The FSA will allow the CME to clear interest rate swaps, the world’s largest asset class traded by notional value OTC, reports Financial Times.
The clearance, given by the FSA, will create competition for LCH.Clearnet, a clearing house in the process of being bought by the London Stock Exchange, and an emerging rival service run by Deutsche Börse – Europe’s largest markets operator.
The Financial Times indicates that authorities want more of the market processed through clearing houses, which stand between two parties in a deal, guaranteeing the deal in the event of a default. According to the Financial Times, the arrival of the service underlies how regulations are overhauling the clearing market. LCH.Clearnet is planning to sell a controlling stake to the LSE, although the deal is awaiting regulatory approval from UK and Dutch authorities. Financial Times also repoprts that SGX, the Singapore exchange, is also in talks with the two parties about taking a stake in LCH.Clearnet.
Chicago Mercantile Exchange Group (CME), is the world’s largest futures market operator, and is set to begin clearing off-exchange swaps in the coming weeks. The service, operated from London, is expected to be running by April. The Financial Times reports that CME’s U.S. clearing business cleared around $1.4tn of interest rate swaps to date, with close to $820bn of contracts currently open. LCH.Clearnet’s SwapClear service has cleared nearly $18tn, and has around $4tn of contracts on open interest. In a quote from Financial Times, William Knottenbelt, the CME’s managing director of the group’s Europe, Middle East, and Africa business, indicated that the CME is setting up in Europe as some clients were concerned that some operators “have no knowledge of U.S. law,” he stated.