NO 227 – JANUARY 2012
2011 AFTERMATH

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SERVICES
WFE Focus January 2012

In 2011, WFE published 3 survey reports; below you can find excerpts from these reports:

IOMA 2010 DERIVATIVES MARKET SURVEY

For the seventh consecutive year, the WFE has conducted the 2010 IOMA Derivatives Market Survey covering 54 exchanges in 2010. The main results were presented last May at the annual IOMA conference, hosted by NSE of India in Mumbai, and available on the WFE website.

The survey results were analyzed into seven groups representing underlying assets: single equity; equity indices, ETF (Exchange Traded Funds), short-term interest rates (STIR), long-term interest rates (LTIR), currencies and commodities

For the first time, clearing statistics were published in annex of the report. Moreover, the volumes of OTC trades registered by the exchanges were presented separately and some innovations for more flexibility in products traded on-exchange were also highlighted.

Clearing statistics

Regarding equity derivatives in America, the Options Clearing Corporation (OCC) (the world’s largest equity derivatives clearing organization in terms of number of cleared contracts) accounted for 70% of the cleared contracts. The OCC’s participant exchanges included: the Boston Options Exchange, Chicago Board Options Exchange, International Securities Exchange, NASDAQ OMX PHLX, NYSE Amex and NYSE Arca. In 2010, volumes of equity derivatives contracts cleared by OCC increased by 8.3%.

In the Europe, Africa and Middle East (EAME) region, the three largest clearing organizations were Eurex, NYSE Liffe Clearing and LCH.Clearnet. Eurex clearing house cleared the Eurex on-exchange trades as well as an important part of OTC trades. NYSE Liffe Clearing1 covered all products on the London derivatives market, including OTC trades booked through its Bclear facility. LCH.Clearnet was clearing other NYSE Liffe on-exchange trades. The other exchanges had their own clearing houses that were clearing 100% of the on-exchange trades.

In the Asia Pacific region, all exchanges had their own clearing house that was clearing 100% of the on-exchange trades.

Regarding interest rate derivatives, the market was dominated by OTC products that were accounting for 87% of the notional outstanding amount at the end of 2010. Among those OTC contracts, interest rate swaps were representing 77% of the notional outstanding amount (USD 348 trillion). With USD 249 trillion of notional outstanding cleared, the clearing facility for interest rate swaps developed by LCH.Clearnet and first launched in 1999, namely SwapClear, was by far the leader in that market at the end of 2010.

In the United States, IDCG (International Derivatives Clearing Group), which is largely owned by NASDAQ OMX Group, had also proposed a clearing solution for OTC interest rate swaps since December 2008. CME Group started offering this service in October 2010.

OTC trades registered by the exchanges and innovative products traded on-exchange

Regarding equity derivatives in Europe, the two biggest exchanges (Eurex and NYSE Liffe) have developed platforms allowing investors to register and clear OTC trades on the exchange.

On Eurex, volumes of single stock options traded were equally broken down between OTC and non-OTC trades in 2010 and there were more index options traded OTC than index options traded non-OTC.

Stock futures market in Europe was driven by OTC trades registered on Eurex and NYSE Liffe that grew respectively by 70% and 46% and that were accounting for 38% of the traded volumes worldwide in 2010 (against 29% in 2009).

In Europe several exchanges have developed flexible products allowing investors to customize the exercise price, the expiration date or the exercise style of options.

In order to offer the advantages of the on-exchange environment (mostly: transparency and clearing) to OTC products, several exchanges have also developed flexible products allowing investors to customize the exercise price, the expiration date or the exercise style of options.

In the United States, the Options Clearing Corporations’ figures on single stock options provide the breakdown between flexible options and regular standardized options. With 0.63% of the volumes and 1% of the paid premium they were still representing a relatively small part of the market, but their growth was impressive. In 2010 their volumes doubled while the total number of single stock options cleared by OCC only increased by 3% that year. CBOE who first introduced these products in 1993 was the leader in the United States and had the largest growth rate in 2010.

These flexible options were also developing in other jurisdictions. In Europe for instance, Eurex offered flexible options. They offered the buy-side the benefit and flexibility of customized OTC options with the efficiency and safety of standardized clearing and settlement processes and the mitigation of counterparty risk with a central counterparty. In South Africa, those flexible derivatives were called “Can-Do options and futures” and were representing 10 million contracts traded in 2010.

On Australian Stock Exchanges, some Equity CFDs (contract for difference) were traded on-exchange with significant volumes (153 million contracts in 2010, but the notional value is much smaller than for single stock futures). In other countries, CFDs are generally traded OTC.

4%
IN 2010, TOTAL NUMBER OF SINGLE STOCK FLEXIBLE OPTIONS CLEARED BY OCC WAS UP BY 4%

Dividend futures traded in Johannesburg have also been included in IOMA survey. With 22 million of traded contracts in 2010 they were representing 19% of the number of stock futures traded and 0.3% of the notional value. These contracts enable investors to protect themselves against dividend risks on a specific stock are also traded on Eurex but volumes are much smaller. Dividend index derivatives can be found too in several exchanges (NYSE Liffe, Eurex, CBOE, Tokyo Stock Exchange) but here again with relatively small volumes.

Regarding commodity derivatives, CME Group has developed clearing facilities to process OTC trades with its platform Clearport launched in 2002 by Nymex. In 2010, OTC trades registered on CME Group were accounting for 13% of the total number of commodity derivative contracts traded on CME Group.

Authors:
Romain Devai, CFA
Grégoire Naacke

London derivatives (including Bclear) were previously cleared by LCH.Clearnet. NYSE Liffe continues to outsource certain clearing functions to LCH.Clearnet Ltd (LCH.Clearnet) including the provision of risk management activities and clearing guarantee arrangements. As part of the arrangements all London market clearing members must also remain LCH.Clearnet clearing members.
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