Eurex Seeking Banks' Support Ahead Of CDS Clearing Launch
July 07 2009 - 4:23PM
Dow Jones News
Frankfurt-based derivatives exchange Eurex has yet to secure
bank support for its credit derivatives clearing platform ahead of
dealers' self-imposed July 31 deadline to begin clearing European
trades.
The race among exchanges to capture over-the-counter business in
Europe mirrors the competitive picture in the U.S.
The backing of dealer banks has been key to the success of a
U.S. platform run by IntercontinentalExchange Inc. (ICE), while a
rival service from CME Group Inc. (CME) has languished and has yet
to launch.
Though Eurex has offered a 90% equity stake in its European
clearing platform to banks that sign on as members, along with a
say in business decisions, no agreements have yet been signed, and
exchange officials acknowledged that dealers are in the driver's
seat.
Eurex, co-owned by Deutsche Boerse AG (DB1.XE) and SWX Swiss
Exchange, remains in discussions with potential stakeholders as
more than 20 market participants run simulations on the Eurex
Credit Clear platform, which has been operational since late
March.
The exchange plans an official launch in conjunction with the
July 31 deadline that dealers identified in a February letter to
the European Commission.
However, officials warned that dealers may wait until the final
days before indicating whether they will join the Eurex
platform.
"We don't expect the decision of market participants will come
very much ahead of this timeline," said a Eurex spokesman.
Eurex Clearing is licensed and supervised by the Bundesbank and
German Financial Supervisory Authority, or BaFin, giving it
approval to launch credit derivatives clearing across the European
Union.
CME and ICE are also targeting the European market, working with
the U.K. Financial Services Authority to gain approval for their
regional offerings.
The ICE service is operationally ready ahead of a late July
launch, while CME continues to develop its offering.
LCH.Clearnet Group Ltd., the European clearing entity, also
plans to launch credit derivatives clearing by the end of the
year.
Major banks are the biggest drivers of trade in over-the-counter
derivatives like credit default swaps, and their support has
emerged as the key factor in the viability of exchange-backed
clearinghouses for OTC instruments.
A host of such facilities has sprung up as regulators in the
U.S. and Europe push central counterparty clearing as a remedy for
systemic risk in bilateral over-the-counter trades, but only one -
the ICE Trust - has seen any business.
CME, despite getting the regulatory go-ahead for its U.S.
platform in March, has yet to launch as it tries to win support
from a handful of major banks.
In London, NYSE Euronext's (NYX) credit derivatives clearing
service has been placed under review; though the service was the
first CDS platform to market in late December, it failed to draw
business and could be wound down as the exchange looks to its New
York Portfolio Clearing venture to provide an entry to interest
rate swaps clearing in the U.S.
Eurex Credit Clear will limit direct membership to dealer banks,
but buy-side participants like hedge funds will get protection via
separate booking and margining of positions, according to
officials.
The minimum contribution to the guaranty fund is set at EUR50
million, or about $70 million - well above the $20 million minimum
required by the ICE facility.
A spokesman said Eurex has no plans to pursue the interest rate
swaps market, where LCH.Clearnet already controls nearly half the
business worldwide, with the support of major banks.
Instead, the exchange will consider equity swaps as it moves
toward a planned "second release" of Eurex Credit Clear later in
the year that could expand the product range to U.S.
dollar-denominated instruments.
Eurex is also pursuing U.S. regulatory approval to allow
American investors to clear over-the-counter trades through its
European clearinghouse.
The company said it does not expect OTC clearing to be a
significant revenue source this year.
ICE has estimated that its ICE Trust venture will earn $30
million in revenue for 2009, with $24 million in expenses.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com