LCH.Clearnet may join NYSE effort to take on CME Group on rates

March 14, 2012 09:00 AM

March 14 (Bloomberg) -- NYSE Euronext’s venture to take on CME Group Inc. in interest-rate trading is in discussions with LCH.Clearnet Ltd. to add swaps to the types of trades it will allow to lower margin costs.

The joint venture between NYSE and the Depository Trust & Clearing Corp., known as New York Portfolio Clearing, may include interest-rate swaps backed by the U.S. operations of LCH.Clearnet, the companies said in a statement today. That would add swaps to the interest-rate futures and U.S. Treasury securities that New York Portfolio Clearing offset against each other to offer lower margin payments to customers.

Users of the offering have saved about 30 percent on average since the service began a year ago, Murray Pozmanter, interim chief executive officer of NYPC, said in an interview today at the Futures Industry Association conference in Boca Raton, Florida. It’s too early to quantify how much additional margin would be reduced by adding swaps, said Dan Maguire, the head of LCH.Clearnet’s U.S. operations.

“There will be substantial savings is what we expect,” he said.

CME Group, the world’s largest futures exchange, said yesterday that it will offer similar margin offsets between its interest-rate futures and swaps cleared by the company.

Long, Short

The cost savings for banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. that are active in these markets come from combining positions in Eurodollar and Treasury futures with interest-rate swaps to allow long and short positions to cancel each other out. The lower risk of that entire position leads to less margin having to be pledged to back the trades.

NYPC and LCH.Clearnet signed a memorandum of understanding concerning the swaps expansion, the companies said today. It would require approval from the Commodity Futures Trading Commission, Securities and Exchange Commission and the Federal Reserve in the U.S. and the Financial Services Authority in the U.K., Pozmanter and Maguire said.

The clearing venture is still discussing how to manage risks from customers’ trades that are spread across securities, futures and swaps markets, Pozmanter said.

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