Wednesday, March 10, 2010

Interest-rate swaps clearing rivalry heats up

Original posted on Reuters by Jonathan Spicer and Ann Saphir:

Clearing in the $400 trillion interest-rate swaps market is finally in for some competition.

Nasdaq OMX Group Inc's (NDAQ.O) majority-owned clearinghouse for interest rate swaps added Newedge USA LLC to its membership ranks on Wednesday, joining a series of clearinghouse partnerships and launches as world regulators move to rein in the vast over-the-counter marketplace.

The move bolsters Nasdaq OMX's bid to compete with CME Group Inc (CME.O), which also plans to clear the contracts, and incumbent LCH.Clearnet, which dominates clearing of dealer-to-dealer contracts and has begun extending its services to hedge funds and other so-caller buy-side firms.

"There certainly is a bigger pie to share. A degree of competition keeps markets honest," Roger Liddell, chief executive of LCH.Clearnet, Europe's top independent clearinghouse, told Reuters. "For some period of time, having healthy competition can only be a good thing."

Newedge, one of the world's largest futures brokerages, expects to have a say in any structural changes at the clearinghouse, called the International Derivatives Clearing Group, or IDCG, which got its start about a year ago. It joins MF Global in backing the venture, and moves the startup closer to the critical mass it needs to build a viable business.

New clearinghouses are springing up and older ones are retooling to take advantage of a global regulatory push for the clearing of more over-the-counter products to avoid a repeat of the financial crisis. A clearer stands between two parties to a trade, guaranteeing their obligations if there is a default.

"It's consistent with our approach that there are a lot of different solutions out there," Gary DeWaal, group general counsel at Newedge, said in an interview on the sidelines of a Futures Industry Association conference here.

"The more differences the better because it means, if there's a blow-up, every system won't behave the same way. We think that's a good thing," he said.

Newedge is also a clearing member at Chicago-based CME Group, the giant derivatives exchange operator that plans to clear interest rate swaps. LCH.Clearnet currently handles more than 70 percent of the interdealer interest rate derivatives market.

Newedge was initially reluctant to join IDCG, DeWaal said. But clients pushed for it, because they felt they were shut out of the dealer-centric models that are already out there, he said.

"It's a huge endorsement," said IDCG CEO Gary O'Connor, in a separate interview. "They are coming on board because their customers are demanding it, and that's the telling factor."

LCH, for its part, is seeing some buy-in since it expanded its services to buy-side clients in December, said LCH CEO Liddell.

"We've had a bit of traction so far," Liddell said. "Some clients are testing and backloading their portfolios in. These things take time, but it's gaining a head of steam."

CME and IntercontinentalExchange Inc (ICE.N) have come under fire for restricting membership for their credit-default swaps clearing offering to dealers only. Buy-side firms fear that CME will likewise tailor its interest-rate swaps clearing -- expected later this year -- to dealers rather than their clients.

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