Derivatives Growth And Belt Tightening Drive NYSE Euronext’s Performance

by Trefis Team
NYSE Euronext
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While other businesses either recede or show no growth, derivative volumes are on a roll and continue to support the top line at NYSE Euronext (NYSE:NYX). The company’s bottom line has also been positively impacted in this quarter, by a cost efficiency initiative called “Project 14”.

The company announced on April 30 that its total revenue for the first quarter of 2013 was $963 million, up 1% from the year ago quarter. It benefited from a 31.6% y-o-y increase in its derivatives transaction-and-clearing-fees revenue while the cash trading and listing segment remained a drag due to a 13% y-o-y decline in equity trading volumes. [1]

The company’s recent cost efficiency initiatives have also helped it in reducing its other operating expenses by almost 6% y-o-y, to reach $380 million for Q1 2013. This positively impacts the company’s profit margins and boosts its bottom line performance.

See our full analysis for Nasdaq OMX

What Is Behind The Surge In Derivative Revenues?

A major chunk of growth in the derivatives division is currently coming from Europe where increased speculation over interest rate cuts led to a 55% y-o-y increase in the volume of total interest rate products. The volumes of equity and commodity based derivative products were also up y-o-y by 13.4% and 12.9% respectively, due to increased volatility in the markets. [1]

Over the next few years, we expect European derivatives to continue growing at impressive rates, as regulations around the world make centralized clearing of standardized over-the-counter (OTC) derivatives mandatory. OTC derivatives are a large market segment ($639 trillion) and were until now traded bilaterally without any major reporting requirements. However, in the wake of the credit crisis, regulations around the globe have mandated that standardized OTC derivatives be centrally cleared.

In the U.S., the Dodd-Frank Act mandates that all market participants should transfer to the centralized clearing channel by September 9, 2013. [2] This is likely to bring a large chunk of OTC derivative volumes that were previously traded over-the-counter to the centrally cleared channel and boost trading volumes for the whole industry.

NYSE’s Liffe platform is one of the leading derivatives marketplaces in Europe and is likely to be one of the biggest beneficiaries of this trend. The benefits accrued to NYSE Life from the increase in trading volumes would be manifold if NYSE Euronext is successfully acquired by the IntercontinentalExchange (ICE). You can read more about the synergy between NYSE and ICE here.

We are currently in the process of updating our model for the company and will soon release a revised price estimate.

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  1. SEC Filing, NYSE Euronext, April 30, 2013 [] []
  2. OTC Interest Rate Swaps Mandatory Clearing Summarized, LCH.Clearnet, December 7, 2012 []
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