New York Portfolio Clearing: We Can Help NYSE Euronext Take on CME
March 2, 2011
Let the battle begin. That’s the motto of New York Portfolio Clearing, the NYSE Euronext’s Liffe US and the Fixed Income Clearing Corp after announcing that the Commodity Futures Trading Commission has given NYPC the green light to begin a process called one-pot margining.
“Imitation is the highest form of flattery,” said Walter Luken, chief executive officer of NYPC in a conference call with reporters on Wednesday afternoon. “The CME’s proposal is shy on detail but real value requires investment and we have invested significant time and regulatory scrutiny.”
Luken was referring to a statement issued by the world’s largest futures market the CME Group on February 28, that it will reduce margin payments for customers who own offsetting interest-rate future and cash U.S. Treasury trades Luken, the former head of the CFTC, was named chief executive officer of NYPC in April 2010.
“It’s fantastic that the CME has recognized the value of efficiency and is trying to imitate the efficiencies of NYPC,” said Tom Callahan, chief executive officer of NYSE Liffe US in the conference call. “We know that repurchase agreements are excluded from the CME initiative and you have to buy millions of shares in CME as a member to participate.”
The NYPC gained approval from the CFTC last month to begin clearing interest-rate futures and on Wednesday won CFTC approval to begin cross margining. That is a day after it won the green light from the Securities and Exchange Commission. CME Group’s Financial Instrument Clearing Membership does require CFTC approval to begin operations later this month.
The goal of NYPC, a joint venture between Depository Trust & Clearing Corp. and NYSE Euronext, is to clear interest rate futures contracts traded on NYSE Liffe US. That will start on March 21. As a subsidiary of DTCC, the FICC already clears U.S Treasury and other fixed-income securities and repurchase agreements
The ability to cross-margin is a key selling point for NYSE Euronext’s Liffe US as it prepares to go head on with CME Group in offering Treasury futures in the U.S. market. Under the FICC’s cross-margining agreement with the NYPC, customers could reduce their margin requirements by offsetting derivative positions at NYPC with cash positions at FICC as if they were in a single portfolio or “single pot.” In 2010, FICC cleared and settled transactions valued at about $4.6 trillion daily.
The CME Group said its new clearing plan called Financial Instrument Clearing Membership could save investors up to 65 percent in margin costs for interest-rate futures and U.S. Treasuries. NYPC, a joint venture between NYSE Euronext and the Depository Trust & Clearing Corp., plans to offer the same margin benefit between rate futures and Treasuries.
Clearinghouses capitalized by their members, are intended to lessen the effects of a bank default by guaranteeing counterparty payment. Each day they collect margins on open trades to keep accounts current and allow regulators to monitor prices and positions.
So far, CME Group, home to about 98 percent of U.S. futures transactions, has successfully thwarted efforts over the past decade by Eurex and Euronext.liffe, now NYSE Liffe, to take business from its Treasury and interest-rate future franchises. But NYPC could give NYSE Liffe US an upper hand against CME.