ICAP and BATS have announced that they are collaborating to provide a new clearing and trading service for Exchange for Physical (EFP) transactions. The transactions are based on an exchange of a futures positions for the underlying asset. According to the two firms, traditionally, trading of the futures leg has been achieved through exchanges, with the physical asset trade being made on the over-the-counter (OTC) markets.
Due to the bilateral nature of an EFP transaction, clearing of the futures portion is enabled on traditional exchanges, while the physical portion being cleared and settled in cash on and off- exchange OTC basis. The result is that there is higher counterparty risk involved with the OTC portion of the trade as it isn’t executed using a central clearing system like that of exchanges. In order to reduce bilateral counterparty risk of such trades, BATS and ICAP partnered to create a trade reporting facility to produce what they believe is the first fully cleared equities trading solution for EFPs.
BATS and ICAP partnered to create a trade reporting facility to produce what they believe is the first fully cleared equities trading solution for EFPs
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The product is based on BATS enhancing its exchange trade reporting service, BXTR, to enable the cash basket of EFP trades to be transacted on exchange. Using BXTR, ICAP will be the first broker to provide the service to their clients, with trades facilitated via their ICAP Fusion platform, an e-commerce portal for trading venues. As part of the partnership, ICAP will also make available fully cleared equity index EFPs on its ISL MTF and will also facilitate traditional voice broking in these products via its Global Broking division.
Overall, the extension of BXTR to allow for EFP reporting, while leveraging the cash trading offering of ICAP, is another example of the OTC markets becoming more adapted to marketplace exchanges. Due to a combination of both regulation and technology, electronic platforms are able to aggregate liquidity from numerous dealers, as well as connect settlement and post-trade reporting of both OTC and exchange trades within a unified structure. In the case of BXTR, once executed using the system, EFP trades will be published on both on and off-exchange books.
On the news, Mark Hemsley, CEO of BATS Chi-X Europe, stated, “The versatility of BXTR has been further demonstrated with this new EFP service, which will allow for more effective balance sheet management, and for operational workflows to be standardised. By settling more trades with CCPs and netting settlements, counterparty risk and costs across the European market will be reduced.”
Garry Stewart, Deputy CEO of EMEA Global Broking at ICAP, added, “As a leading player in execution services ICAP Global Broking is committed to developing innovative products for our customers particularly around hybrid and electronic trading offerings. ICAP Fusion provides a customisable, single point of access which will greatly enhance the operational efficiencies of clients. We are pleased to be working with BATS and our clients to refine and improve the trading of this market.”