Clearing Expands in Equity Derivatives

Terry Flanagan

Bats Chi-X Europe, the European exchange, and Icap have started to enable centrally cleared trading of exchange for physicals on index futures which the inter-dealer broker believes could be extended to other bilateral equity derivatives.

EFPs on index futures are traded on the difference between the index futures price and the spot price of the index. Previously dealers had to calculate the amount of shares for each index constituent, which can lead to errors, and had to register the cash and futures legs separately as the futures leg was exchange-traded and cleared but the cash/physical leg was settled on an over-the-counter bilateral basis.

In the new service both the futures cash and legs will be centrally cleared.

Garry Stewart, deputy chief executive of EMEA Global Broking at Icap, told Markets Media “The EFP service allows trades to be anonymous, eliminates credit risk through introducing central clearing and allows trades to be automated in Fusion [Icap’s portal for trading venues] with full straight-through processing of all positions.”

Central clearing for the new service will be provided by LCH.Clearnet, EuroCCP and SIX x-clear.

“Several clients have told us they will realise very substantial savings as the cash leg becomes centrally cleared and netted down with their other positions at the CCP,” added Stewart. “For certain clients this efficiency together with the removal of counter party credit risk will allow them to trade much larger volumes.”

Icap will facilitate fully cleared equity index EFPs across the key European indices as well as traditional voice broking in these products.

Stewart said: “There are a lot of possibilities for extending this service into other equity derivative products. Icap Global Broking continues to invest in hybrid products like this which pair our voice brokers’ strong industry knowledge and client relationships with innovative technology to realise savings for our clients and help them adhere to the new regulatory landscape.”

Last year Traiana, a provider of post-trade processing and risk-management services, launched Harmony CCP Connect to transfer OTC equity swaps from the existing bilateral settlement model to a central clearing model.

The service from Bats Chi-X and Icap has gone live. In May 2014 Euronext announced it would provide centrally cleared trading of exchange for physicals on index futures from the first quarter of this year. A Euronext spokeswoman said the EFP service is now slated to launch next month. The Euronext service will initially be available on CAC 40 Index Futures, the French blue-chip index, and AEX-Index Futures, which includes the 25 most actively traded Dutch companies on NYSE Euronext Amsterdam.

As part of its new service, Bats has enhanced its trade reporting facility BXTR by expanding its Exchange Trade Reporting services to enable the cash basket of the EFP to be traded on-exchange.

“Clients have been asking us on-and-off for this service for about a year and we approached Bats Chi-X,” added Stewart. “The exchange has a pan-European equities coverage and good reputation with certain counterparties and they were very open to adapting their service to work with us.”

Once trades are accepted by Bats, they will be published in real time as on-exchange, off-book trades and codified using Market Model Typology (MMT), the reporting standard that is now mandatory across all equity trades that touch the exchange. In March, notional value either traded on BATS or reported to BXTR reached €755.3bn.

Rival trade reporting service Boat Services said yesterday it will apply to become an Approved Publication Arrangement under MiFID II.

This will allow Boat to offer publication services for all MiFID II instrument classes, including bonds, structured finance products, derivatives and emission allowances.

Featured image by 22 North Gallery/Dollar Photo Club

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