LSE Ready to Start Service That Eases Banks’ Capital Burden

  • Spider service is a key reason behind LSE-Deutsche Boerse deal
  • Nasdaq’s NLX will be first market to offer Spider to banks

London Stock Exchange Group Plc is ready to debut its much-heralded service to ease capital requirements on banks, one of the key reasons behind its planned tie-up with Deutsche Boerse AG.

LSE’s LCH division has received regulatory approval to lower the margin needed to back trades executed on Nasdaq Inc.’s NLX futures market from May 23, according to an e-mail to members that Bloomberg has seen. That’s earlier than expected. LSE had previously told member firms that the service, LCH Spider, would start before the end of June.

Spider compares interest-rate swaps held by LCH with futures contracts traded on NLX. If Spider finds that a swap and a futures contract cancel each other out, it reduces the amount of margin that the bank needs to post to safeguard the trade and therefore the amount of capital the bank needs to hold against the margin.

LSE and Deutsche Boerse have said that their plan to combine into a European exchange giant makes sense because it would save money for banks. LCH, which is majority owned by LSE, clears the vast majority of the world’s interest-rate swaps. Eurex, a subsidiary of Deutsche Boerse, is among the biggest futures markets globally.

Too Big To Fail

Xavier Rolet, LSE’s chief executive officer, has argued that Spider would make banks’ balance sheets more efficient without merging LCH and Eurex Clearing into a single clearinghouse. Regulators on both sides of the Atlantic have said that they don’t want to see any clearinghouse become too big to fail.

LSE plans to introduce Spider for its new futures market, Curve Global, but Curve won’t begin trading until the third quarter.

With Spider, Nasdaq is attempting to drain market share from Europe’s two dominant markets for interest-rate futures: Eurex and Intercontinental Exchange Inc.’s ICE Futures Europe. It has a long way to go. NLX had almost 35,000 open interest-rate contracts at the end of trading on May 11, compared with 6.5 million on Eurex and 19.6 million on ICE.

NLX’s head of business development, Victoria Kent, says that using Spider to scour LCH’s repository of swaps will enable the clearinghouse’s bank customers to reduce the margin paid by both their customers and themselves. As margin is classified as a risk asset, banks have to increase their capital in tandem with their margin.

“In the first instance, we are focusing on the Short Sterling product and then we are moving onto Euribor, which is a bigger market,” Kent said. “It’s impossible to determine how portfolio margining will roll out on an institution by institution basis.”

Exchanges have sought to put a number on how much the banks will save from portfolio margining, but estimates are difficult because any savings would differ by institution.

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