As the concern posed by dealers’ credit risk in over-the-counter (OTC) products becomes more pronounced, and with the onset of OTC Swaps traded on exchange in the U.S., for the first time in Europe this [OTC] risk is being mitigated for Contracts For Difference (CFD) products by using a centralized clearing firm, and thus benefiting end-users who are trading these products in the event of bankruptcy of their CFD provider.
The first to market this new approach is LCH.Clearnet, which will provide the clearing service to Cantor Fitzgerald and thus benefit its end-users trading CFDs, according to a joint press release on each of the corporate’s website respectively.
In addition, the prime brokers to the trade, Commerzbank, ING and Citi, will also establish offsetting positions to the transactions originating from Cantor Fitzgerald’s clients, and will have those offsetting transactions cleared back with LCH.Clearnet – which are then matched in a market neutral manner on its books.
This mitigates the counter-party risk on the trade to LCH.Clearnet whose strong capital position provides a larger degree of cushioning for any would-be creditors in the event of a collapse. According to the press release, Citi becomes the first general clearing member of LCH.Clearnet to provide third party clearing services for this market segment. In addition, Commerzbank and ING participated to make this initiative possible from a prime broker position, as offsetting trades are passed through to LCH.Clearnet which does not hold a position (hence is broker-neutral).
In an effort to understand more about the scope of this news, Forex Magnates reached out to Charles Knott, Director, Cantor Fitzgerald Europe, who was also quoted in the corporate announcement today from LCH.Clearnet.
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Mr. Knott said to us regarding the above press release, “We are very excited about the launch of centrally cleared CFDs in terms of the changes that we will see greater protections afforded to our clients. We are very pleased that the regulator has supported this initiative and what we do believe quite firmly is that in due course it will become a requirement amongst all European regulators that OTC products are centrally cleared.”
While this could be the beginning of a developing wave of centrally cleared CFDs, it appears to resonate with regulators as a means to managing systemic risk by relocating it to counterparties with higher balance sheets, and in doing so helping to protect customers in the case of a default of their brokerage dealer.
CFDs have become increasingly popular with investors over the last decade, providing a simple way to trade on a leveraged basis for both long and short positions across various asset classes, such as in shares, interest rates, indices and commodities where margin rates are traditionally much higher for the underlying instruments.
Commenting on the new initiative in the official press release, Alberto Pravettoni, CEO of LCH.Clearnet’s Repo and Exchanges business, said in the corporate press release, “We are delighted to be the first CCP to offer central clearing of OTC CFDs and to have worked closely with market participants to develop a solution that is tailored to their needs. By working with CFD providers who meet our criteria for membership, we help investors access the best market price for a trade while benefiting from reduced counterparty risk, collateral efficiencies and cross-margining opportunities between cash equities and CFDs.”
On its corporate website, Cantor Fitzgerald states that it possesses one of the largest institutional sales forces serving over 5,000 clients worldwide, in 33 locations. That sales force appears to be a major driver of growth and was also recently increased as Cantor Fitzgerald announced earlier this week continued expansion of its Emerging Markets sales and trading team with the appointment of Thomas Blondin as Head of Central & Eastern Europe, Middle East & Africa, and Dang Bui as Managing Director in the Debt Capital Emerging Markets Group.