Nasdaq OMX Group Inc. (NDAQ)’s European derivatives market has pushed back its starting date as the U.K. securities regulator seeks further tests on its clearing system, according to four people familiar with the situation.
Nasdaq’s London-based NLX, scheduled to go live on April 12, will be delayed by weeks after the Financial Services Authority asked LCH.Clearnet Ltd., the trade processor, for more information, said the people who declined to be identified as discussions are private. LCH.Clearnet will be the clearinghouse for NLX, reducing the fallout from any default by guaranteeing counterparty payment.
Nasdaq, the operator of America’s second-biggest equity exchange, announced plans for the U.K. platform in June. NLX, led by Charlotte Crosswell, will set up its interest-rate derivatives system with six products, including futures on the German bund, Euribor futures and short sterling, in direct competition with Europe’s largest derivatives exchanges.
“As new derivative exchanges enter the fray and clearinghouses look at making themselves more attractive, regulators want to ensure this doesn’t come at the cost of greater risk-taking,” said Richard Perrott, exchange analyst at Berenberg Bank in London, who rates Nasdaq a buy. “Still, this looks likely to be only a short-term setback for NLX.”
NLX is using LCH.Clearnet’s so-called Value at Risk margin model, the people said. VAR has previously been used for over-the-counter clearing and regulators are seeking further tests as it will be used to process trades listed on an exchange for the first time, the people said.
“NLX is progressing well with ourselves and LCH.Clearnet technically ready to launch,” Crosswell said in an e-mailed statement today. “We have good market support and a strong set of partners in place, and look forward to making a launch announcement shortly with the necessary approvals.” Rachael Harper, a spokeswoman for LCH.Clearnet in London, referred to the NLX statement and said the firm had nothing to add. Joseph Eyre, a spokesman for the FSA, declined to comment.
NLX is seeking to capitalize as NYSE Euronext (NYX), which is being bought by IntercontinentalExchange Inc. (ICE), moves its clearing from LCH to ICE in London. Customers who trade Liffe contracts will also have to switch. LCH is the world’s largest clearinghouse for interest-rate swaps.
Deutsche Boerse AG and NYSE Euronext own Europe’s largest derivatives exchanges. NYSE Euronext’s London-based Liffe dominates the market for short-term interest-rate derivatives and Frankfurt-based Eurex, Europe’s largest futures exchange, handles long-term products. CME Group Inc. (CME) also plans to open a market for currency futures in London this year.
NLX, which wants a share of more than 10 percent of transactions in its first year of operation, will also offer medium-term German government debt known as Bobl, so-called Schatz short-term German debt, and a U.K. government bond.
Exchanges and clearinghouses globally are seeking to offer cost savings to customers as new rules force banks to hold greater capital. In October, CME, the world’s largest futures exchange, received regulatory approval to reduce the amount of margin required of its customers to back interest-rate futures and over-the-counter derivatives that offset each other, a process called portfolio margining. In March last year, CME began offering the service to the banks that are members of the exchange.
The cost savings come from combining positions in exchange-traded Eurodollar and Treasury futures with privately negotiated interest-rate swaps to allow long and short positions to cancel each other out. The lower risk of that entire position leads to less margin having to be pledged to back the trades.
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