Thank goodness for competition!

The inherent beauty of any true marketplace is competition. Competition means choice. Choice drives participants to innovate and create efficiencies of many hues. Fortunately, there are signs that competition between futures venues is finally starting to take place. That’s good news for any participant with an eye on their bottom line.

In the past week or two, we’ve seen lots of press on banks moving a portion of their clearing business from LCH to Eurex – as they are perfectly entitled to do. Credit to @philstafford in the FT for giving this some context. And we’ve also heard that ICE is looking to copy CurveGlobal’s inter-commodity spread contract between SONIA and LIBOR futures. In both cases, we’re seeing the benefits of competition in a way that is refreshing to true believers in competitive markets.

Another element of competition is that it can’t always go your own way. Competition means choice. That’s why I’m happy to congratulate Eurex on the growth of their EUR cleared swaps business – it’s not without effort, I’m sure. At CurveGlobal, we too have clearly been fighting hard to break down the walled siloes that have characterised the futures markets – and it’s taken nearly two years to get where we are today. Market competition and choice are starting to drive behavioural change, so who needs a forced European location policy?  

While most venues would like every trade to take place on their platform, the only needs that would serve are their own, not the broader needs of the market or clients. Take CurveGlobal’s Three month SONIA contract. If you look at the five-day moving average since the beginning of June, we’re delighted that we have a 4:1 share, but also satisfied that our clients have choice – to trade with us or with our smaller rival (in the SONIA Three month).

If we look more recently at the daily data, the picture is similar – a clear leader but a market with clear choice.

In OTC clearing, the stakes for banks are arguably much greater. By bifurcating their portfolios, they are in danger of losing much of the efficiencies that can be gained by clearing at one CCP. With the introduction of portfolio margining between bond futures and OTC swaps at LCH just a few months away, it would be surprising if we didn’t see other firms looking to move some futures positions to hedge their existing swap positions.

But whether and where any participant chooses to trade and clear should be entirely up to their firm. That’s the nature of competitive, healthy markets. Let’s hope they are here to stay.