Listed Derivatives to Become New Exchange Battleground in Europe

Terry Flanagan

Evolving market structure in Europe is potentially opening up new avenues of opportunity for hard-pressed exchanges, as new derivatives regulation zooms into view.

With volumes generally muted throughout 2012 on cash equity exchanges, bourses have been looking at new opportunities to compensate for a lack of trading revenue.

The sector is also beginning to witness a possible era of consolidation following recent mergers, such as in November when Oslo Børs, the Norwegian stock exchange, bought Burgundy MTF, its Swedish rival. Burgundy MTF, like many multilateral trading facilities in the region, has struggled to post a profit in the past couple of years.

“I think it highlights what everyone has known for a while—that cash equity or exchange business is challenging; certainly for brokers, primary exchanges and for the MTFs,” Paul Squires, head of trading at Axa Investment Managers, a French-headquartered institutional investor, told Markets Media.

“There is not that much margin in there and the profitability is around some of the other areas like derivatives and clearing. That is where they want to position themselves.”

Seemingly, derivatives is to be the new exchange battleground in Europe. New regulation, as demanded by the G20, is set to force all standardized OTC derivative contracts through centralized clearing and eventually on to exchange-like venues in a bid to reduce systemic risk following the financial crisis.

“The European trading landscape has changed recently, with the focus increasingly shifting from equities to derivatives, given the paucity of trading volumes in equities and un-sustainability of a lot of the venues that appeared on the scene after MiFID [in 2007],” said Philippe Carré, global head of client connectivity at SunGard’s capital markets business in London, a trading technology firm, in a recent blog.

The OTC derivatives market is over 10 times the size of the listed derivatives sphere, which is currently dominated by two players in Europe, NYSE Euronext’s Liffe and Deutsche Börse’s Eurex, which between them currently control over 90% of trading in some European contracts.

It is predicted that at least some of the vast $700 trillion OTC swaps landscape will be turned into futures-like products, thus circumventing ways of having to set up as registered swaps dealers, as mandated by the new regulations, and avoid the extra costs involved, such as higher margin requirements, by offering swap agreements as futures contracts.

“Regulations have provided a window of opportunity for entrants in the listed fixed income derivatives market to challenge the leading exchanges,” said Joséphine de Chazournes, senior analyst with at research consultancy Celent’s securities and investments group.

New entrants, such as Nasdaq OMX NLX, are about to launch in the coming months by initially competing head on against Liffe and Eurex in the rates business, while others, such as Dutch-based cash equity and equity derivatives multilateral trading facility Tom MTF—which Nasdaq recently purchased a 25% stake in—is already carving a niche for itself in the Dutch equity options sphere, putting itself in direct competition against Liffe’s Amsterdam business.

“Nasdaq seems determined to get back into the thick of it in Europe,” said Carré. “The combined launch of Nasdaq NLX, competing in the rates business, and now with the possibility to spread the battle to the listed equity options world through the Tom MTF ‘franchise’ is definitely an interesting combination, showing the strength of the trading platform operator.”

Leading U.S. derivatives exchange operators are also heading to London to set up in a bid to try and take advantages of the new rules. These include CME Group, IntercontinentalExchange and the Chicago Board of Options Exchange.

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