Euronext Adds Derivatives Innovation

Shanny Basar

Euronext has started centrally clearing bilaterally negotiated derivatives so clients can use capital more efficiently as London Stock Exchange Group has announced the launch of an interest rates derivatives venture to take advantage of portfolio margining.

The pan-European exchange said in a statement today that it has launched AtomX so clients can customise options and futures which will be cleared though LCH Clearnet and can be netted against other Euronext derivatives positions.

Adam Rose, head of financial derivatives at Euronext, told Markets Media: “Central clearing will allow clients to offset positions negotiated outside the central order book against positions in COB so they pay less margin. Our two largest competitors in Europe have a similar offering and in the context of Basel III, collateral needs to be used as efficiently as possible.”

In addition to the standard financial derivatives contracts available in Euronext’s central order book, AtomX offers more than 900 flex contracts where clients can change the standard terms, although expiration dates are currently limited to the third Friday of the month.

“When Liffe had BClear this service was used and valued and AtomX offers more flexibility than ICE,” added Rose. “The flex contracts give clients choice more granularity in the strike price, and choice in the option type and settlement with flexible maturities being introduced next year.”

Liffe was part of the derivatives business of NYSE Euronext when it was acquired by IntercontinentalExchange, the US derivatives exchange, in 2013. In June last year ICE spun off Euronext in an initial public offering.

Adam Rose, Euronext

Adam Rose, Euronext

AtomX runs on TRADExpress, a multi-asset technology platform supplied by Cinnober. In addition to equities derivatives, Euronext also offers commodity derivatives and currency options.

“Our trading system from Cinnober is multi-asset class and we are currently looking at whether the commodities community is interested in AtomX so the range of products may be enhanced,” added Rose. “We are also looking at currency options which are also traded in the central order book.”

Christopher Meyers, institutional trading UK and Benelux of Flow Traders, said in a statement: “We are pleased Euronext is introducing this service which enables us to combine the flexibility of OTC trading with the advantages of the regulated market.”

On 16 October the London Stock Exchange Group announced the launch of CurveGlobal, an interest rate derivatives venture which is slated to go live in the second quarter of next year. The new contracts will also be cleared through LCH.Clearnet, LSEG’s clearing subsidiary, and complement the planned interest rate portfolio margining service, which is expected to go live in the first quarter of next year. CurveGlobal and LCH.Clearnet’s interest rate portfolio margining service will both be available on an open access basis to all participants.

CurveGlobal is being launched with initial investments from the Chicago Board Options Exchange and six banks – Bank of America Merrill Lynch, Barclays, Citi, Goldman Sachs, J.P. Morgan and Société Générale. The venture will initially offer trading in Euribor and Short Sterling short-term interest rate futures and long-term interest rate futures in Bund, Bobl, Schatz and Gilts.

Michael Davie, chairman of CurveGlobal, said in a statement: “Rate markets have undergone considerable change in recent years, and market participants are under ever-increasing cost pressures. Customers want to safely manage risk and to maximise efficiency which the compelling combination of CurveGlobal and LCH.Clearnet’s portfolio margining will deliver.”

Davie, the chief operating officer of LCH.Clearnet, will be transferring to LSEG as head of rates services. LCH.Clearnet had announced in March that it was planning an interest rate portfolio margining service so clients can offset margins between over-the-counter and listed interest rate derivatives, and manage collateral more efficiently.

Analysts at KBW, the boutique investment bank specialising in financial services, said in a report that CurveGlobal will directly compete with interest rate futures from ICE and Deutsche Boerse. KBW said: “We don’t think this should be a surprise to investors. LSE will have a 32% stake in CurveGlobal to start, and will lower this to 25% with the introduction of additional shareholders.”

Nasdaq also offers short- and long-term UK and European listed interest rate derivatives through Nasdaq NLX, based in London. Robert Greifeld, chief executive of Nasdaq, said on the US exchange’s third quarter results call last week that the LSEG’s announcement was not a surprise.

Greifeld said: “Since that announcement, we have reconfirmed with our customers that there’s no change in plans they have with respect to NLX. I’ve previously stated that we needed to proceed with NLX2 with some core support in a very meaningful way from some of the major banks, and we’re continuing along that path. And right now we remain optimistic that we’re going to get there.”

The Nasdaq chief said he expects the listed futures market in Europe to evolve so that many trading venues clear through a common CCP.

“If we have LCH playing the essential role that DTCC would play in the US equity world, we certainly see that our customer could trade on one venue and, as long it’s clearing in the same venue, then it’s basically fungible,” he added. “It puts the customer in a position where the different trading venues can compete quite aggressively against each other and, if customers have smart order routers, they can create essentially a virtual book between the different venues.”

Featured image by MarineCorps NewYork/Flickr under creative commons

Related articles

  1. Derivatives clearing obligation is being adapted as part of the interest rate benchmark reform.

  2. Buy Side Forced to Review Collateral Arrangements

    Initial margin for centrally cleared markets increased by $300bn over March 2020.

  3. Basel Committee Consults on Interest-Rate Risk

    LCH SwapAgent said trade highlights its coordination of the transition to risk free rates for non-cleared OTC ...

  4. Regulators Defend MiFID II Transparency

    CPMI and IOSCO encourage work to enhance transparency regarding new access models and facilitate porting.

  5. CCP clearing will be particularly advantageous for capital treatment.