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Transatlantic Exchanges, Brokers Put Their Money on European Options Growth
December 17, 2007
Fragmentation could encourage options trading growth in Europe, as it did in the U.S., where volume has grown by 30 percent annually for several years. Buhannic pointed out, however, that each European exchange has its own clearing system, while in the U.S. the Options Clearing Corp. clears trades across all the exchanges. Since derivative transactions can contain multiple options contracts as well as long equity positions that may be executed and hence cleared on different exchanges, cross-margining the transactions in Europe becomes all but impossible, creating an impediment to expansion.
Buhannic also noted that equity options in the U.S. are considered securities products, while options on futures contracts are treated as futures products--the former regulated by the Securities and Exchange Commission and the latter the Commodities Futures Trading Commission. In Europe, options and futures products fall under a single regulator. That creates complications for portfolios holding positions on exchanges in both continents. "How do we margin between a position on ISE and a position in Eurex?" said Buhannic.
It also creates a regulatory dilemma for European options investors, who in the U.S. will face two sets of rules and two methods to calculate margin requirements.
"There will be huge pressure for the regulators to evolve," said Buhannic, adding that the issue in the U.S. is whether there should be two regulators, while Europe will focus on a different question: Can products continue to be cleared on a single platform, or should there be multiple clearing venues?
The biggest obstacle for the European options market may be changing the mind-set of investors, especially retail ones, who have typically invested conservatively and avoided the financial markets. European institutions already trade large volumes of derivatives, particularly options on non-equity products. On the equity-option front, Euronext.liffe, the largest of 11 European options exchanges, executed a daily average of 955,000 contracts in October--less than half the recent volumes transacted by the four largest U.S. options exchanges.
One reason the European options exchanges foresee significant growth is their efforts to attract activity now conducted over the counter. To that end, Euronext.liffe launched Bclear in 2005, giving institutions and brokers the ability to customize listed transactions and clear them more efficiently. "Since October 2005, 150 million contracts have been registered on Bclear," said Hajali, adding that he expects that growth to continue.
U.S. Brokerages Abroad
European retail investors are increasingly buying structured financial products that their financial services firms construct using OTC and listed derivatives. But they are also investing more in equities, a trend that is perking their interest in equity options, in part as a hedging tool.
It helps that some of the most successful U.S. brokerages specializing in options have set up shop in Europe. "We're committed to growing the business in Europe," said Rumi Kuli, EVP of international business development at optionsXpress.
The electronic brokerage has registered in Amsterdam, enabling it to offer trading accounts across much of Europe. Kuli said that beyond improving access to overseas markets, the increased efficiency and liquidity stemming from transatlantic exchanges will eventually lower costs for all investors.