As new European derivatives rules drive up costs, trading venues are following their US peers by exploring the creation of alternative, cheaper contracts. The new types of derivatives, known as swap futures, are starting to gain traction in the US, with exchanges including CME Group, Eris Exchange and trueEx leading the charge. Some of the largest European exchanges, including the Deutsche Börse-owned Eurex and Nasdaq OMX-owned NLX, along with start-up trading venue Gmex, are looking to join the fray.
Exchanges sought to devise a new product because G20-led reforms, intended to reduce the risks associated with over-the-counter derivatives, are driving up the cost of swap trading by requiring them to be backed by collateral at clearing houses.
Under US derivatives rules, which are currently being implemented via the Dodd-Frank Act, some swap futures are subject to lower initial margin because they are standardised and will, therefore, theoretically be easier to liquidate in stressed market conditions, compared with bespoke OTC derivatives. Practitioners expect the same reasoning to hold true in Europe, but this is yet to be confirmed, with Esma currently devising rules for clearing.
Neal Brady, chief executive of Chicago-based Eris Exchange, which has stated its plan to expand into Europe, said: “Next year will be an extremely interesting one for swap futures. We expect volumes to pick up in the US once market participants are mandated to trade OTC derivatives on swap execution facilities, while in Europe market participants and trading venues, including ourselves, will be preparing and looking for opportunities to launch swap futures.” A spokesman for Eurex said the firm was still canvassing opinion about the best structure of its swap future, while NLX is consulting the market on its contract.
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