Nasdaq’s bid for euro swap clearing faces questions

Dealers unconvinced by Swedish CCP’s attempt to capture relocated euro swap clearing volumes

euro-swap-clearing

Dealers are sceptical about Nasdaq Clearing’s move to launch euro interest rate swap clearing, as the Stockholm-based clearing house attempts to capture a portion of the volumes required to head to the eurozone.

At the beginning of the year, the central counterparty (CCP) announced its intention to expand its offering to clear euro, Danish and Norwegian krone interest rate swaps. 

The initiative coincides with the European Parliament and Council of the EU nearing the final stages of approving the Emir 3.0 text, which mandates clearing a portion of euro-denominated derivatives at European CCPs.

But for Nasdaq Clearing’s service to work, traders say it would require a balance of payers and receivers, and dealers aren’t persuaded by the idea. 

The banks don’t want to do it unless there are customers pushing for this product
Head of rates trading at a European bank

“We as a bank prefer not to have too many clearing houses, initial margin and so forth. We’re struggling with Eurex and LCH and trying not to have too many open positions in terms of IM on both clearing houses,” says a head of rates trading at a European bank. 

“It’s an impossible task because Nasdaq is trying to push it more than its customers are trying to push it. And the banks don’t want to do it unless there are customers pushing for this product,” says the rates trading head.

Others question what the Swedish CCP can offer compared to Eurex, which has been the only destination for eurozone-based euro swap clearing. 

“What is their marginal advantage versus Eurex or LCH?” says the head of euro rates trading at a US bank. “I don’t know where this is coming from. I’m surprised.”

Patrik Lohr, chief executive of Nasdaq Clearing, says it has been in discussions with members for a while about introducing euro swap clearing, and the active account requirements under Emir 3.0 have sped up that process. 

“Some clearing of euro will need to take place outside the UK, so we want to make sure that we are there for our members and clients to make sure that they can clear euro with us,” says Lohr. 

Nasdaq is expected to launch the service in the second quarter of this year but it is dependent on attracting enough interest from customers. So far, the clearing house has garnered interest from Nordic clients that want to clear locally. 

It typically requires at least four members to sign up before launching a service, says Lohr. At the moment, the CCP is working to get further commitments from clearing banks. 

“We have not received all the commitment that we need yet, but we believe that we will have enough members to sign up to launch the service,” he says.

Local flavour

Under Emir 3.0, firms will be required to clear a portion of their euro-denominated derivatives at EU-based clearing houses. The European Securities and Markets Authority is expected to establish distinct thresholds for euro- and Polish zloty-denominated interest rate swaps and short-term interest rate derivatives, as well as aggregate positions across these products.

Esma is expected to establish five sub-categories of each of the three asset classes, totalling 15 sub-categories. Once a firm crosses the threshold, those that have more than €6 billion notional of eligible positions are required to clear at least one trade every six months to show that their EU clearing activity is representative of their total activity. 

For those exceeding €100 billion of positions, this requirement becomes monthly.

Depending on the firm, that could result in some being required to clear at least five euro interest rate swaps every month at a European clearing house. 

The finalised regulation is anticipated by mid-April before the end of the current parliament term in May. 

Nasdaq is the second European clearing house to announce the launch of euro interest rate swap clearing. In May last year, Madrid-based BME Clearing revealed it was in talks with banks to join its euro swap clearing service, which it hoped would become an alternative venue for onshore clearing.

Lohr believes Emir 3.0 has introduced a regional characteristic to euro swap clearing. 

“We’re not assuming we will have a lot of southern European banks coming to us. We believe that there will be some local flavour in this,” he says. 

Dealers, though, say having more clearing houses means more costs and friction. 

“It increases the costs for banks and clients having more than one clearing house,” says the European bank’s head of rates trading. “It’s like throwing sand into machinery. It’s just another thing that makes the market have more friction.”

For regulators who have worked to bring Emir 3.0 to fruition, however, the announcement is seen as a win as it increases options and competition in the bloc. 

“We’ve always said we’re not regulators for one particular entity, we’re regulating for Europe as a whole,” says one EU official.  

“Businesses will make their own choices based on a range of different factors. We need to promote competition; we need to promote choice; we need to promote a wide range of services,” adds the official. 

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