Nasdaq Seeks Banks as `Core Support' in Derivatives Battle

  • CurveGlobal market was publicly announced on Oct. 16
  • LCH portfolio-margining service to start before end of March

Nasdaq Inc. Chief Executive Officer Bob Greifeld says he isn’t backing down in his fight for a piece of the European futures market, after another competitor emerged last week.

Nasdaq’s London-based NLX market has been unable to win sizable share from entrenched derivatives markets owned by Deutsche Boerse AG and Intercontinental Exchange Inc. Now, London Stock Exchange Group Plc has confirmed that it’s starting a futures exchange that will list the same products and is doing so with six banks and the Chicago Board Options Exchange as shareholders.

Greifeld said in a conference call on Thursday that the market operator is also looking to build “core support” with major banks. The exchange’s customers have made no change of plans since CurveGlobal Ltd., as the LSE venture is known, was announced last week, he said.

“We’re continuing along that path,” Greifeld said of discussions with banks. “We remain optimistic that we’re going to get there.”

The listed futures markets have traditionally been a winner-takes-all competition, and there’s a long history of failed attempts to start new platforms. The incumbents -- Deutsche Boerse, ICE and CME Group Inc. -- account for 80 percent of trading in interest-rate products.

NLX lost 16.5 million pounds ($25.4 million) in 2014 and 17 million pounds the year before, according to a filing with the U.K. Companies House. Nasdaq said Thursday that it had earnings per share of $0.88 in the third quarter, a 13 percent increase from a year earlier. NLX is a drag on earnings of about 2 cents per quarter.

Potential Losses

CurveGlobal and NLX have similar strategies: they both aim to help customers clear swaps and derivatives at LCH.Clearnet, the clearinghouse majority-owned by London Stock Exchange Group. That’s important because of regulations that require banks to carry more capital to absorb potential losses. The hope is that customers will be able to reduce capital holdings through a process known as portfolio margining.

To make that happen, customers will have to shift their futures clearing to LCH, which is already the world’s biggest swaps clearer. They will be able to hold less capital by offsetting futures against swaps that are held in the same clearinghouse.

CurveGlobal has the advantage of already having banks and an exchange on board as shareholders. The venture may add other investors.

“To have six of the world’s biggest banks putting equity into something at a time when equity capital for them is incredibly precious and expensive, that’s pretty important,” Michael Davie, chairman at CurveGlobal, said last week. “The other thing is really to exploit the opportunity to portfolio margin listed products alongside over-the-counter swaps.”

Portfolio Margining

NLX has the advantage of already being operational and could be the first to make use of LCH’s interest-rate portfolio-margining service, which is scheduled to start before the end of March 2016, depending on regulatory approval. CurveGlobal goes live in the second quarter of next year.

If customers began clearing futures and swaps at LCH, that would make the listed-futures products fungible, meaning they could trade them on either venue, Greifeld said. That structure would more closely resemble what already happens in stocks trading, he said.

“It puts the customer in the position where the different venues can compete quite aggressively against each other,” Greifeld said.

Both markets will offer futures trading based on U.K. and European government debt, and short-term interest rate contracts in Euribor and Short Sterling and long-term interest rate futures in bund, bobl, schatz and gilts.

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