November 15, 2012 10:07 pm

Eurex clearing service gains traction

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The number of institutions using Eurex’s new service for clearing interest rate swaps may double by the end of the year ahead of new rules overhauling off-exchange trading.

The derivatives business of Deutsche Börse said on Thursday it expected the number of brokers using the service, which officially went live on Tuesday, to rise from an initial 10 to around 15-20 brokers in coming weeks.

BNP Paribas, Goldman Sachs, Morgan Stanley, Nomura and Société Générale are among the institutions preparing to join EurexOTC Clear to clear interest rate swaps, it said.

The rapid take-up of the service – Eurex had seven brokers backing the service in May – underlines how market infrastructure operators and users alike have been forced to adapt in recent months.

G20 economies agreed three years ago to safeguard markets against another financial crash by pushing more of the $640tn OTC market through clearing houses and force investors and brokers to put up more collateral, or insurance, for trading.

A clearing house stands between two parties, guaranteeing a trade in the event of a default. Political and legal process has meant rules on both sides of the Atlantic are yet to be finalised, even though the deadline to comply with the G20 mandate is the end of the year. Mandatory clearing is expected to begin in the second half of next year in Europe.

The move is expected to put more pressure on banks to find margin for trading while also forcing many buyside institutions such as asset managers and pension funds to post margin for the first time.

Eurex is gearing up for a battle with rivals such as LCH.Clearnet, the Anglo-French group, and CME Clearing and ICE Clear on the other side of the Atlantic, as clearing houses look to both meet the new rules and exploit the changes commercially. Interest rate swaps are by far the largest asset class traded off-exchange.

However, the future profitability of OTC clearing is unclear. “We believe that clearing operations are set to become far more heavily regulated in the future to prevent too-big-to-fail status. This is likely to limit the potential revenue size of just the clearing services revenue pool,” wrote Daniel Garrod, an analyst at Barclays, in a recent research note.

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