ICAP plc, a markets operator and provider of post trade risk mitigation and information services, and Bats Europe, Europe’s largest stock exchange, have announced that following the launch of ICAP’s cleared equity basket solution in April 2015, over €212 billion of notional trades have been routed through the Bats Exchange Trade Reporting (ETR) service for clearing during the financial year ended 30 June 2016.
The service enables cash equity baskets to be traded anonymously on-exchange and cleared while deepening liquidity.
ICAP and Bats developed the solution to solve over-the-counter (OTC) market issues surrounding the trading of European index Exchange for Physical (EFP).
Prior to the solution being launched, the cash/physical leg of the transaction was settled on an OTC bilateral basis, while the futures leg was exchange-traded and cleared.
Submission of Equity Trades
The solution works by customers submitting their equity trades through the ICAP Securities multilateral trading facility (MTF) accessed on ICAP Fusion, the company’s e-commerce portal for trading venues. ICAP then routes these matched third party trades to Bats’ ETR service to enable the cash basket to be reported on exchange and cleared through the CCP, mitigating bilateral counterparty risk.
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Bats ETR Service
The Bats ETR service provides reduction in counterparty risk by allowing for centralised clearing, which has been welcomed during recent market uncertainty and volatility.
For example, on Friday 24 June, following the Brexit referendum results, ICAP routed more than 80 percent of its EFP business to Bats cleared ETR services, up from the typical 60 percent, highlighting the importance of centralised clearing during times of market uncertainty to reduce counterparty risk.
This trend is likely to continue as the balance sheet of banks, and the reduction of OTC counterparty risk continues to be a priority in financial services.
The solution has future-proofed this type of trading activity by ensuring that it adheres to new regulations such as MiFID II and Basel III which seek to make markets more transparent and reduce counterparty risk.
Garry Stewart, Deputy CEO of EMEA Global Broking at ICAP, commented: “Collaborating with Bats Europe, ICAP has developed a unique solution, for a market which has seen limited innovation since it was founded. The take-up of our combined solution demonstrates the market interest for fully cleared, on exchange trading in traditional OTC brokered markets.”