London’s newest derivatives trading venue is set to debut on Monday with its performance closely watched as Brussels examines whether to sanction Europe’s largest exchange.
CurveGlobal, backed by seven major investment banks and the London Stock Exchange Group, will initially compete in interest rate futures markets that are dominated by Deutsche Börse and the US Intercontinental Exchange.
The latest push by the UK exchange into fixed income derivatives comes at a critical juncture as Brussels assesses the potential merger of the LSE and Deutsche Börse.
As part of its initial investigation Brussels is looking at whether its wings could be clipped and it would no longer offer competition to the German group. Questionnaires sent out to market participants by the European Commission have asked whether, “absent the merger, CurveGlobal can become a credible new player”.
Andrew Ross, who joined in February as chief executive after 14 years at Morgan Stanley, says it will remain separate, pointing to the venue’s governance structure.
The seven banks — Bank of America Merrill Lynch, Goldman Sachs, Barclays, BNP Paribas, Citi, JPMorgan and Société Générale — will own 65 per cent. The LSE will own 25 per cent and CBOE Holdings, the US equity options exchange, the rest. The £30m they have invested will fund CurveGlobal for five years.
CurveGlobal will initially begin with fixed income contracts that look like the most actively-traded futures but will develop new products. Mr Ross likened it to Netflix: “We aren’t owning the TVs — sometimes we’ll distribute someone else’s products and sometimes we’ll have our own original content.”
Tougher post-crisis rules have forced banks to hold millions of dollars against their trades in capital, funding and margin requirements. Trading via CurveGlobal would allow investors to net positions in their portfolios at LCH, the LSE and bank-owned clearing house, reducing those costs.
Mr Ross said one unnamed customer saved $300m in tests. “We’d say the fixed income market was fundamentally broken. It’s really challenging if you’re the banks in this space.’’
Many industry executives privately doubt its chances, pointing to a long list of failed efforts to move liquidity from one venue to another. An attempt by Nasdaq, the US exchange, has failed to gain traction.
However Frederic Ponzo, managing partner of GreySpark Consulting, argued that the platform could be a success. “It is supported by the seven biggest rates dealers in Europe who will most certainly pump liquidity into it and is underpinned by proper exchange technology.”
The involvement of CBOE has led to speculation it will push into the US electronic swaps market or develop fixed income volatility indices. “CBOE has been very helpful with advice on an approach in the US. That might lead up to some thoughts on the evolution of the products,” said Mr Ross.