added that portfolio margining in other asset classes beyond interest-rate swaps is a goal downstream. He said that rates have "been our big focus, but as we expand into other asset classes, like FX, where there is a strong correlation we will be able to offer the same," he said.

Initially, CME will provide portfolio margining only to its member firms, meaning dealer banks. Regulatory approval is needed before the derivatives exchange offers the benefit to its broader customer base, which is where the vast majority of CME's business comes from in clearing. Its customers include hedge funds, insurance companies, regional banks and government-sponsored enterprises.

Paulhac said CME has been in discussions with regulators and hopes to get approval in 2012 to launch portfolio margining for customers in rate swaps sometime in 2012. It has offered portfolio margining in futures for several years.

-By Howard Packowitz and Katy Burne, Dow Jones Newswires; 312-750-4132; howard.packowitz@dowjones.com

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