Newedge Pushes into OTC Derivatives Clearing

Newedge said it has cleared its first OTC interest rate swaps contract on the Chicago Mercantile Exchange’s CME Clearing facility, as the broker eyes new revenue opportunities related to its own restructuring.

“Driven by new regulation, the market for OTC clearing is transforming,” commented Nicolas Breteau, CEO at Newedge, in the firm’s release. “Such change provides a real opportunity for us as an agency broker to leverage our expertise in clearing of exchange-traded derivatives and OTC commodity swaps, expand our offering, and add value for clients.”

The IRS transaction is also the first to be cleared on CME Clearing by a non-traditional OTC swap dealer, stated today’s release. According to Newedge, the clearing process is supported with a default management agreement between Newedge, a futures commission merchant (FCM) member of CME and its two bank shareholders — Societe Generale CIB and Credit Agricole CIB. Newedge’s IRS clearing platform is accessible to customers of both parent banks that are seeking a central counterparty clearing solution.

"We are pleased that Newedge has cleared their first client IRS trade with CME Clearing," stated Kim Taylor, president of CME Clearing, in the release. "We continue to work with both the buy- and sell-side, including FCMs such as Newedge, to identify capital and operational efficiencies that ease their transition to central clearing.”

But the move into OTC derivatives clearing comes follows reports of a broader restructuring by the French broker, which announced job cuts last December.

Last December, Reuters reported that Newedge planned to cut up to 16 percent of its global workforce, or about 450 people, due to a slide in its revenues. The cuts were to be made over the next 18 months. Newedge had announced job cuts as part of a cost cutting plan to restore profitability, which also included cost savings from infrastructure and IT, according to Reuters.

The article also said Newedge had been up for sale for the past year and had a difficult time attracting buyers due to the Eurozone debt crisis, a slow down in trading volumes and strict regulations.

From Reuters article:

As part of the plan, Newedge is mulling a split of its asset execution and clearing businesses into two distinct legal entities.

The proposed split will affect equities, fixed income and financial futures and options, a spokesperson said. Meanwhile, clearing and execution of commodities and foreign exchange would be included in the new clearing company, the spokesperson added.

The reason for splitting the company is to help attract buyers, according to Reuters, which notes that new regulations like Basel III force trading firms to hold more capital.

In today’s release, Newedge said it’s expansion is in response to regulatory changes – principally the Dodd-Frank Act and European Market Infrastructure Regulations - to the $441 trillion IRS market that are paving the way for a shift in the bilateral OTC market. The aim is to increase central counterparty clearing (CCP), drive greater transparency, and reduce counterparty risk for the benefit of end customers, according to the firm’s release.

However, according to Reuters, clearing tends to require less capital than execution, so housing the clearing business in a separate unit would enable Newedge to offer more competitive pricing.

Newedge is already a participant in cleared OTC commodity swaps through CME ClearPort, ICEA Clear Europe and SGX Asia Clear, noted the company’s release. The firm also expects to evaluate and participate as clearing broker in additional OTC central counterparty clearing venues as well as other asset classes.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio