From the May 01, 2010 issue of Futures Magazine • Subscribe!

NYSE Liffe to launch interest rate futures

The Treasury complex has not been the liveliest sector in the last year, but looks to become much more interesting in 2010 on many levels. Trading volume is picking up in long anticipation of the Federal Reserve’s exit strategy (see Chartview). Soon there will be another competitor offering futures on the entire interest rate Treasury complex, as NYSE Liffe U.S. announced plans to launch a complete suite of interest rate futures from three-month Eurodollars to 30-year bonds sometime in the
third quarter.

The April announcement was not a surprise, but the challenge to CME Group’s dominance in the sector may be the most sound one to date. “We didn’t just roll out of bed and decide to take on the CME,” says Tom Callahan, CEO NYSE Liffe U.S. “The goal from the first conversations was to build a world class multi-asset class exchange, so this was the result of two years of hard work.”

What makes this challenge more substantial is that it will correspond with the launch of New York Portfolio Clearing (NYPC), a new clearing joint venture between NYSE Euronext and The Depository Trust & Clearing Corporation (DTCC) pending regulatory approval. NYPC must be approved as a derivatives clearing organization by the CFTC and the Securities and Exchange Commission must approve rule changes on the cash side.

Currently all cash Treasuries are cleared through the Fixed Income Clearing Corporation (FICC), a subsidiary of DTCC, though there is no regulatory mandate for this. Industry experts state that the potential clearing efficiency from NYPC along with the NYSE brand make this the strongest challenger to the CME Group interest rate complex to date. “They have something to offer that is a little different. It is going to be cheaper for the end user,” says one expert.

NYPC holds the potential for creating significant efficiencies as clearing members will be able to offset cash and futures interest rate positions in one pot.

The difficulty in the past, according to Callahan, has been that the cash and futures sides used different risk methodologies for calculation of margin. He adds, because of that difference cross margining agreements like the one between the FICC and CME Group are not effective. “You can’t take futures using one risk methodology and cash using another and try and put them together in a single pot. It just doesn’t work,” Callahan says. The NYPC will be a single pot clearing house with a cross margining agreement — based on the same risk methodology — between FICC and NYPC.

CME Group notes that their crossmargining agreement with FICC provides savings and that margin credits within their interest rate complex range from 60-75%.

ELX Futures noted in a letter to the SEC in October, when the initial plan for NYPC came out, that it intends to object to any rule amendment that creates an exclusive arrangement between DTCC and NYSE Euronext. The letter states that NYSE indicated that the joint venture is designed to give them a “competitive advantage through clearing and settlement efficiencies.”

NYSE is building the clearinghouse with DTCC and Callahan says that their Treasury futures business will be the beta client of NYPC. “Once the clearinghouse achieves operational stability, other exchanges are going to be invited to become clearing members of NYPC. If others choose to do that, you will have multiple exchanges in the same clearinghouse that are all going to be sharing the same single risk pool, all in that same single margin calculation. That is something that doesn’t exist right now. Our clients are telling us that is something they want.”

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