The move is required by Europe's new clearing regime, which restricts the power of shareholders in a central counterparty (CCP), and could open the door to significant changes in the competitive landscape – making it more likely that dealers move their business to a rival service and providing cross-margining opportunities for planned new futures products. "The concept of dealers' governance has been removed from the SwapClear agreement", says one clearing executive at a large dealer. "We've moved from having powers of direction to obligatory rights of consultation and powers of escalation on material issues."
The move could have major implications for the battle for interest rate trading dominance in Europe. The LSE is understood to be in discussion with a number of banks over the development of a deliverable swap future (DSF). Nasdaq's NLX is also understood to be evaluating a swap futures contract, but has yet to decide on a final design. The bourse is building a franchise in sterling and euro interest rate futures, in an attempt to rival the dominance of Eurex and Liffe. The ability to offer savings via cross-product margining against the SwapClear pool of open interest would help either bourse as they battle CME Group and Eurex, which are CCPs that already have large pools of futures open interest and are now vying for swap clearing business. To offer cross-margining, the LSE and Nasdaq would legally have required approval of the OTCDerivNet banks. Under the terms of the new agreement, that is no longer the case.
Changes have also been made to the terms of SwapClear's profit-sharing agreement. The changes are not detailed in the CFTC filing, but according to research from RBC Capital Markets, the LSE has indicated it expects to receive a profit share of roughly 34 per cent from SwapClear for the year ended March 31, 2014. That is more than double the previous marginal rate of 15 per cent, the bank says, adding that it expects that rate to climb further this year.
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