Now that regulators have given the green light, the Chicago-based Clearing Corp. (CCorp) and Swiss-German Eurex AG plan to immediately roll out a transatlantic global clearing link, officials from both companies said this week. That paves the way for lower clearing costs, more trading opportunities and greater operating efficiency, they say.
Phase One of the link -- approved a week ago by the Commodity Futures Trading Commission -- will allow clearing members of CCorp to directly clear European derivatives contracts in the United states, says Rudolf Ferscha, CEO of Eurex, in a press briefing yesterday in Chicago.
"The technical readiness for the link had been achieved already in spring. So we had no reason to hesitate or to wait. We have decided to roll it out immediately," Ferscha says.
U.S. firms trading European benchmark futures contracts on Eurex, the world's largest and all-electronic derivatives exchange, during the European time zone could choose to clear them through U.S.-based CCorp. This is important to U.S. firms that want to consolidate their U.S. and Eurex customer positions in a single segregated clearing account, either due to fiduciary obligations or because of a preference to deal with a U.S. clearing house under U.S. rules, which offers certain protection under U.S. bankruptcy laws.
Despite the optimism surrounding this announcement, the reality is that EurexUS has not met the high expectations that it set for itself a year ago. Given that EurexUS is struggling with a 5 percent market share in U.S. fixed-income derivatives contracts, it raises the question of whether Eurex made a mistake in launching the U.S. exchange without winning approval for the Global Clearing Link first. "Our preference would certainly have been to introduce the clearing link on Feb 1," says Ferscha. "We are happy to introduce it now because it will bring the benefits that we all envisaged at the time."
Instead of discussing on EurexUS' low market share, Eurex officials prefer to shift the focus more on the next phase - Phase Two of the Global Clearing Link - which is now before the CFTC and awaiting approval. With Phase two, Eurex is seeking permission to list European benchmark products on Eurex U.S. -- like the DAX equity index or the EuroStoxx 50 or the Bobl -- so that users could open and close positions on a broad portfolio of products between the U.S. and European exchange. "That phase will allow the fungible passing of contracts between the European and U.S. clearing spaces, which will also allow the 21-hour listing of all of our benchmark products and the significant expansion of trading time in the Asian and Australian time zones," says Ferscha.
However, Eurex still does not have approval for the full clearing link.
Regulatory approval for Phase One of the Global Clearing Link came eight months after Eurex AG launched EurexUS, an all-electronic derivatives platform, to compete with its rivals, the Chicago Board of Trade and the Chicago Mercantile Exchange. During that period, Eurex may have lost some momentum with the futures commission merchants, who were excited about the clearing link early on. Over the past year the CBOT has slashed its clearing fees and offered savings through its common clearing link with the CME.
In response, Dennis Dutterer, CEO of The Clearing Corp., says there's a large amount of interest in the link from the futures commission merchants community including both large and small firms, because of cost savings in clearing fees and internal costs in terms of technology and administration. Plus, there's interest in trading European products.
All customer groups can benefit from the clearing link, contends Ferscha, noting that cheaper access to transatlantic clearing will be available to everybody. "If you listen to people in brokerage houses, they have been craving for offset opportunities. People want to hold a broad portfolio in one clearing corporation to offset for margining purposes and collateral purposes," he says.
There are 63 members of the Clearing Corp. who could potentially participate in the global clearing link, which enhances the distribution potential of the European exchange, says Ferscha. Eurex distributes about 20 to 25 percent of its DAX and EuroStoxx 50 equity index products into the states. "This makes it more attractive for people to access clearing through the states and use their tried and trusted relationship with the Clearing Corp.," Ferscha says.
Citing the twin themes of clearing choice and lower clearing costs as benefits, Dutterer says: "We want to create a global market for trading and clearing these markets through exchanges and clearing houses. We want to provide new trading opportunities for customers, not just in the U.S. and Europe, but worldwide."
End-users already trading on Eurex in Europe would have the opportunity to hold their positions at The Clearing Corp., leading to the potential for reduced clearing costs as well as reduced internal costs, since their systems are already operating and connected to CCorp., says Dutterer. Also, he says it would lead to more efficient use of capital and reduced risk through portfolio margining through one common collateral pool. Savings will also come from utilizing the same networks, relationships and existing communications lines in place, says Dutterer.
Despite persistent questions about the modest volumes on EurexUS and the amount of time it's taken to get the clearing link to go up, officials insist they're committed to the Eurex U.S. platform. "We have come here to serve the U.S. customer. We will stay here and continue to add benchmark range of products to EurexUS. That is a very important part of the strategy," Ferscha says.
If phase two of the Global Clearing Link is approved, Eurex would list a broad portfolio of European benchmark products on Eurex US, so that it can make those products available after 1:00 p.m. central time. "We need that platform to sell our products into Asia and Australia when the sun is shining in the U.S.," says the Eurex CEO. "Eurex US is more than a platform to list our US Treasury products. It is our worldwide 21-hour distribution engine," he adds. 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