Earthquakes don't happen often in the world of derivatives but people still speak in awe about how the Bund contract shifted from London to Frankfurt -- and perhaps with relief too for some exchanges as nothing similar has been seen since.
Academics have long pontificated why LIFFE lost out to Deutsche Boerse, pointing to Frankfurt's electronic trading with European reach to grab participants who funnelled orders through brokers wearing colourful jackets in a trading pit.
The first half of 2016 should see at least two attempts at pulling off a similar coup.
Nasdaq NLX in London is set to go live with its link to clearing house LCH.Clearnet to offer customers the ability to net their exchange-traded and over-the-counter positions, and thereby potentially slash the amount of regulatory capital they tie up.
“The movement of a contract in the past was very rare. Are we going to see portfolio margining drive that once again?” Charlotte Crosswell, NLX chief executive, told Trading Places. “We have set up ourselves to do that with NLX, as we believe the savings on bank capital will be the driver for future trading behaviour.”
Crosswell said 11 general clearing members have linked up to NLX and LCH for portfolio margining, and hinted at the sort of market share that will be needed to change behaviour. “With five percent, you are taken seriously by the market, and at 10 percent you attract buy-side flow,” she said.
“It feels like the opportunity is now. The momentum seems to be gaining every month and I believe that is being driven by the bigger macro factors at banks, their need to cut costs, and not just round the edges anymore,” Crosswell said.
Jostling in the same space will be CurveGlobal, a new interest rate derivatives venture being launched by the London Stock Exchange Group, also with LCH.Clearnet, which it controls.
CurveGlobal, due to go live in the second quarter of 2016, is also backed by a number of major dealers, such as Goldman Sachs, Barclays and Citi, together with the Chicago Board Options Exchange.
“We believe we have a very compelling commercial proposition,” an LSEG spokesman told Trading Places. “The strong support from shareholder banks and CBOE differentiates this from other ventures of this kind and LSEG has a proven track record of partnering with customers to deliver open access solutions that provide greater choice to the market as a whole.”
If successful, portfolio margining could have far-reaching knock-on effects according to Crosswell, such as driving consolidation in Europe's fragmented clearing sector.
“We firmly believe that LCH.Clearnet will be one of the winners in the future, as we see the potential consolidation of positions at the clearing house level to see margin efficiencies,” she said.
Therefore, gone are the days when rival exchanges politely stuck to their bit of the interest rate curve as they now all clamber to offer products that cover the whole curve in different currencies.
NLX and CurveGlobal will both be offering short term interest rate futures (STIRs) in Euribor and Sterling, and long term interest rate futures in Bund, Bobl Schatz and Gilts.
It all may not be that easy in practice, however.
LIFFE's new owner, ICE, is no slouch and been ruthless in getting and keeping what it wants. Deutsche Boerse's Eurex won't be giving up the Bund or part of if without a fight, while the CME in Europe has been quietly playing a long game.
ICE and Eurex have the ability and money to fight back and strangle newcomers – Eurex already has its Prisma portfolio margining, for example.
Unlike with the Bund's shift from London to Frankfurt in what became a zero-sum game, LSEG thinks that this time round it will be more of a case of splitting up market share rather than winner takes all.
“We think there is sufficient liquidity available in these products to enable trading on multiple trading venues,” LSEG said.
The “Battle of the Bund” was not an overnight skirmish but an eight-year war of attrition that lasted from November 1990 to July 1998.
Do NLX and CurveGlobal have the stamina for what could be a long and expensive haul over terrain littered with corpses of past attempts? The banks lined up behind both of them, and the CBOE to boot in LSEG's case, will be the minimum needed to re-create a snowball effect that has not been seen for nearly 20 years.