Nasdaq Out to Crack Interest Rate Duopoly of Liffe and Eurex in Europe

Terry Flanagan

Nasdaq OMX, the transatlantic exchange operator, is confident that when its new derivatives platform opens for trading early next year, it will upset the current Liffe and Eurex duopoly in exchange-traded interest rate derivatives in Europe by offering lower fees and reduced margin requirements.

The new venture, called Nasdaq OMX NLX, is expected to make its bow in the first quarter of next year and will begin by offering similar short-term and long-term interest rate products and euro and sterling-based listed derivatives to those provided by NYSE Euronext’s Liffe and Deutsche Börse’s Eurex venues, which between them currently control over 90% of trading in some European contracts.

Liffe currently dominates the short-term interest rate derivatives business, while Eurex controls the long-term interest rate sector. Turquoise, a pan-European multilateral trading facility owned by the London Stock Exchange, recently tried to break the vice-like grip that the two venues have on the derivatives space in Europe but has struggled to make any real impression.

“NLX is going to be listed interest rate derivatives, both short-term interest rates and long-term interest rates which are currently traded on two incumbent exchanges—Liffe and Eurex,” Charlotte Crosswell, chief executive of Nasdaq OMX NLX, told Markets Media.

“We are going to bring them on to one execution platform and we are going to clear them all on one clearing house—as they are currently cleared at two different clearing houses.”

Both Eurex and Liffe operate a ‘vertical silo’ approach, where the exchange owns its own clearing house in one integrated business. NLX, though, will separate trading from the clearing, which will be done by LCH.Clearnet, the Anglo-French clearing house.

“The advantage of doing that is offering lower fees on the execution side but also we’ll be able to cross-margin the whole yield curve,” said Crosswell. “We are partnering with LCH who will clear all the products and cross-margin between them. That is currently not done on the incumbent markets today. Short-terms are cleared at one clearing house and long-terms at another. So that allows us to have post-trade efficiencies.”

Crosswell says the move to set up in London is in part to take advantage of the new derivatives rules that are likely to come into play from the middle of next year, in the guise of the European Market Infrastructure Regulation, or Emir, that will see all standardized OTC derivatives trades moved on to exchange-like venues and driven through central clearing with the view to increasing transparency and reducing counterparty risk.

“A lot of people are looking at collateral requirements under the brave new world in the move to central clearing,” said Crosswell. “By not only offering lower fees in execution and also post-trade efficiency and lower clearing fees we believe we will make quite a change as to how the market works today.

“We have strong support from the market. Most people recognize that it is the right time for competition for derivatives in Europe. With the regulatory changes that are coming in in Europe and the U.S. we also have the ability to look at introducing new products. While we are going with the lookalikes to start with, we have also had strong input from many market participants—prop groups, market makers, brokers—into new products that could be launched.”

The new NLX platform will be operated from a data center run by Equinix, the U.S. group, in Slough, just outside London, and will be operated as a multilateral trading facility, pending regulatory approval.

“Nasdaq’s NLX has thrown its hat into the ring almost directly to compete with Liffe and Eurex,” Steve Grob, director of group strategy at Fidessa, a trading and technology company, told Markets Media.

“We have slowly been seeing exchanges start to compete with the monopolies of Eurex and Liffe and you’ve seen that with Turquoise listing some Liffe contracts with, to be fair, fairly limited success.”

However, volumes at both Liffe and Eurex are down this year due to the ongoing eurozone crisis and some market participants have questioned if the time is right to be launching a new derivatives venue, especially with the current near-zero interest rate environment.

London, though, has recently assumed the mantle of derivatives capital of Europe. CME Group, the largest U.S. futures exchange operator, last month announced that it was to launch a London-based venue while its global rival IntercontinentalExchange has made the U.K. its European home. The Chicago Board of Options Exchange, the largest U.S. options venue, this month said it, too, will be establishing a presence in London via a hub in a data center. Liffe also operates out of London, although Eurex, Europe’s largest derivatives player, is run from Frankfurt.

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