30 October 2013

Philip Stafford: Innovation the keystone for exchanges

Until now, the swap futures debate has been primarily a US one as it is further down the road with the implementation of the G20 mandate, writes Stafford in the FT. But the European market now looks as if it will follow a similar approach to the one taken across the Atlantic.

As Deutsche Börse confirmed, its Eurex derivatives business would also be developing its own swaps futures contracts. Eris is also planning to set up in Europe next year, chief executive Neal Brady told Trading Room last week.

For Deutsche Börse, the investment fits its strategy these days to pursue projects unlikely to put it on a collision course with regulators. It also has similar investments in Digital Vega and RFQ Hub. Success would also boost Eurex’s fledgling over-the-counter interest rate swaps business.

However, it also allows Deutsche Börse to try something innovative alone in the market, especially while others are distracted. ICE is about to have its hands full integrating NYSE Euronext while CME Group is facing a serious hold-up with UK regulators in its plans to begin European derivatives trading.

The big question is whether the customers – end users like asset managers and big corporations – are actually ready for this new product. Even now, many are still wrestling with the intricacies and differences in clearing between the US and Europe and simply ensuring they are compliant with incoming rules. Growth in CME swap futures has been steady rather than spectacular, with the 10-year contracts accounting for nearly half of the 1 million contracts traded so far.

But in one sense, the winners and losers are immaterial right now. Innovation in this corner of the financial market has been sorely lacking in the last decade. The financial crisis took precedence and then followed the fierce debate with banks, other exchanges and politicians over the appropriate regulatory response. Nevertheless, innovation is the lifeblood of the industry.

It is encouraging that discussions about new products are emerging as it indicates that exchanges are serious about re-establishing their identities as facilitators in the market. They can only be launched if relations with customers are healthy. The emergence of swap futures is a start but the industry still has a long way to go. 

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