November 3, 2009 / 1:14 PM / 10 years ago

Madrid bourse challenges U.S. DTCC in derivatives

LONDON, Nov 3 (Reuters) - The Madrid bourse (BME.MC) scored a first in Europe on Tuesday by unveiling plans to open a warehouse for derivatives contracts, pitting itself against America’s DTCC as it seeks to exploit a regulatory crackdown.

“The project is expected to be completed by the second quarter of 2010,” the Madrid bourse (BME) said in a statement.

“The new service will initially be provided in Spain although it has a clear international orientation. The system can in the future be shared with other markets or implemented by BME in other countries,” it added.

The G20 group of countries agreed in September that all contracts traded in the $450 trillion privately-negotiated over-the-counter (OTC) derivatives sector should be reported to a data repository or warehouse.

It is part of wider efforts to crackdown on an opaque, lightly-regulated sector at the heart of the credit crunch.

A warehouse keeps a central “golden copy” of transactions that supervisors can consult when things go wrong, making it easy and quick to see who is exposed to a defaulting firm.

The collapse of Lehman Brothers investment bank last year worried regulators as it was not immediately clear who was a counterparty to its many derivatives contracts.

Madrid faces tough competition as the DTCC operates the world’s only repository for derivatives contracts in the United States and holds most of the world’s OTC contracts.

Some EU lawmakers and regulators say an EU-based warehouse could make it easier to sort out disputes over contracts transacted on the bloc’s soil.

The Madrid exchange said many of the world’s biggest banks like JP Morgan, Morgan Stanley and Goldman Sachs who dominate OTC derivatives trading, are members of the Spanish bourse.

It should therefore be possible for such banks to report their trades to the new warehouse instead of to DTCC.

“If the aim of the European Union is to have a single market, this should be possible,” a spokesman said.

Madrid is the first listed firm to set up a warehouse — the DTCC is run as a utility.

“By launching this project BME takes one step forward in its strategy of expanding its business line in the context of past and future developments affecting the markets and their regulation and supervision,” the bourse said.

Spain has been slow to apply two-year old EU rules that introduce competition in share trading but they will take full effect in 2010.

The BME will then face possible erosion of its share volumes, as London and other markets already do from upstart platforms, and it will therefore need to look for new revenue streams to keep shareholders sweet. (Reporting by Huw Jones, editing by Andy Bruce)

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