Ross faces tough test running LSE Curve

Ross faces tough test running LSE Curve

Andy Ross’s appointment as chief exec of LSE’s Curve Global, like that of Pep Guardiola as manager of Manchester City, was one of the worst kept secrets in the business.

It is tempting to draw further comparisons between the dapper managerial guru and Guardiola but the obvious one is both face serious challenges.

Ross’s appointment is undoubtedly a boost for the ambitious Curve project, coming more than three months after the British exchange group said in mid-October it was looking for a chief executive.

The chief executive vacancy was the major question marks hanging over the project as it gears up to launch, slated for the second quarter

Ross is unusual in that he is a derivatives guy with expertise on both sides of the listed versus over-the-counter divide, having worked in futures before moving into swaps clearing more recently.

This breadth is important given the chairman of the venture, Michael Davie, is definitely from a swaps background.

The appointment this week of futures expert Cathryn Lyall as chief operating officer gives the senior management at Curve a nice balance between futures and swaps.

This will likely be crucial.

Curve plans to challenge the two silos of European futures trading -- ICE Futures Europe in the short-end of the curve and Eurex in longer-dated contracts – by offering savings through a new clearing service from LCH.Clearnet, which is majority-owned by the LSE Group, called portfolio margining.

Portfolio margining is a technique whereby clearing houses calculate the net exposure across a group of assets with similar attributes such as interest rate swaps and interest rate futures.

The LSE hopes the launch of its portfolio margining service, called LCH Spider, will make Curve compelling as it will enable savings for clients by allowing them to offset the futures they trade on Curve (and clear through LCH) with the swaps already cleared in LCH’s Swapclear service.

LCH. Clearnet’s Swapclear is the world’s main clearing house for interest rate swaps, holding more than 90% of the global market.

The power of portfolio margining, however, is a moot point.

Reports have claimed the value of savings delivered by margining can be as much as two thirds or three quarters for certain clients but banks have in private questioned these figures and said it can be of only marginal importance to most clients.

Eurex launched a portfolio margining service in mid-2014, offering much the same proposition as Spider, with the backing of Citigroup, Commerzbank and Morgan Stanley (including a nice quote from one Andy Ross) but this service has not taken off.

The LSE has made decent progress on the client front. BNP Paribas became in late January the seventh investment bank to sign up to use the platform, after Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs, JP Morgan and Societe Generale stumped up their cash in October last year.

The inclusion in the group of CBOE Holdings is also interesting and hints at Curve Global (to give it its proper name) looking at the US market or to move aggressively into options.

The big unknown, at this stage, is what will Eurex and ICE Futures Europe do to counter the threat of Curve.

Fee cuts would be an obvious reaction but a more ambitious response would be to look to clear their futures into LCH.Clearnet and offer some of the same benefits that Curve might offer.

The LSE has said it would be happy to support that kind of arrangement under its pledge to support the pro-competitive principle of open access.

It would be interesting to see one of the incumbents take that step.