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Last updated: May 1, 2012 12:07 am
Chicago’s trading community is stepping up its attempt to wrest control of over-the-counter derivatives markets from New York-based dealer banks.
New York’s vice-like grip on over-the-counter derivatives may loosen with the implementation of rules stemming from the Dodd-Frank Act, which overhauled US markets in the wake of the financial crisis. Stricter capital requirements are also making it harder for big banks to take on customers’ risk.
That could give an edge to the already highly regulated market for exchange-traded futures, which is primarily based in Chicago, to take share from privately negotiated swaps, which the dealers in New York control.
On Monday, Eris Exchange said it had struck a deal with CME Group, both based in Chicago, to allow traders to reduce their costs by combining the clearing of futures and swaps trades. Eris was founded in 2010 by a consortium of Chicago trading firms to trade listed futures meant to replicate over-the-counter interest rate swaps.
The announcement comes a day ahead of the annual general meeting of the International Swaps and Derivatives Association, the bank-run industry body for over-the-counter derivatives. ISDA is meeting in Chicago this year, just blocks away from the home of the CME, the world’s largest listed futures market.
The new offering, which goes live on May 7, will be used to offset collateral and margin requirements for trading in interest-rate swaps on Eris, and eurodollar and Treasury futures positions at CME.
If successful, the Eris-CME effort could bolster Eris’s efforts to challenge the banks’ over-the-counter trading. It could also drive swaps clearing into CME Group’s central clearing house that is already the world’s largest for futures trading.
A new study by Greenwich Associates this week found that a key cost for traders will be how much collateral they will need to post against their trades. “The need to post collateral would cause them to ... cut back their activity in interest rate derivatives,” the survey said.
Eris claims that the offsets could reduce the margin need for interest-rate swaps, which are highly correlated with eurodollar and Treasury futures, by up to 95 per cent.
Supurna VedBrat, managing director at BlackRock, welcomed the move, saying it “provides the market with a new source of liquidity for cleared interest rate swap exposure delivered with cross-product portfolio margin efficiency with CME Group futures directly at the individual client level”.
Neal Brady, Eris chief executive, told the Financial Times the offering was aimed at financial traders such as hedge funds and asset managers. “Interest-rate swap clients are increasingly looking for ways to minimise operational and financial costs as they begin to migrate bilateral OTC swap activity to central counterparty clearing,” he said.
Eris represents one of several attempts by the Chicago financial trading community, which pioneered exchange-traded financial derivatives in the 1970s, to seize the initiative on the changing OTC markets from Wall Street dealers.
The Chicago Board Options Exchange and DRW Trading, a Chicago-based trading firm that is the chief backer of Eris, announced a deal last week to launch listed futures contracts that mimic equity-based swaps.
CME is also using margin offsets as a key offering in its battle for a share of interest rate swaps clearing with LCH.Clearnet’s SwapClear. SwapClear is the global leader in bank-to-bank clearing, but the two groups are fighting for the new market for bank-to-customer trading.
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