Euronext.Liffe, the pan-European exchange group, has succeeded in capturing a slice of the region’s over-the-counter equity derivatives market in recent months with the launch of a service that clears and settles equity derivatives trades.
According to senior executives, some 30m trade lots – about €1,500bn worth of equity derivatives business – have passed through its system since the service, known as B-Clear, was set up in late October.
It is difficult to judge what proportion of total OTC turnover this represents because of the opaque nature of trading flows in the OTC equity derivatives market, which was estimated to be worth more than €5,000bn in terms of outstanding contracts at the end of last year. OTC trades are those that take place away from exchange, settled in private deals between banks or investors.
But the figures from B-Clear are likely to be closely watched since Euronext.Liffe’s attempt to move into this sphere marks a strategic shift for the exchange. It comes amid a wave of global consolidation between exchanges, which has prompted Euronext.Liffe itself into merger discussions with the New York Stock Exchange.
In recent years the global OTC derivatives market has expanded in both the US and UK, as banks and investors have increasingly moved their business away from exchanges.
This has been marked in European equity derivatives. Whereas about four-fifths of equity derivatives trading is believed to take place on exchanges in the US, in Europe the level is nearer to a quarter. This partly reflects the high costs of doing business on exchanges in Europe, coupled with the fragmented nature of the region’s exchanges.
Euronext.Liffe initially tried to fight this trend by looking for ways to persuade investors to bring this business back onto its own derivatives exchange, Liffe. But its decision to launch B-Clear appears to mark a tacit recognition that it cannot win that battle and would do better to find a way to capture revenues from this OTC business instead.
The B-Clear system effectively clears trades, even though they remain off-exchange. The fees are 25 per cent to 75 per cent lower than on-exchange fees in European exchanges. The service is not fragmented into national markets but covers about 300 European equities. It allows the users, such as hedge funds and dealer banks, to remain anonymous if they wish.
Get alerts on Capital markets when a new story is published