Nasdaq OMX first to win EU approval to clear derivatives

LONDON, March 18 Tue Mar 18, 2014 12:44pm EDT

LONDON, March 18 (Reuters) - Nasdaq OMX has kicked off Europe's next phase in making financial derivatives safer by becoming the first clearing house to be authorised under new European Union rules.

Derivatives, such as credit default swaps, were at the heart of the 2007-09 financial crisis and their opacity deepened the woes of Lehman Brothers, the U.S. bank that collapsed in 2008.

World leaders agreed the following year that to increase transparency in the $700 trillion sector, contracts should be reported - which began last month in the EU - centrally cleared and traded on electronic platforms.

A clearing house is backed by default funds to ensure a trade is completed even if one side goes bust.

Now that the first clearing house has been authorised under the new reforms, it starts a clock for the European Securities and Markets Authority or ESMA, an EU watchdog, to decide which types of derivatives contracts must be cleared across the 28-country bloc.

"This is now the kick-off for the central clearing obligation. Probably the earliest possible date for mandatory clearing to start is by the end of this year," ESMA spokesman Reemt Seibel said.

More than 20 clearing houses have applied for authorisation under the EU derivatives law.

Hans-Ole Jochumsen, an executive vice president at Nasdaq OMX, expects some assets like certain currency derivatives to be cleared even if ESMA decides that clearing should not be mandatory.

"There is a growing feeling in some banks that probably it would be good to have a more transparent set up to avoid any regulatory compliance risks," Jochumsen told Reuters.

In other assets, such as commodities, capital requirements to cover contracts that are cleared will be lower than for uncleared contracts, giving a financial incentive to clear.

"We are in very close dialogue with a number of European banks about whether we can clear over-the-counter equity based products," Jochumsen said.

Nasdaq OMX is already the fourth largest derivatives clearing house in Europe and clears equity, interest rate and commodity derviatves. It faces competition from rivals such as Eurex Clearing and LCH.Clearnet and ICE Clear .

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