Major Exchanges Look To Seize The European Derivatives Market Opportunity

August 21st, 2013 by Trefis Team
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The financial crisis showed the urgent need for increased transparency in the derivatives market. Due to this, the G-20 nations in 2009 resolved that “all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties.” [1]

Since then, regulations such as the Dodd-Frank Act in the U.S. and the European Market Infrastructure Regulation (EMIR) across the Atlantic have been forcing OTC derivatives to move to centralized clearing systems. According to the Bank for International Settlements (BIS), the $633 trillion notional amount outstanding in the global OTC derivatives market will eventually shrink by roughly 46% due to these regulatory mandates. [2] [3]

With these new regulations comes a big opportunity for derivatives exchanges around the globe. In particular, Europe derivatives account for over 44% of the total outstanding volume according to some estimates making this is particularly attractive market. [4] The most noticeable names in the race to capture this opportunity are the IntercontinentalExchange (NYSE:ICE), the CME Group (NASDAQ:CME), the Deutsche Borse (ETR:DB1) and NASDAQ OMX (NASDAQ:NDAQ). We anticipate that derivative contract volumes for all of these players will increase in the coming years due to the rapid growth in this market.

See our full analysis for NYSE Euronext | NASDAQ OMX | CME Group

The IntercontinentalExchange

This U.S. based commodities exchange franchise is best known for its energy derivatives. However, it is in the process of acquiring NYSE Euronext (NYSE:NYX) whose LIFFE business is one of the two market leaders in the European interest rate futures market. When merged with ICE’s multi-asset derivatives clearing platform, LIFFE is likely to become a formidable player in the market – having deep client relationships as well as the ability to introduce more innovative products.

Currently, we do not cover ICE but plan to start doing so once its acquisition of NYSE Euronext gets completed. Our forecast for ICE’s derivatives volumes is likely to be much higher than what we currently project for NYSE Euronext as a stand-alone entity.

The Deutsche Borse

The Deutsche Borse is a leading German exchange operator. Similar to NYSE Euronext, it owns a market leading European derivatives business in Eurex – together Eurex and LIFFE have a virtual duopoly in the European interest rate futures market. The company has been expanding its product suit to maintain its lead in this market. (see: Eurex to Enter Currency Market With Derivatives, Eurex ups the stakes in battle for swaps clearing)

The CME Group

The CME Group is one of the largest derivatives marketplaces in the world. It launched its European clearing business, called the CME Clearing Europe, in May 2011 and has been rapidly expanding its capabilities. The business started clearing European interest rate swaps earlier this year and then expanded into alternative fuel and vegetable oil contracts in July. The initiatives seem to be bearing fruit as the business cleared on an average $41 billion worth of interest rate swaps every day in Q2 2013, triple the same in the previous quarter. The company also has a clearing arm in the U.S. and that too has been growing at impressive rates.

Additionally, the CME Group plans to start a London-based derivatives exchange on September 9. The new exchange will initially offer foreign exchange futures and then expand into other asset classes. This new exchange is probably the CME group’s answer to ICE’s LIFFE acquisition. However, it remains to be seen how much market share it will be able to pluck from LIFFE.

We do not currently break CME’s derivatives volumes by geography as the exchange’s European presence is still small, compared to its U.S. operations. However, as the exchange’s European operation gets established and starts bringing in more volumes, we expect this geography to become increasing important.

NASDAQ OMX

NASDAQ OMX is one of the largest and most diverse exchange operators in the U.S. The company expressed its intentions to enter the European derivatives segment in 2012 and has since then announced several initiatives pursuant to that goal. The most notable is its new London-based derivatives exchange, called NASDAQ NLX, which has partnered with LCH.Clearnet for clearing services. The exchange has been offering deep discounts to early adopters and seems to be gaining good traction. The company was handling around 25,000 lots a day in June, compared to just 3,500 lots on the day of its launch. [5] (see: The incentive scheme for NASDAQ OMX NLX and NLX’s Early Adopter Scheme)

The company has also entered other derivatives markets within Europe. It acquired NOS Clearing ASA in July last year to get an entry into the seafood derivatives, cargo freight and electricity certificates market. Then in December, it acquired 25% stake in Dutch equity derivatives trading venue called The Order Machine (TOM). It also expanded into the energy derivatives in Germany earlier this year. We will cover these initiatives in detail in another article. [6]

Other Players

Apart from the major players mentioned above, some other rivals may also emerge in the future. Recent news suggests that the former CEO of BATS Chi-X Europe plans to start a new futures exchange in London through his company called Global Markets Exchange Group. The exchange is likely to launch by the end of this year if it receives regulatory approvals, and will be in direct competition with NASDAQ and CME’s London-based futures exchanges. (see: Derivatives Exchange Startup GMEX Readies Feeds)

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Notes:
  1. Non-Cleared OTC Derivatives: Their Importance to the Global Economy, ISDA, March 2013 [↩]
  2. Statistical release: OTC derivatives statistics at end-December 2012, BIS, May 2013 [↩]
  3. Second Consultative Document: Margin requirements for non-centrally cleared derivatives, BIS, February 2013 [↩]
  4. The Global Derivatives Market: An Introduction, Deutsche Borse, April 2008 [↩]
  5. Nasdaq OMX NLX Achieves Low Latency and Rising Trade Volumes in Start-up Phase, Low-Latency.com, June 17, 2013 [↩]
  6. see: NASDAQ OMX completes the acquisition of NOS Clearing ASA, NASDAQ OMX Acquires 25% of Dutch Derivatives Trading Venue TOM and Nasdaq Expands in Germany Amid Energy Derivatives Overhaul [↩]