CME European Roll-Out

Widening their rate swaps offering

Originally published in the March 2014 issue

CME Clearing Europe was launched three years ago to be a “broad asset class clearing house,” says its CEO, Lee Betsill, who explains that the aim is to give the CME Group’s global client base “a choice of clearing venues, and also a jurisdiction governed by English law that some may prefer.” The London-based clearer is “strategically key” for CME Group’s worldwide footprint as the EU soon follows the US in making clearing mandatory.
CME Group’s own origins in Chicago date back to 19th-century US agricultural trading, and commodities were also the first tradable contracts at CME Clearing Europe. In 2011 it started out with energy, metals, agriculturals and European natural gas with major interest rate swaps introduced last year. Rate swaps on the major currencies, GBP, EUR, CAD, AUD, CHF, JPY and USD, can now reach out as far as 50 years, and crucially they can be precisely tailored to the exact maturity required by users. This year’s enlarged range of interest rate swaps on CME Clearing Europe and recent approval of the new exchange, CME Europe, are all part of an ongoing drive that will eventually see CME Group’s European menu aligned with its US offering. The new contracts added in 2014 are overnight index swaps (OIS), zero coupon swaps, forward rate agreements (FRAs), basis swaps, variable notional swaps, and three Scandinavian currencies: Swedish, Danish and Norwegian krone. CME Group executive director of interest rate products, David Coombs, says, “Overnight index swaps are probably the most significant product addition” as this contract has seen “heavy activity at the front end as traders position for possible
ECB tightening.”
Investors and traders now have another venue to choose from, with a number of differentiating features. Global trading volumes for CME Group interest rate swaps are cumulatively more than $20 trillion since 2010. This, combined with the CME Group’s leading position in interest rate futures, makes for “a deep pool of liquidity,” says Betsill: average daily volumes across all interest rate products (including futures) averaged over $3 trillion a day in 2013.
Margin and capital efficiencies
Having a suite of futures sitting alongside swaps on the same venue can bring other advantages in terms of margin and capital efficiencies. Margin requirements could be cut by as much as 90% when treasuries or Eurodollar futures are offset against rate swaps, CME Group estimates based on its US experience. CME Group’s portfolio-level margining has also helped its clients to use margin more efficiently, says Coombs.

CME Group’s CORE tool makes it easy for users to mix and match blends of swaps and futures, and map out the associated margin needs. Traders using multi-asset class platforms may be able to obtain additional margin and capital efficiencies where such brokers offer netting benefits.
Flexible architecture
Many such routes exist for feeding trades into CME Group, via voice broking or electronic means including instant messaging. The CME Direct application offers real-time streaming quotes, a customisable interface, and allows both OTC and futures trades to be executed by voice or its new instant messaging platform, CME Direct Messenger. In all cases trades are still processed electronically, with OTC trades placed via CME Direct Messenger automatically cleared through CME Group’s ClearPort; other affirmation platforms can also
be used.
Trades can be executed through CME Group’s own networks or external vendors. CME Group’s own electronic trading platform, Globex, provides 25% of non-US routing. Equally the CME Group has so far established alliances with 12 exchanges, including nine outside the US in Latin America (Brazil, Mexico), Asia (India, Japan, Korea, Singapore, Malaysia), Dubai, and Russia.
Buy-side and sell-side responses
Several brokers routing trades to CME Group have already acclaimed the expanded product range. Jonathan Somekh, clearing product management of one broker, MarkitSERV, said, “MarkitSERV has been pleased to provide the industry with connectivity to the range of new services from CME, most recently the expansion of rates clearing at CME Clearing Europe.” Similarly, Alex Lenhart, European head of prime services listed derivatives, OTC clearing and FXPB at Credit Suisse, says, “Credit Suisse welcome CME Clearing Europe’s recent product extension.” And, “It’s great that the competitive offering available to clients continues to expand,” adds John D. Wilson, global head of OTC clearing at Newedge.

Buy-side as well as sell-side users are also key, as Betsill explains: “Hedge fund activity is very important to the CME Group. As many hedge funds are global in nature they already have experience of Dodd Frank.”

“We welcome the broadening of CME Clearing Europe’s clearable interest rate swaps offering,” said Luc Leclercq, chief operating officer of BlueBay Asset Management. “This provides market participants with an increased choice of European venues at which to clear their over-the-counter positions ahead of regulatory requirements and is a significant step for the European market as the timeline to mandatory clearing under EMIR approaches.” These sentiments were echoed by Richard Watts, co-head of investments for F&C Management Ltd, who said: “We welcome the announcement of CME’s interest rate product extension. This is a positive development, bringing with it additional venues offering clearing across a broad spectrum of OTC derivatives. It allows buy-side clients an increased level of flexibility which will ultimately be beneficial for them and the market as a whole.”

Segregation and protection
New regulations also impact asset segregation and protection options, where CME Group offers multiple choices. Its individually segregated account is already EMIR-compliant. Pending approval from Bank of England, CME Group will be able to offer full segregation of collateral at the custodial level, something Betsill thinks is “unique at this point in time.” The full segregation model will offer “capital efficiencies over and above other segregated models,and comfort around bankruptcy events,” he says. Already portability of margin and positions would allow for a smooth transfer from any defaulting member to an adopting member.
Before mandated clearing begins in Europe, reporting of trades under EMIR went live in February, and there has been lots of activity coming through across all of the asset classes, even in the first week. The technological transition has gone smoothly, according to Betsill, who was COO before becoming CEO of CME Clearing Europe. The pattern of activity is familiar to CME Group from their experience with Dodd Frank reporting and clearing in the US. Interest begins to swell before mandatory dates with the real ramp-up coming after it becomes compulsory. So CME Group is already seeing a groundswell of interest in clearing interest rate swaps, but expects the real surge to come at some stage later this year. A decade before Dodd Frank kicked in, CME Group was clearing energy OTC derivatives trades through its ClearPort service, that started in 2002.
Broadening the range of rate swaps is only one step along the journey of expanding the tradable universe. Foreign exchange swaps and credit default swaps are set to be the next asset classes added, to catch up with CME Group’s US offering. Beyond that, CME Group is always researching all kinds of potential product innovations, so traders should watch this space. CME Group blazed the trail into weather derivatives, and recently over in the US, Coombs tells us that CME Group has already stolen a march on competitors with a Mexican peso rates contract.