London’s Newest Derivatives Exchange Defies Brexit Curveball

  • LSE-, JPMorgan-backed futures venue Curve to debut Sept. 26
  • Derivatives platform aims to win Deutsche Boerse, ICE clients

The U.K.’s newest derivatives exchange, backed by London Stock Exchange Group Plc, is pressing ahead with plans to debut later this month despite headwinds few saw coming when the project was announced nearly a year ago.

For one, its main backer LSE is being acquired, putting into question whether the new CurveGlobal exchange will compete against potential new owner Deutsche Boerse AG. After Britain’s Brexit vote, officials in France and Germany began trying to pick apart a vital piece of derivatives plumbing in London. Those challenges hadn’t emerged when Andy Ross was hired in February to helm CurveGlobal.

Ross hosted a dry run of Curve’s trading systems over the weekend with market makers and a few bank backers ahead of the planned Sept. 26 launch. LSE and the other investors are putting about 30 million pounds ($40 million) into the project.

“We’re focused on the closest sharks to the boat,” Ross, a former managing director at Morgan Stanley, said in an interview last week. “There might be other sharks in the sea, but it could even be in a different ocean to the one we’re in at the moment.”

To Ross, the shark closest to the boat is getting traders to switch over to Curve to build liquidity on the platform. Many of those interest-rate futures traders are customers of Deutsche Boerse or ICE.

LSE has a 25 percent non-controlling stake in Curve, while seven banks including JPMorgan Chase & Co. and the Chicago Board Options Exchange own the rest. They’ve provided enough funding to last about five years.

Poaching Deutsche Boerse customers might become awkward if the German exchange overcomes antitrust hurdles to purchase LSE. Ross brushed those concerns aside, pointing out that the Turquoise stock market has grown under LSE, its majority-owner and rival.

Curve has seemingly always recognized the difficulty of its task. While in development it was called Project Rita, a reference to the film “Groundhog Day,” because of the industry’s repeated failure to creating a new futures market. Notable duds include Eurex U.S., which shut after two years of trying to break into U.S. rate futures in 2006. Nasdaq Inc.’s interest-rate futures venue in Europe has failed to gain traction.

“It pays to be the second or third try to create competition, as the pioneers always burn too much capital before they can get their platform working,” said Niki Beattie, head of Market Structure Partners, which advises brokers and exchanges. The new futures market could also be used to argue to regulators that the LSE acquisition will still allow for plenty of European competition, she said.

Still, Beattie has her doubts.

“There are so many hurdles to overcome en route to building liquidity,” she said. “You have to have a core group of people ready to go live at the same time.”

Ross says Curve’s backers aim to cut costs for customers by breaking down the walls between over-the-counter swaps and exchange-traded futures. Customers are forced to hold expensive, redundant clearinghouse capital in separate locations.

A trader using Curve for futures instead of, say, Deutsche Boerse’s Eurex may be able to cancel out some collateral it holds in an LSE swap-clearing unit called LCH. That tactic resembles the rationale behind Deutsche Boerse’s purchase of LSE.

“Clearly banks are super capital constrained,” said Ross. “Anything that allows them to benefit from the economies of scale within their businesses at LCH by putting the futures there is clearly dramatically beneficial.”

LCH launched its tool for the process, called portfolio margining, in May.

Ross declined to provide estimates on potential capital savings, but said one customer exercise suggested margin savings of hundreds of millions of dollars.

Curve will offer futures trading on assets including U.K. and European government debt and some short-term interest-rate contracts and long-term interest-rate futures. It plans to widen its lineup after proving itself with familiar products.

“We’re absolutely expecting this to take some time,” Ross said.

— With assistance by Matthew Leising

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