CME Clearing Europe Builds On Swaps

Terry Flanagan

Lee Betsill, chief executive of CME Clearing Europe, said the exchange plans to launch interest rate swaps denominated in further European and Asian currencies after it received regulatory approval for a suite of additional swap products last month.

Betsill told Markets Media: “We have a number of priorities and ambitions for the European venture which include a competitive IRS offering, the launch of futures in foreign exchange and other asset classes, and the roll out of more over-the-counter products.”

On February 27, the exchange said it had received approval from the Bank of England to add to its existing interest rate swap offering. On March 3, it could begin clearing overnight index swaps, zero coupon swaps, forward rate agreements, basis swaps, variable notional swaps and Swedish Krona, Danish Krone and Norwegian Krone currencies.

CME Clearing Europe was launched in May 2011 and began with metals before adding an initial set of interest rate swaps last year.

“The new authorisations enhances what we already have and allows us to provide instrument types that are important to our client base.” added Betsill.

Richard Watts, co-head of investments for F&C Management Ltd, said in a statement: “This is a positive development, bringing with it additional venues offering clearing across a broad spectrum of OTC derivatives. It allows buy-side clients an increased level of flexibility which will ultimately be beneficial for them and the market as a whole.”

This week CME Clearing Europe completed the first Euro overnight index swaps trade between clearing member Credit Suisse and hedge fund BlueBay Asset Management. OIS swaps are based on volatility in the underlying 1-day interbank interest (Eonia) rate for the Eurozone. Eonia is less than the historically low 0.25% European Central Bank benchmark rate – but a decrease in bank cash reserves is pushing the overnight rate up leading to increased trading of OIS swaps.

“We have a slate of products that we intend to roll out this year and next year including further interest rate swaps denominated in further European and Asian currencies,” added Betsill. “Our intention is offer a board range of asset classes.”

The exchange is also launching a new fully segregated account which goes further than European regulations requiring clearing houses to offer individually segregated client accounts.

“Our approach is to offer enhanced version of this account type with full collateral segregation for each client which results in enhanced capital relief and extra security in bankruptcy,” added Betsill.

CME Clearing Europe is expanding its product range ahead of mandatory clearing being introduced in the region, which is expected early next year. The exchange aims to allow global OTC clients to have the choice of clearing in the US or Europe with parallel offerings.

“CME Clearing has more than 400 clients and the number is growing all the time, especially in Europe as we prepare for mandatory clearing,” Betsill. “Asset managers are a key group for us, as well as regional banks, commercial firms and hedge funds who we expect to start clearing ahead of their own deadline.”

The exchange reported that last month CME Group cleared a daily average of $117bn of notional value of OTC interest rate swaps. During February OTC interest rate swap open interest increased 8% from the end of January to $11.8 trillion.

Analysts at KBW,the financial services boutique, said in a report last week that CME’s open interest for interest rate swaps is higher than rival LCH’s client IRS open interest of $10.4 trillion.

KBW said: “CME management noted that LCH clears a much higher proportion of overnight index swaps, which can skew comparisons.”

The analysts also said that the CME’s direct alternative to swaps, deliverable swap futures and its core standardised rates futures, could benefit now that deadline in the US for electronic trading of some interest rate swaps came into effect in February.

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