Rainbow Rises in Europe: Derivatives Get New Platform
February 11, 2008
The latest in a series of trading venues started by groups of often overlapping global financial institutions, a new European platform could address fungibility issues in the listed derivatives market and ultimately reduce costs for investors.
The co-owners of the platform--Project Rainbow--include Barclays Capital, Deutsche Bank, Goldman Sachs, JP Morgan Chase & Co., MF Global, NewEdge and UBS, the Financial Times said on Feb. 5. The group was reportedly formed in April and has a temporary CEO in place. None of Rainbow's backers would comment on the initiative.
The news follows an announcement in December that a group of 12 major firms--Bank of America, Barclays, Citadel Investment Group, Citigroup, Credit Suisse, Deutsche Bank, eSpeed, Getco, JP Morgan, Merrill Lynch & Co., Peak6 and the Royal Bank of Scotland--is planning to launch a yet-to-be-named futures exchange in the U.S.
Both initiatives--neither has provided a definitive timetable--seek to put competitive pressure on the few large derivatives exchanges on both sides of the Atlantic.
Project Rainbow, however, is also driven by the European Union's Markets in Financial Instruments Directive (MiFID), which became effective in November and harmonizes rules across member states while requiring investment firms to seek best execution in most asset classes. Those rules have prompted the emergence of new venues such as Turquoise, an equity-trading platform anticipated to launch in September. Turquoise is owned by BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman, Merrill Lynch, Morgan Stanley, Societe Generale and UBS.
"Just as Turquoise was an attempt to introduce increased competition in the European equity landscape and put some pricing pressure on the London Stock Exchange and other European exchanges, Rainbow is meant to put pressure on derivatives exchanges," said Adam Sussman, head of research at New York-based Tabb Group.
Details on the new platform's features, such as whether it will register as an exchange or a multilateral trade facility--Europe's version of alternative trading systems in the U.S.--are limited. Sussman said it will likely display quotes, since there is less demand for anonymous trading in the derivatives market than in equities due to the abundant liquidity on the exchanges for large orders.
Besides offering competitive prices, the new platform could distinguish itself from Euronext.liffe and Eurex, Europe's main derivatives exchanges, by applying a different pricing model, noted Sussman. "An innovative pricing scheme to get people on board might be something they're contemplating," he said, citing the maker-taker model--where liquidity providers receive rebates and takers pay fees--that is prevalent among U.S. equity venues and has found success at the Boston Options Exchange and NYSE Arca.
Project Rainbow initially plans to offer futures contracts on short-term interest rates denominated in sterling and in Euribor--products that would be pitted against the successful Euronext.liffe contracts.
LCH.Clearnet May Clear
A spokesperson at LCH.Clearnet, which is considering clearing transactions for Rainbow, said that the clearinghouse's board postponed the decision at a meeting on Feb. 6. London-based LCH.Clearnet currently clears for Euronext.liffe, the London Metal Exchange and the Atlanta-based IntercontinentalExchange (ICE).
For Rainbow, the timing is fortuitous, since LCH.Clearnet is facing future revenue challenges and is eager to find new business. ICE said in August that it plans to discontinue clearing through LCH.Clearnet in mid-2008, opting to use a clearinghouse it is building in London, ICE Clear Europe. The exchange estimated in April that its futures, options and over-the-counter contracts generated $50 million in clearing fees for LCH.Clearnet in 2006.
