SIX Group, the operator of the Swiss stock exchange, is considering clearing derivatives trades as regulators urge banks to make more use of the service, according to Thomas Zeeb, chief executive officer of SIX Securities Group.
“We are looking at whether it makes sense to do derivatives clearing,” Zeeb said in an interview yesterday in Zurich. “Anyone in the infrastructure space who has ambitions on the pan-European level will take a look at it even if only to decide let’s take it off the table. We are all in a competitive space.” SIX Securities encompasses the post-trade businesses of the Swiss bourse.
European Union and U.S. regulators are pushing for tighter oversight of the $605 trillion over-the-counter derivatives market. The EU plan would require more of the products to be traded through central clearinghouses, which are intended to lessen the fallout from a bank default by guaranteeing counterparty payment. The European Commission, the executive arm of the EU, is scheduled to formally announce the proposals this month for discussion with the European Parliament and member states.
Zurich-based SIX Group is co-owner of Eurex, Europe’s largest futures exchange, along with Deutsche Boerse AG. Eurex operates Eurex Clearing, which provides central counterparty services for derivatives, bonds, equities and the repo market. SIX owns x-clear, a clearinghouse that focuses on stocks, exchange-traded funds, bonds and structured products and warrants for the exchange.
“We will have the initial analysis done by Christmas but timing on a decision depends on other factors,” Zeeb said. “Much of it depends on what regulators do, and of course our partnership with Deutsche Boerse. We wouldn’t want to step on our partner’s toes. We are not going to do something that’s detrimental to our partnership,” he added.
If the Swiss exchange starts clearing derivatives it will likely start with equity derivatives, said Marco Strimer, chief executive officer of x-clear.
“We do have a bit of expertise on the futures side,” Strimer said in an interview. “We are looking at it and if we do anything we will start by looking at clearing equity derivatives. It makes sense for us to diversify our product range and it makes sense for clients to be able to concentrate in a single central counterparty instead of shopping the world and having collateral everywhere.”
In addition to Eurex, exchanges including Atlanta-based Intercontinental Exchange Inc., Chicago-based CME Group Inc. and NYSE Euronext already offer derivatives clearing.
“There is a huge amount of competition killing itself on the margin,” Zeeb said. “Is this the best time to get in on it? It’s hard to tell whether the optimal number of providers is 3, 4 or 10. And does the Swiss infrastructure bring enough to the table to break into this market, particularly when we already participate via Eurex?”
Zeeb’s comments come as derivatives exchanges, their customers and regulators gather in Switzerland to debate industry trends including clearing at the 31th annual Buergenstock Meeting in Interlaken, organized by the Swiss Futures & Options Association. The conference this year is being attended by executives such as Andreas Preuss, CEO of Eurex; Christian Katz, CEO of the Swiss stock exchange; Garry Jones, head of global derivatives at NYSE Euronext and John Damgard, president of the Futures Industry Association.
Regulators in the U.S. and Europe are pushing swaps users to process standardized contracts through clearinghouses because the unregulated market complicated efforts to resolve the financial crisis when investors found it difficult to determine how interconnected banks had become.
Clearinghouses, capitalized by their members, operate as central counterparties for every buy and sell order executed by their members, reducing the risk of a trader defaulting.
“I don’t think anyone can afford not to take a look and understand the implications of such a service offering, for us, our clients, and the Swiss Financial Centre,” Zeeb said.