On 31 May, NLX marked its third birthday with a new
leadership team and renewed vigour to restore the fortunes of
the interest rate futures market.
NLX was launched by Nasdaq in 2013 with the belief that
upcoming changes to market structure in Europe combined with a
perceived duopoly of the European rates market would create an
opportunity for disruption.
Three years later and the new senior team comprising former
Morgan Stanley and UBS investment banker Victoria Kent and Carl
Slesser, who was previously chief technology officer at NLX,
now the exchange’s president, believe that the
opportunity is clearer today than ever.
"Changes to market structure and capital pressures are
having an impact on both the buy-side and the sell-side," says
Kent, NLX’s commercial director. "Category 2
mandatory clearing is coming up, Mifid II will be introduced in
2018 and the LCH has just launched its Spider portfolio
"As a result, there is an unprecedented opportunity for us
today, driven by a focus on the cost of trading and the cost of
NLX’s proposition has always been centred on
clearing efficiencies enabled by the ability to trade the long
and short end of the euro and sterling curve at one venue
clearing into one CCP and the opportunities that will
ultimately be offered by the portfolio margining of exchange
traded and swap products.
Three years ago, the pressures on collateral and the need
for clearing efficiencies were more a theoretical than a clear
and present business challenge.
That has changed today with the clearing business at banks
under pressure from Basel III and CRD IV and the buy-side
taking on more responsibility for collateral and seeking
efficiencies as a result.
After a long wait, LCH’s Spider
portfolio-margining model has just launched. Spider will enable
the cross-margining of futures positions against swaps cleared
at SwapClear resulting in billions of pounds of collateral
efficiencies for banks and their clients.
"NLX is uniquely positioned to offer access to the Spider
portfolio margining at LCH today," says Kent. "Clients and
their sell-side providers are looking for solutions now, not in
a year’s time, and we are seeing unprecedented
interest from the buy-side as a result of that."
Hans-Ole Jochumsen, President, Nasdaq added: "As the
appetite and dynamic of the market continues to evolve through
new regulations and the increasing influence of the buyside, we
see NLX uniquely positioned to respond to demands in the
Over the three years NLX has been in operation, it has
traded over 22 million contracts. Early incentive programmes
resulted in solid volumes on the market but the strategy was
criticised for its trading spikes and the volumes fell away
once the incentive programmes were removed.
Slesser says that NLX has learned the lessons from the early
push to get people onto the platform but points out that NLX
has 11 general clearing members on board, with a 12th due to
join in July and that all the major ISVs are connected to the
"We are in a good place today to grow participation," he
says. "We have a three year track record and operate a low
cost, robust and scalable trading platform."
Nasdaq is putting in place a number of programmes to drive
open interest on the platform and help firms mitigate the costs
of transitioning onto NLX.
The FCA has recently approved a programme that is intended
to stimulate the migration of open interest.
There is an unprecedented opportunity for us today, driven by a focus on the cost of trading and the cost of capital
Under the programme, NLX will cover the costs that firms
have incurred on other exchanges as well as any other costs
associated with moving over to NLX.
While this is intended to enable firms to block trades over
to NLX, the firm will also seek to increase trading through the
order book and has a new FCA-approved scheme in place to cover
the costs of firms that build open interest through the order
Controls will also be in place to disincentivize firms from
trading low-risk strategies in order to encourage meaningful
flow on the platform. "These are intelligent programmes to grow
participation, not blunt instruments" says Kent.
In addition, NLX will maintain its aggressive market making
The first focus will be on shifting open interest in short
sterling before moving to euribor. Once bund, bobl and schatz
can be margined against SwapClear positions at LCH, NLX will
then focus on bringing in open interest on those products.
Meanwhile, Slesser says that the launch of options remains
core to the strategy. "We are ready to go with options and have
been up and running in our test environment for some time."
Key to the success of the new strategy is to capitalise on
the interest from the buy-side. In the first three years of
operation, NLX focused its efforts on the banks and the
proprietary trading market.
Kent says that today, most of the new interest is coming
from asset managers and hedge funds.
"Three years ago the cost of collateral was not a priority
for the buy-side," she says. "That has changed and they are
becoming more and more aware of the critical need for
efficiencies and positioning themselves to take advantage.
"We want to ensure that the GCMs are active and have
appropriate reasons to be active. Then as the client demand
grows for more efficient portfolio margining, we are there to