GFI and Icap, the inter-dealer brokers, announced plans on Thursday to acquire stakes in the Chicago-based Clearing Corporation as part of a joint expansion of their role in the over-the-counter derivatives market.
The Clearing Corporation’s business has dwindled since a botched attempt by the Eurex unit of Deutsche Borse to expand in the US two years ago, a move which saw the Chicago Board of Trade abandon the unit in favour of clearing trades through the Chicago Mercantile Exchange,
However, access to clearing services – which effectively guarantee and settle trades - has emerged as the key battleground in the rapidly-consolidating derivatives exchange industry. The economies of scale from pushing large volumes through a fixed-cost platform also make it one the most profitable areas of the business.
“This investment confirms our commitment as leading inter-dealer brokers to developing clearing capabilities and solutions for OTC derivative products,” said a statement from Michael Gooch, GFI’s chairman and chief executive.
The move by the two broker-dealers could also alleviate some of the competition concerns surrounding the planned $8bn takeover of the Board of Trade by the CME, which on Thursday filed joint prospectuses ahead of planned shareholders’ votes in early 2007.
The two Chicago exchanges account for 90 per cent of listed derivatives trades in the US, but maintain that they do not expect their deal to be blocked because of intense competition from the far larger OTC market.
The CME is also developing clearing services for OTC products, notably in foreign exchange, but the threat of a potential rival would be alleviated by the positive impact on its bid to secure regulatory clearance for the CBOT deal.
Icap launched a New York-based futures unit last year and plans to take a minority stake in The Clearing Corp alongside GFI, and develop settlement services for interest-rate and credit products. Current investors include Eurex.
Credit derivatives are viewed as the new frontier for the exchanges, but the market remains dominated by deals between banks and institutions which lack the efficiency and transparency of exchange-cleared transactions.
“Ultimately, we believe that centralised clearing will further expand the market for OTC derivative products through added settlement efficiency and reliability,” said Mr Gooch.
“Together, we will support The Clearing Corporation’s mandate to develop clearing capabilities for new financial derivatives products that will benefit all market participants,” said Michael Spencer, Icap’s group chief executive.
The appeal of an independent settlement entity in the wake of the Chicago exchange merger plan has boosted The Clearing Corp’s search for partners and new investors alongside a line-up which include Goldman Sachs, Merrill Lynch and Eurex. A number of private equity groups are said to have “kicked the tires” in recent months
GFI and Icap will each take minority stakes for an undisclosed sum.