NASDAQ OMX Gets Approval For European Clearing House

April 4th, 2014 by Trefis Team
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NASDAQ OMX Group (NASDAQ:NDAQ) has now become the first exchange operator to receive approval for its Stockholm-based clearing house to operate under new European Union (EU) trading rules that regulate derivatives trading. The Swedish Financial Services Authority recently approved the application of NASDAQ OMX Clearing as a central counterparty (or clearing house) under the European Market Infrastructure Regulation (EMIR). NASDAQ OMX was the first to gain approval among more than twenty other clearing houses that applied for authorization under EU derivatives law in the last few months. It is interesting to note that regulatory authorities rejected the application of NASDAQ OMX’s rival operator, Deutsche Borse’s Eurex Clearing, under the new guidelines, despite the latter having a full risk assessment conducted by BaFin, the federal financial supervisory authority of Germany. [1]

In December of 2012, the Bank of England (BoE) signaled its intentions to start supervising clearing houses across the U.K, in an attempt to keep investors secure from clearing houses defaulting. [2] Last month BoE started reviewing clearing houses such as IntercontinentalExchange Group’s (NYSE:ICE) ICE Clear Europe, CME Group’s (NASDAQ:CME) CME Europe clearing house and LCH.Clearnet, an independent London-based clearing house. [3] NASDAQ OMX Clearing is the currently the fourth biggest CCP in Europe behind ICE Clear Europe, Eurex Clearing and LCH.Clearnet.

Our price estimate for the company’s stock is around $32, which is about 15% lower than the current market price.

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See our full analysis for NASDAQ OMX

Approval Adds To Thriving European Derivative Trading Volumes

NASDAQ OMX’s clearing house was the first among all CCPs to offer multi-asset derivatives clearing in Europe. Now it has become the forerunner among the clearing houses that applied for approval under the EMIR. The company intends to further diversify its offerings, specifically within interest rate swaps and German power derivatives. [4] Additionally, the company also plans to introduce the clearing of foreign exchange (FX) products on its Sweden-based clearing house, seeing the potential growth in trading FX contracts.

When NASDAQ OMX Nordic initially sought approval from the Swedish Financial Services Authority, management said that operating a clearing house along with the exchange in Europe was going to provide a common platform to its customers to trade multi-asset class derivatives using a single collateral account, compared to having multiple accounts and generally higher combined collateral. [5] In addition to reduced collateral commitments, having a common account makes trading more convenient for individual customers.

In recent years, the company has witnessed a decline in clearing volumes, which the company attributed partially to restrictions on algorithmic (high-frequency) trading. However, the newly obtained EMIR approval could help reverse this trend. Although broker services contributes only about $30 million to the company’s overall revenues, the early advantage gained by NASDAQ OMX could help boost clearing revenues. On a macro level, it is likely that customers realize the benefits of using a single account for multi-asset class derivatives trading, which could add to NASDAQ OMX Nordic’s customer base. We expect the revenues generated by broker services to gradually increase through the end of our forecast period. However, if the revenues grow at a faster rate and reach pre-2009 levels of about $50 million by 2015, there could be a 3% upside to our price estimate for the company’s stock.

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Notes:
  1. NASDAQ OMX Gets Go Ahead For Clearing House Under New Rules, Financial Times, March 2014 [↩]
  2. BoE To Clamp Down On Clearing Houses, Financial Times, December 2012 [↩]
  3. BoE Starts Reviewing Of Clearing Houses, Financial Times, March 2014 [↩]
  4. NASDAQ OMX Becomes First EMIR Compliant Clearing House, The Trade News, March 2014 [↩]
  5. NASDAQ OMX Adapting To Emir, Financial Times, October 2013 [↩]