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Eurex Will Offer Central Clearing Service for OTC Derivatives

  • July 22, 2008
  • Shane Kite

Eurex announced today that its clearing arm aims to launch central counterparty (CCP) services for over-the-counter derivatives during the first half of 2009. The platform will focus initially on credit default swaps (CDS) based on Markit Group’s iTraxx European indexes.

Eurex, a joint venture of Deutsche Borse and the SWX Swiss Exchange and the world’s largest derivatives exchange, said the Eurex Clearing CCP platform will serve as a European counterpart to OTC clearing initiatives that are preparing to roll out in the U.S. Chicago-based Clearing Corp., which is backed by a consortium of dealers--as well as Eurex--will in September begin providing central clearing for CDX North American High Yield and Investment Grade indexes, followed by iTraxx indexes, index tranches and single-name CDS.

The Eurex announcement follows NYSE Euronext subsidiary Liffe’s July 7 statement that it will offer centralized clearing of contracts based on the iTraxx European indexes by the end of the year. Liffe, which is second to Eurex in the exchange-traded derivatives market, said its Bclear trade confirmation and processing platform will feed trades to LCH.Clearnet, which will guarantee the transactions.

Eurex said it is in discussions with several infrastructure providers about the new system but added that the platform could utilize Eurex Clearing’s existing functionality--in addition to new trading and risk management services--to process OTC credit derivatives, which are often bespoke and trade bilaterally. The platform could be extended to include asset classes such as equity and fixed income, said the exchange, depending on market demand.

“A European OTC CCP platform would increase capital efficiency by reducing balance sheet exposure,” explained Eurex in the statement. “It seeks to promote the optimal use of margin deposits, eliminates manual process errors and effectively covers the OTC market’s counterparty default risk.”

“The benefits of our service extension would be increased market stability and capital efficiency,” said Thomas Book, Eurex board member in charge of clearing. “Customers would profit from straight-through processing, enhanced collateral management and multilateral netting for OTC trades, which currently account for 84 percent of all derivatives traded.”

The new service is designed to address industry concerns about systemic risk due to backlogs of transaction confirmations in the credit derivatives arena. Regulators have pointed to potential counterparty defaults in calling for improvements in the CDS market’s infrastructure, and many players have targeted CCP clearing mechanisms as a solution to mitigate risk in the $62 trillion sector.

While exchanges argue that they can offer optimal solutions for risk management and clearing, observers have noted that the market is dealer-driven and any service will need to have the support of sell-side firms. Eurex and CME Group have both indicated their interest in entering the space.

Meanwhile, Markit and the Depository Trust & Clearing Corp. (DTCC) announced yesterday that they have formed a joint venture that will offer a single gateway for confirming OTC derivative transactions globally. The new company will combine the Markit Wire--formerly SwapsWire, which was acquired by Markit earlier this year--Markit Trade Manager, Markit Tie Out and Markit PortRec services with DTCC’s Deriv-Serv matching and confirmation platform and its AffirmXpress, MCA Xpress and Novation Consent services.

More coverage of the Markit-DTCC joint venture will appear in the July 28 issue of Securities Industry News.

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