CurveGlobal To Benefit From MiFID II Best Execution
Andy Ross, chief executive of CurveGlobal, said the London Stock Exchange Group’s interest rate derivatives venture will benefit from the new best execution regulations despite the mandate for open access being postponed.
MiFID II, the regulation covering financial markets in the European Union which went live last month, was due to boost open access by allowing firms to choose where to clear derivatives trades irrespective of the execution venue. However regulators granted some exchanges a waiver from having to comply with the open access requirement until July 2020 due to concerns over financial stability and the UK’s forthcoming exit for the European Union.
Ross told Markets Media that it will not be a problem for CurveGlobal to continue to compete without open access.
“The MiFID II delay on open access shines the spotlight on all the exchanges not opening their markets,” he added. “We continue to be a meaningful competitor through margin efficiency, providing a better pool of liquidity for trading and innovation like the new SONIA futures and blended blocks.”
This month CurveGlobal said that since launching in 2016, 2.2 million lots have been traded and open interest was 176,579, with 10% of volume coming in the previous 29 trading days.
Yesterday CurveGlobal announced that a new three-month SONIA futures contract is due to begin trading on London Stock Exchange Derivatives Market in the second quarter of this year, subject to regulatory approval. Rival ICE Futures Europe has launched a one-month SONIA futures contract.
The Bank of England is the administrator of the sterling overnight index average (SONIA) benchmark, the unsecured reference rate for the sterling overnight indexed swap market. The UK central bank became the administrator of the benchmark in 2016 following the scandals over the fixing of interest rates and SONIA is due to replace LIBOR by 2021. The new future is due to go live shortly after the initial setting of the new benchmark rate, due to be implemented from 23 April 2018.
The SONIA contract will be free for both trading and clearing for the rest of 2018. Ross said: “We are helping regulatory agenda by building liquidity in SONIA and minimising barriers to trading.”
CurveGlobal is also introducing an Inter-Commodity Spread contract between the three-month SONIA and three month short sterling futures to enhance liquidity in the new contract. In addition the new future can be cleared alongside swaps and futures at LCH, the clearing house owned by the London Stock Exchange Group, so margin can be used as efficiently as possible.
The clearer launched LCH Spider, a portfolio margining tool for interest rate derivatives, in 2016 so eligible members and clients can offset margin between over-the-counter and listed interest rate derivatives in order to decrease the combined initial margin. SONIA futures should be eligible for portfolio margining later this year.
“Portfolio margining is an important part of the process but is just one part of the process,” added Ross. “It is really important to have a tight liquid market to trade and we are very focused on good availability and liquidity.”
The year portfolio margining will be expanded to enable eligible participants to clear and cross-margin all short and long-term euro and sterling contracts and will be extended to US dollars.
He continued that the strengthened best execution rules under MiFID II will be an advantage for CurveGlobal, especially once asset managers have to start reporting on the execution venues they have used to their clients. MiFID II extended best execution requirements outside equities for the first time.
Ross said: “CurveGlobal products listed onLondon Stock Exchange Derivatives Market continue to be best price or tied the majority of the time, while we have lower transaction fees and margin and do not charge for market data so the story is compelling.”
He added that CurveGlobal has been successful with banks in deploying smart order routing. “Smart order routers are used in equities, which are fungible unlike futures, but the futures risk is fungible through clearing,” said Ross.
Existing bank shareholders contributed to CurveGlobal’s second funding round, which closed this month at £20m, alongside the London Stock Exchange Group and Cboe, the US exchange operator with a range of interest rate futures.
Mark Hemsley, president, Europe, Cboe Global Markets, and CurveGlobal board member, said in a statement: “The successful closing of this second round of funding for CurveGlobal is a testament to the value investors see in the platform, which is providing a credible and innovative interest rate offering. Now is an opportune time for a new global interest rate marketplace and CurveGlobal represents a compelling trading alternative that offers new interest rate products, increased trading efficiencies and reduced transaction costs.”
The report identifies potential areas that could benefit from more harmonisation.
Distinct clearing thresholds could be developed by ESMA.
Euro clearing may be forced to move from London after Brexit.
Regulators are analysing MiFID II data and will make changes.
CFTC and Bundesbank argued over the supervision of euro clearing.