On 31 May, NLX marked its third birthday with a new leadership team and renewed vigour to restore the fortunes of the interest rate futures market.
NLX was launched by Nasdaq in 2013 with the belief that upcoming changes to market structure in Europe combined with a perceived duopoly of the European rates market would create an opportunity for disruption.
Three years later and the new senior team comprising former Morgan Stanley and UBS investment banker Victoria Kent and Carl Slesser, who was previously chief technology officer at NLX, now the exchange’s president, believe that the opportunity is clearer today than ever.
“Changes to market structure and capital pressures are having an impact on both the buy-side and the sell-side,” says Kent, NLX’s commercial director. “Category 2 mandatory clearing is coming up, Mifid II will be introduced in 2018 and the LCH has just launched its Spider portfolio margining service.
“As a result, there is an unprecedented opportunity for us today, driven by a focus on the cost of trading and the cost of capital.”
NLX’s proposition has always been centred on clearing efficiencies enabled by the ability to trade the long and short end of the euro and sterling curve at one venue clearing into one CCP and the opportunities that will ultimately be offered by the portfolio margining of exchange traded and swap products.
Three years ago, the pressures on collateral and the need for clearing efficiencies were more a theoretical than a clear and present business challenge.
That has changed today with the clearing business at banks under pressure from Basel III and CRD IV and the buy-side taking on more responsibility for collateral and seeking efficiencies as a result.
After a long wait, LCH’s Spider portfolio-margining model has just launched. Spider will enable the cross-margining of futures positions against swaps cleared at SwapClear resulting in billions of pounds of collateral efficiencies for banks and their clients.
“NLX is uniquely positioned to offer access to the Spider portfolio margining at LCH today,” says Kent. “Clients and their sell-side providers are looking for solutions now, not in a year’s time, and we are seeing unprecedented interest from the buy-side as a result of that.”
Hans-Ole Jochumsen, President, Nasdaq added: “As the appetite and dynamic of the market continues to evolve through new regulations and the increasing influence of the buyside, we see NLX uniquely positioned to respond to demands in the market.”
Over the three years NLX has been in operation, it has traded over 22 million contracts. Early incentive programmes resulted in solid volumes on the market but the strategy was criticised for its trading spikes and the volumes fell away once the incentive programmes were removed.
Slesser says that NLX has learned the lessons from the early push to get people onto the platform but points out that NLX has 11 general clearing members on board, with a 12th due to join in July and that all the major ISVs are connected to the MTF.
“We are in a good place today to grow participation,” he says. “We have a three year track record and operate a low cost, robust and scalable trading platform.”
Nasdaq is putting in place a number of programmes to drive open interest on the platform and help firms mitigate the costs of transitioning onto NLX.
The FCA has recently approved a programme that is intended to stimulate the migration of open interest.
Under the programme, NLX will cover the costs that firms have incurred on other exchanges as well as any other costs associated with moving over to NLX.
While this is intended to enable firms to block trades over to NLX, the firm will also seek to increase trading through the order book and has a new FCA-approved scheme in place to cover the costs of firms that build open interest through the order book.
Controls will also be in place to disincentivize firms from trading low-risk strategies in order to encourage meaningful flow on the platform. “These are intelligent programmes to grow participation, not blunt instruments” says Kent.
In addition, NLX will maintain its aggressive market making schemes.
The first focus will be on shifting open interest in short sterling before moving to euribor. Once bund, bobl and schatz can be margined against SwapClear positions at LCH, NLX will then focus on bringing in open interest on those products.
Meanwhile, Slesser says that the launch of options remains core to the strategy. “We are ready to go with options and have been up and running in our test environment for some time.”
Key to the success of the new strategy is to capitalise on the interest from the buy-side. In the first three years of operation, NLX focused its efforts on the banks and the proprietary trading market.
Kent says that today, most of the new interest is coming from asset managers and hedge funds.
“Three years ago the cost of collateral was not a priority for the buy-side,” she says. “That has changed and they are becoming more and more aware of the critical need for efficiencies and positioning themselves to take advantage.
“We want to ensure that the GCMs are active and have appropriate reasons to be active. Then as the client demand grows for more efficient portfolio margining, we are there to provide that.”