Enthusiasm for a big expansion in derivatives clearing vied with caution about how to implement it as the dominant feeling when heads of exchanges and clearing houses discussed the challenges facing them at a conference in London in June.
Roger Liddell, chief executive of LCH.Clearnet, said: “The possibilities are almost endless. Anything that can be traded for which there is a good sense of pricing and a reliable source of liquidity can be cleared.”
The industry leaders were speaking at the IDX conference organised by the Futures and Options Association and the Futures Industry Association.
There was unanimous approval for the benefits of central counterparty clearing, which all felt had shown its worth in handling the Lehman Brothers default smoothly.
Firms including CME Group, LCH.Clearnet, NYSE Liffe, Eurex and Inter-continental Exchange reported the success and rapid growth of their OTC clearing systems.
David Peniket, president of ICE Futures Europe, and Paul Swann, head of ICE Clear Europe, emphasised how they had added many complex OTC energy products to their clearing platform.
Craig Donohue, chief executive of CME Group, made a similar point about CME ClearPort, and said the system now had $5tr of cleared positions outstanding in the energy market. “It’s a $250m a year business for us and growing,” he said.
Asked which OTC products the exchanges were working on bringing into a cleared environment, the industry leaders named a wide range. Donohue pointed out that the interest rate swap market was more than 11 times the size of the credit default swap market and that there was some $50tr of OTC FX business.
“We’re investing in each area,” he said.
“This is the beginning of a secular shift in the market which will take many many years – it’s analogous to the shift we went through from floor trading to screens. Each asset class and product or customer base will have a different path,” he said.
But despite the appetite to expand OTC clearing, there was a strong sense of not wanting to be rushed, and a broad consensus that regulators should not force market participants to adopt clearing.
And although each of the big exchange groups – CME Group, ICE, Eurex and NYSE Liffe – believes it has worked out a way to risk manage CDS positions in a central counterparty, they hinted that knowledge in this area was in its infancy.
Asked by FOW whether there was any reason why CDS could not be cleared as easily as equity derivatives, Garry Jones, global head of derivatives at NYSE Liffe, highlighted the lower liquidity of CDS due to the narrower range of participants involved, as well as the fact that CDS reference individual bonds, of which there is a finite supply for delivery.
Donohue said the liquidity, price transparency and price reporting of the two markets were “hugely different”.
The discussions confirmed the overall direction in which regulators’ anxieties have appeared to push the derivative markets since 2008 – towards the creation of new central clearing systems, with a much lesser emphasis on new mechanisms of price disclosure.
l NYSE Euronext and the Depository Trust & Clearing Corporation plan to form a joint venture to create a new clearing house for US fixed income trading that will go live in early 2010.
The clearing house, New York Portfolio Clearing, is a challenge to CME Group’s supremacy in US futures clearing. The new clearing house will combine NYSE Euronext’s US futures exchange, NYSE Liffe US, with the DTCC’s Fixed Income Clearing Corporation (FICC).