UPDATE 2-Nasdaq sees major return from derivatives clearing
(Adds analyst comment, share price)
NEW YORK, Jan 6 (Reuters) - Nasdaq OMX's (NDAQ.O) new clearinghouse for interest rate derivatives could yield big returns if it attracts enough users, with one analyst suggesting a jump in the company's 2009 earnings of up to 33 percent
The exchange operator last month bought an 80 percent stake in the International Derivatives Clearing Group, or IDCG, which began clearing swaps based on U.S. dollar interest rates early last week.
Nasdaq is now looking for partners in the venture, which comes as U.S. and European regulators push for more transparency in the vast over-the-counter markets.
"We're in the perfect environment to deliver something massive," said Chris Concannon, executive vice president of Nasdaq transaction services and a member of the International Derivatives Clearinghouse board.
"Down the road, given the size of the asset class ... I can see this as being a major contributor to revenue in the years to come," he told Reuters in an interview.
Worth about $357 trillion, interest rate swap contracts represented 52 percent of total OTC markets worldwide at the end of June, according to the Bank of International Settlements.
"I would expect to start delivering on other currencies this year," Concannon said, adding that the euro is first on Nasdaq's agenda, followed by other G7 currencies.
He said Nasdaq is looking to investment banks and other large market participants such as hedge funds as potential partners in the clearinghouse, which acts as a central counterparty to those buying and selling the contracts.
Nasdaq's shares were off 3 percent at $25.92 on Tuesday in a mixed market for exchange operators.
PROFIT BOOST
Diego Perfumo, analyst at Equity Research Desk, a Connecticut-based advisory firm specializing in exchanges, said that if Nasdaq can attract a quarter of the available market share, clearing revenue could boost the company's per-share earnings this year by 70 cents, or 33 percent.
"There are assumptions made to get there, but the growth could be substantial," Perfumo told Reuters. "They're clearing existing products that the market is currently trading."
Chicago-based derivatives exchange CME Group Inc (CME.O) and London-based clearinghouse LCH.Clearnet also run trading or clearing platforms for interest rate swaps -- ventures that analysts say have had mixed success.
New products unveiled by exchanges "have a fairly dreadful hit rate," said Edward Ditmire, analyst at Fox-Pitt Kelton. "Investors should need to see some pretty firm results" from Nasdaq.
"There are very few success stories," Ditmire said, noting this is why exchanges are keen to attract business by sharing equity stakes.
With some regulators blaming the private nature of the OTC market -- where participants face each other directly in trades -- for the current credit crisis, exchange operators see this as an opportunity to win new business.
Regulators have said they want one or more central counterparties installed in the $45 trillion credit default swap (CDS) market, where contracts are traded that insure against the default of debt issuers. See: [ID:nL6382833]
While rival exchanges have clamored to set up CDS clearinghouses, New York-based Nasdaq, which runs the Nasdaq Stock Market, has focused on the interest rate market, which has attracted less regulatory attention.
Concannon said buysiders, anxious over exposure to counterparties that may default on commitments, see a huge benefit to using its International Derivatives Clearinghouse.
He said "several trades" ran through the clearinghouse in December, but did not say which, or how many, institutions were active.
The U.S. Commodity Futures Trading Commission approved IDCG's clearinghouse on Dec. 22. See: [ID:nN22499265] (Editing by John Wallace, Phil Berlowitz)
